BBPW3203 FINANCIAL MANAGEMENT II

OUM BUSINESS SCHOOL

SEMESTER SEPTEMBER 2015

BBPW3203
FINANCIAL MANAGEMENT II

MATRICULATION NO:
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E-MAIL
LEARNING CENTRE

730120055386001
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730120055386
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013-2214277
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BBPW3203 FINANCIAL MANAGEMENT II

Contents
Table of Contents
Introduction of selected companies
PROTASCO BERHAD (Protasco) ................................................................................ 4-5
COCOALAND HOLDINGS BERHAD (Cocoaland) .................................................... 6-8
Capital Structure
Equity Financing and Debt Financing ................................................................................ 9
Ratios ................................................................................................................................ 10
Capital Structure Ratio of selected companies ............................................................. 11-12
Theoretical Considerations

................................................................................................ 13

Protasco & Cocoaland

Companies Capital Structure Ratios and Theories from Scholars

................................... 14

Capital Structure and Financial Performance

Differences and Relations

............................................................................................. 15-19

Summary ...........................................................................................................................

Appendix
Protasco
Statement of Financial Position At 31 December 2013 ................................................

20

21-22

Statement of Profit or Loss and Other Comprehensive Income for the Financial Year
Ended 31 December 2013 .................................................................................................

23

Cocoaland
Consolidated Statement of Financial Position as at 31st december 2013 ..........................

24

Consolidated Statement of Comprehensive Income for the year ended

31st december 2013 ..........................................................................................................

25

References

26

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BBPW3203 FINANCIAL MANAGEMENT II

INTRODUCTION
The purpose of this paper is to analyse the capital structure of two public listed companies,
which comparisons are made from the respective audited consolidated financial report in year
of 2012 and 2013. Cocoaland Holdings Berhad and Protasco Berhad the companies listed
on the Main Board of the Kuala Lumpur Stock Exchange (KLSE) are used for the
aforementioned purposes.

PROTASCO BERHAD (Protasco)

The company was founded by Hasnur Rabiain bin Ismail and Chong Ket Pen in 1991 which
its headquarters was in Kajang, Selangor. Listed on the Main KLSE Board in 2003. Main
office located at 87, Jalan Kampung Pandan, 55100 Kuala Lumpur. It has more than 1,200
employees throughout Malaysia. Recorded RM480 Million of revenue in 2003 and recorded
as much as RM969.7Million in 2013. It operates in four segments: Construction Contracts,
Engineering and Consultancy Services, Training and Education and Trading.

Business Activities
Construction Contracts
- Experts in design, constructs, upgrade and maintenance of roads, bridges and building
services. Act as a developer and contractor for the Perumahan Penjawat Awam 1Malaysia in
Federal Territory of Putrajaya and few Perumahan Mampu Milik 1Malaysia) projects.

Engineering and Consultancy Services

- Provides site investigations, soil testing, slope studies, geotechnical and structural forensic
engineering services. It offers consultations and solutions, materials certifications, product
listing, research and development.
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BBPW3203 FINANCIAL MANAGEMENT II

Training and Education

- Its Infrastructure University Kuala Lumpur (IUKL) offers quality training services and
range of educational programmes. IUKL collaborates with local and international universities
as well as the industrial partners, aiming to enhance the students learning experience.

Trading and Manufacturing

- Specialises and complements the maintenance, construction and property developments
segment. Focus on trading and distribution of products by reputable local and international
suppliers from pavement related materials to construction building materials, petroleum-based
products and few others.

VISION AND MISSION

Target to be a multi-billion dollar entity in term of market capitalisation for return on
investment; to be one of employees choices and performed beyond customers expectations.
To continuously contribute to infrastructure development and nation-building as well as to
become a leader in property development sector and deliver a superior value in both
residential and commercial market.

BBPW3203 FINANCIAL MANAGEMENT II

Figure 1.2 Corporate Structure Protasco Berhad

BBPW3203 FINANCIAL MANAGEMENT II

COCOALAND HOLDINGS BERHAD (Cocoaland)
The Group was incorporated in 2000, listed on Second Board in 2005 and the Main Board a
year later under Consumer products. The registered office is located at LOT 6.08, 6 th Floor,
Plaza First Nationwide, No. 161, Jalan Tun H.S.Lee, 50000 Kuala Lumpur. Hiring a total of
745 employees, the Groups revenue recorded as high as RM 254.4Million in 2013, 14%
increased from preceding year.

Business Activities
It focuses on manufacturing and trading range of products. Chocolates, gummies, cookies,
beverages, pudding, jelly, snacks and cookies are to name a few. The brand name like Koko
Jelly and Lot100 are well known especially among children and the teenagers.

Vision and Mission

To expand the production lines thus to increase revenue in gummy in line with improvised
sales mix aiming for much higher recorded revenue in years to come. To be an international
market other than the existing in Asia. It will continuously be focusing on producing high
quality and healthy products as target to create better awareness of its brands and products.

BBPW3203 FINANCIAL MANAGEMENT II

Established in 1984,
primary trading role,
responsible in export
market of the Group

L.B.
L.B.
Food
Food
S.B
S.B

Incorporated in
1985

B
B Plus
Plus
Q
Q S.B
S.B

Cocoala
Cocoala
nd
nd
Retail
Retail
S.B
S.B
Engaged
distributing,
trading

Main
manufacturer,
incorporated in

Cocoala
Cocoala
nd
nd Ind.
Ind.
S.B
S.B

COCOALA
COCOALA
ND
ND
HOLDING
HOLDING
S
S BHD
BHD

in
and

M.I.T
M.I.T.E.
.E.
Food
Food
Ent.
Ent. S.B
S.B

LOT
LOT 100
100
Food
Food Co.
Co.
Ltd
Ltd &
&
CCL
CCL F&B
F&B
S.B
S.B

Sales role of
L.B Food and B
Plus Q

Established in 1980,
wholly-owned
subsidiary of B Plus Q

Figure 1.1 Corporate Structure - Cocoaland Holdings Berhad

BBPW3203 FINANCIAL MANAGEMENT II

CAPITAL STRUCTURE
Equity Financing and Debt Financing

Capital structure is the proportion of the Debt and Equity composition. Debt which is usually
Bonds whilst Equity, usually stocks has different terms and rights bestowed on the owners
themselves. If equity increases, the protections to creditors increase and cost of carrying debts
will be lesser. Lenders such as bankers and trade creditors, evaluate customers positions
based on the capital structure. When a firm foresee expansions, the capital requirement will
consequently be high hence funds via equity or debt financing will soon be decided.

Equity Financing
It is the funds from respective shareholders that consists of contributed capital (initial
funds for an exchange for shares of stock or ownership) and retained earnings
(represents carried forward profits from years previously).It has no guaranteed rate of
return thus it is the basic risk capital of the company. Equity capital has uncertainty
returns but do have probability of returns far exceeded those of debt-holders.

Debt Financing
It refers to borrowed money that is at work in the business. The long-term bond is the
safest type because the firm allowed to having longer tenure to repay, while continuing
paying the interest expense. The returns are fixed and repayments are guaranteed. The
advantage of Debt Financing is the tax relief and higher Shareholders Funds. The
disadvantages are due to increased leverage in respect of higher and accumulated debt
ratio.

BBPW3203 FINANCIAL MANAGEMENT II

Ratios

Debt-Equity ratio =

Total Liabilities
Total Shareholder s' Equity

100

This ratio is the most important of all capital adequacy ratios as it focuses on the relationship
of debt liabilities as a component of a firms total capital base. Investors are relying on this
ratio to identify the level of companys leverage which seen to be a true measure of the
riskiness level. It gives an indication of how much they have committed to the company
against to what the shareholders have. Lower percentage shows that a company is using less
leverage and has a stronger equity position.

Debt ratio =

Total Liabilities
100
Total Assets

This ratio, on the other hand, indicated the percentage of assets financed by debt rather than
equity. It is used to determine the financial risk of the firm and measure the total assets
owned by the creditors. A ratio which are higher than 1 indicate considerable proportion of
assets being funded with debt but lower than 1 show that a bulk of assets funded by equity. If
not being able to serve the repayment, the investors will avoid from choosing the company.

Ratio/Financial Year

PROTASCO BERHAD

BBPW3203 FINANCIAL MANAGEMENT II

2012
Debt-Equity Ratio

Total Liabilities
Total Equity

x 100

298,805,000 400,516,000 = 0.7461 = 75%

453,955,000 425

The ratio shows that the creditor of Protasco Berhad

This indicate that Protascos o

provided 75 cents of companys assets for every RM1

as compared to only RM1 by

assets provided by the shareholders (0.75:1.00). It shows

leveraged will not attract lend

that the company did not rely much on its debt difficult to make new loans du
financing.
298,805,000 699,321,000 = 0.4273 = 43%

Debt Ratio

Total Liabilities
Total Assets

x 100

453,955,000 879,

The creditors provided 43 cents of Protascos asset as

The companys assets was fin

compared to RM1 asset provided by the owner capital.

52 cents for each RM1of

contradict

Like Debt-Equity ratio, the company is obviously rely to Debt-Equity ratio which tot
on
its internal finance for the additional assets required for additional capital required as c
the year.
Figure 1.3 Protasco Berhad Capital Structure Ratio (Year 2012 and 2013)

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Ratio/Financial Year
Debt-Equity Ratio

Total Liabilities
Total Equity

x 100

COCOALAND HOLDINGS BERHAD

2012

2013

41,161,128 196,159,607 = 0.2098 = 21%

44,512,015 207,563,655 = 0.2144 = 21%

The creditors provides 21 cents of assets for every RM1

Minor changes as compared to the preceding year. This

assets provided by the shareholders (0.21:1.00). It indicates

indicate shareholders' benefited from capital funded by the

21% of total loan Group makes against its total available

creditors by only 21 cents for two consecutive years by means

capital contributed by the shareholders since the Group is

of debt taken to finance its operation. This is considered as

not in a capital intensive industry

healthy BUT at the same time it suggest a conservative

management who unwillingly to take risks.

Debt Ratio
Total Liabilities
Total Assets

41,161,128 237,320,735 = 0.1734 = 17%

x 100

44,512,015 252,075,670 = 0.1766 = 18%

Cocoaland s assets were being financed by debt holders by

Only 18 cents creditors contribution to the Groups assets
only 17 cents compared to RM1 of its net worth. This is lower compared to RM1 of its net worth. This is slightly higher as
as compared to total funded by the Groups total equity.

compared to the preceding year and still lower compared

to total Equity Financing

Figure 1.3 Cocoaland Holdings Berhad Capital Structure Ratio (Year 2012 and 2013)

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BBPW3203 FINANCIAL MANAGEMENT II

Theoretical Considerations
There are three different theories developed to analyzed alternative capital structures. The
implementation by the management of companies has impact or not at all on its investors and
most importantly, the market value of each company.
TRADITIONALIST THEORIES (YES)
Trade off Theory
The exposure of the companies with various cost (bankruptcy and agency cost) and its
benefits (tax) associated with debt financing. The trade off between costs with its tax benefits
to ensure the debt is at its optimal level that maximises value of the firms. This theory
suggests that there is an impact on the companies market value.
Pecking Order Theory
This theory tells that the firms do not have a target amount of debt but the amount of debt
financing employed relies on the profitability of the firm itself. Funds from Retained earnings,
Debt Financing and Equity Financing were used instead. Hence, the firm will strategies its
finance through internal financing; adapt dividends pay-out ratio to opportunity of
investments. This theory also suggests that the impact of capital structure on companies
market value does exist. Some firm prefers not to use equity due to impact on EPS and share
prices (since undervalued equity would lead to higher levered capital structure).

MODERNIST THEORY (NO)

Modigliani and Miller (M&M)
The value of debt and the equity of the firm depend on the value of assets of business. If debt
financing does not affect the value of the assets, it will not affect the combined value for debt
and equity issued against those assets, which known as Modigliani and Miller proposition.
Unlike the traditionalist theories, M & M concluded that in the perfect market the theory, the
decision on the capital structure is irrelevance. The firms value do not depends on the ability
of its assets to create value. M & M suggest that firm to take taxation into consideration and
proposed to employ as much debt as possible.

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BBPW3203 FINANCIAL MANAGEMENT II

PROTASCO AND COCOALAND
- Companies Capital Structure Ratios and Theories from Scholars
The pecking order theory is one of the most influential theories of corporate finance. Unlike
M & M, under this theory, the costs of accessing debt markets were high (higher interest rate).

In view of that fact, both companies expand business activities via access to equity market.
The firms preferred Equity Financing (equity funding), which those are in accordance with
the pecking order theory. The last alternative would be to issue new equity by which Protasco
did in 2013. However, its Debt ratio indicates that for every RM1.00 asset value of Protasco,
were contributed by its owner capital than only 52 cents from the external investors.

Contradict to Protasco, the Cocoaland seems to not really depend so much on its external
finance. The additional capital requirements were being funded mostly by its net worth rather
than from utilisation of its equity.

The ratios for both companies appear to be consistent with pecking order theory whereby
lower Debt ratio as compared to Debt-Equity ratio for both except for Protasco for the year of
2013.

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BBPW3203 FINANCIAL MANAGEMENT II

CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE
-

Differences and Relations

Many firms are taking credit rating as an important tool of communication on capital structure
decisions. The preferences made by the management for investors via internal financing, debt
or equity.
As for Financial performance, it determines a firms ability to generate profits through the use
of its assets. It is critical to any firms success and adaptive to changes in its market and
industry. Common measures include liquidity, financial efficiency, solvency, profitability,
repayment capacity. The relationships that exist between these measures help to suggest the
type of action to take in order to make improvements in financial performance.
To evaluate the Financial Performance of both companies, the Return on Equity (ROE) and
Return on Assets (ROA) are used as index for firm profitability in this analysis:

ROE =

Profit After Tax

100
'
Total Shareholder s Equity

ROE measures efficiency of the firm in generating income from its total
equity. It is a useful tool to measure the profitability from the firms
perspective since the stockholders considered as its real owner.

ROA =

Profit After Tax

100
Total Assets

ROA measure effectiveness of the firm utilises its assets to generate

profit.
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BBPW3203 FINANCIAL MANAGEMENT II

PROTASCO BERHAD

Ratio/Financial Year
Return on Equity (ROE)

PAT
100
Total Equity

2012
71,215,000
100 = 17.78% = 18%
400,516,000

The ROE indicates that for every RM1 of its equity the

An insignific

company has generated 18 cents of PAT for the year.

generated 17

Or only 18% returns on all its equities.

Rate of return
is only 17%

Return on Assets (ROA)

PAT
100
Total Assets

71,215,000
100 = 10.18% = 10%
699,321,000

The ROA, on the other hand, able to generate 10 cents of

The ROA wa

PAT by utilising RM1 from its overall assets. 8% lower as

the company

as compared to the returns from its equity.

each RM1 of
rate of return

Figure 1.4 Protasco Berhad Financial Performance (Year 2012 and 2013)

COCOALAND HOLDINGS BE

Ratio/Financial Year
Return on Equity (ROE)

2012
21,218,139
100 = 10.82% = 11%
196,159,607
Groups efficiency to generate profit from its total equity is

PA T
100
Total Equity

at 11% . For every RM1 of its equity the Group has

generated 11 cents of PAT.

Return on Assets (ROA)

PAT
100
Total Assets

The ratio rem

proportion of

almost the sam

21,218,139
100 = 8.94% = 9%
237,320,735
Lower as compared to ROI ratio. For every RM1 of total

The proportio
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BBPW3203 FINANCIAL MANAGEMENT II

common assets, the Group were able to generate 9 cents of
PAT.

the same Year

Figure 1.5 Cocoaland Holdings Berhad Financial Performance (Year 2012 and 2013)

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BBPW3203 FINANCIAL MANAGEMENT II

Capital Structures versus Financial Performances

PROTASCO

Debt-Equity
ROE

2012 (%)
74.61
17.78

2013 (%)
106.56
17.14

Debt-Asset
ROA

42.73
10.18

51.59
8.30

Debt-Equity
ROE

2012 (%)
20.98
10.82

2013 (%)
21.44
10.62

Debt-Asset
ROA

17.34
8.94

17.66
8.75

COCOALAND

Figure 1.6 Protasco Berhad and Cocoaland Holdings Berhad

~ Capital Structure and Financial Performance

The Capital Structure and the Financial Performance of both companies show an inverse
relationship for two consecutive financial years. Higher Debt-Equity/Debt ratio resulted to
lower ROE/ROA ratios respectively. In other words, the financial performances of both
companies were recorded lower as a result from higher capital structure made for the year.

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BBPW3203 FINANCIAL MANAGEMENT II

However, both recorded higher Debt-Equity and ROE as compared to Debt ratio and ROA. Both
companies increased its total capital requirements via Equity Financing. It implies that the
capital structure have negatively affects its financial performance and in this case its rate of
return from investment and utilisation of assets.

If by introducing debts in its capital structure, it influenced the proportion of risks in investment
which give a direct impact on each of the companys shareholders. Publicly Traded Firms such
as Cocoaland and Protascos common stock is the most utilised form of capital.

Nonetheless, investors should use both sets to get the complete picture of a companys financial
position. This is also crucial for investors as it helps them to understand the impacts and
consequences on investment they made.

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BBPW3203 FINANCIAL MANAGEMENT II

SUMMARY
Generally, there are two forms of capital namely equity capital and debt capital which stands on
its own advantages and disadvantages respectively. The debt-equity ratio percentage provides a
much more dramatic perspective on a company's leverage position than the debt ratio percentage.
Capital structure ratios reveal these facts which analysts should pay attention to.

Both companies follow the pecking order theory, whereby the total common stock or internal
financing were chosen. The decision was driven by the fact that it is the easiest, less risky and
takes the least effort. Practically, firms may be concerned about their ability to access markets
and achieving fair pricing which these decisions often feed into their capital structure decisions.

Companies expansions will acquire additional capital in the form of debt and equity, by which of
course, each has cost attached to it. Should the firm being funded by too much debt, thus, higher
interest are to be made and also its obligation to serve debts. Incorrect capital structure will
jeopardised the firm positive position. However, when both are blended and employed perfectly,
will increase and magnify the rate of returns for their equity as well as assets.
A low level of debt and a healthy proportion of equity in a company's capital structure is an
indication of financial strength. Prudent use of leverage increases the financial resources which
avail for growth and expansion. How thriving this formula may seem, it does require a company
to adopt best decision with its various borrowing commitments.

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APPENDIX

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Loth,R. (n.d.). Debt Ratios: Debt-Equity Ratio. [Online]. Available: http://investopedia.com/

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(2006).

An

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Number of words: 2,978

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