1. amount of the company’s capital that is borrowed.

1. Changes to capital structure


The capital structure indicates the amount of
debt and equity, which is used by a firm to finance its assets. This is usually
showed in the form of a debt – to – equity ratio, which calculates the amount
of debt and liabilities, both short term and long term against the
shareholder’s equity. “The capital structure is how a firm finances its overall
operations and growth by using different sources of funds” (Investopedia.
2018). Equity financing is when company sells its shares within the business
whereas debt financing is borrowing money and having pay interest on top of the
borrowed amount.

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To understand the capital structure of the
two firms we will have to work out the gearing ratio. “The gearing ratio is
also concerned with liquidity. However, it focuses on the long-term financial
stability of a business” (Tutor2u.
2018). The
greater the ratio % the greater the amount of the company’s capital that is
borrowed. From the data the gearing ratio was calculated for Land Securities
Group showing that in 2013 it was 31.62% which decreased every year and in 2017
it had dropped down to 18.51% (shown in appendix 1). In 2013, it can be
said that Land Securities Group had normal gearing and was happy to finance its
activities using debt. But in 2017 it’s become even more well-established
business as the gearing have reduced which suggests it’s more financially
stable and the firm is performing well in their capital structure on the basis
of gearing.


gearing ratio for Grainger Plc in 2013 was 69.014% (shown in appendix 2)
“The more a
company relies on debt the less control it has over its finances and more it is
at risk” (Vause, 2014). This is highly geared meaning the firm has to pay back
interest and loans before being able to re-invest in earnings which decreases
the performance of the firm as it decreases net profit. But in 2017 it has
dropped down to 6.94% is very good as it shows it has become more financially
stable and its ratio is lower than Land Securities Group.


Weighted Average Cost of Capital (WACC) “is a
financial metric used to measure the cost of capital to a firm” (Wall
Street Oasis. 2018). WACC shows the return to stakeholders, equity owners and
lenders which they can expect to receive for their investments. Gearing is
related with WACC calculations as gearing increases the WACC decreases
therefore it will increase the shareholder wealth. Modigliani
and Miller
(M&M) with tax shows that interest expenditures of the
company’s debt is deductible, allowing tax savings. M
theory (no tax) Debt is cheaper but cost of equity increases so WACC is


From the data the WACC was calculated for
Land Securities Group showing that in 2013 it was 7.14% (appendix 3) without
tax and increases to 7.49% in 2014, then it decrease to 6.92% in 2015 and
afterward it went up slightly for 2 years to 7.91%.On the other hand the WACC
with tax showed a same pattern as WACC without tax, as it can be seen appendix
3. The WACC without tax for Grainger PLC, was
10.75%(appendix 4)  in 2013, then it
decreased for two year to 10.35% in 2015, then it increases to 12.11% in 2016
and it decreases back down to 10.50% in 2017. Same again
the WACC with tax showed a same pattern as WACC without tax, as it can be seen
appendix 4. It’s good to have low WACC because this will mean the debt is
cheaper therefore it will increase the market value of the firm which will
enable to increase the capital structure of the company. As
we can see both WACC figures without and with tax is clear that they both firm perform
well with the use of tax.


We can see by having higher WACC, it’s more
risky as more shareholders to invest in because increase in WACC means increase
in debt. It allows the investors an insight of the risk involved within the
firm but they should also consider higher the risk the higher the return will
be. Land Securities Group and Grainger PLC must change and increase their
fluctuation to improve the WACC.




2. Bankruptcy risk


Bankruptcy is a risk of legal process to get
out of debt when you can no longer make all your required payment. “Bankruptcy
involves a transfer of most of the debtor’s assets to a licensed trustee who
sells them and distributes the money amongst the debtor’s creditors” (Bennett,
2001). Altman’s (1968) Z score and Beaver model (1966)
will identify the risk of bankruptcy and explain the risks involved. Beaver is univariate
discriminating modelling, whereas Altman is multi-variate dominant modelling.


Altman’s Z-Score shows numerical method to
predict the probability of bankruptcy.


Zones of Discrimination:

v Z
> 2.99 -“Safe” Zones

v 1.81
< Z < 2.99 -"Grey" Zones v Z < 1.81 -"Distress" Zones   Land Securities Group Z-score was 1.903 in 2013, 2.476 in 2014, 2.858 in 2015, 2.959 in 2016 and 2.629 in 2017(appendix 5) results show that the firm is slowly improved in the Z-score which suggests the firm is less likely to become bankrupt. For Grainger Group Plc Z-score was 1.571 in 2013, 1.716 in 2014, 1.653 in 2015, 2.120 in 2016 and 1.638 in 2017(appendix 6) results show that the firm is most likely to become bankrupt due to the findings of Altman's Z-score prediction.         3. Critical discussion   Bankruptcy does have an affect on firm's cost of capital, considering the theory of Modigliani and Miller capital structure. As the firm takes more debt, its WACC increases which relates to the M theory therefore more debt will mean more interest costs to pay which will then reduce the earnings and cash flow. It will also mean that high debt in the capital structure will increase the cost to finance. This will increase the bankruptcy risk because of the increase in debt of the firm's capital structure which is also affected by the increase in WACC.   The Z- score is not only used to forecast when a company will go bankrupt, as it allows the likelihood of bankruptcy actually occurring. Some of the external factors which are not considered when calculating the Z-score such as the pre-bankruptcy non-financial events, economic circumstances, firm size and geographical location therefore it can affect the bankruptcy prediction. Altman Z-score is difficult when predicting the company future value as it uses the past financial data which is considered as historical data. Beaver model has drawbacks as it give unclear and unpredictable organization results for the different ratios because looking at different ratios at one time it becomes challenging to decide if the firm is likely to become bankrupt as each ratio will give different results.   We can say overall the results show that the gearing has decreased and Z-score have increased for the companies. Grainger PLC is at higher risk of going bankrupt because debt ratio is significantly high in 2017 would mean they will find it hard to pay back their debts when compared to Land Securities. This does suggest that Land Securities is in safe zone when looking at the Z-score however it can be said that they are better positon than Grainger PLC.