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Table of Contents
Usefulness of financial statements for non accounting end users.
Accounting treatment of property.
Current capital structure.
Sources of finance.
Scentre Group is the owner of the eminent portfolio of living centres in New Zealand and Australia having retail real estate assets under the management estimated at greater than $50 billion and ownership interest at shopping centre being estimated as $34.2 billion. This embraces 42 Westfield living centres having great franchise value and the capability to fascinate top retail brands of the world. The major strategy of the company is to own interest in the high quality regional living centres available in the market and to undertake investment in these assets through the opportunity of redevelopment (Scentre Group, 2020). It works with leading retail and prestigious brands to establish a leisure and unique shopping experience. It has developed a responsible business framework that laid emphasis on 4 areas, namely, community, environmental impact, economic performance and its people. The main purpose of the report is to analyse the financial statements of the company in order to find its usefulness for the non-accounting users and to obtain clear understanding about its capital structure.
Several significant functions are being performed by financial statements of the corporation. The annual report of the Scentre Group reflects the true state of affairs of the company and is considered helpful to acquire essential financial information. It can be effectively used by creditors, government, shareholders and investors to undertake effective decision making process (Knezevic et al., 2019). They have clearly reflected the financial performance of the company that further helps in bridging the gap between the expectation of owners and lapses in management. Every business organization require funds for carrying out its functions and business processes in an effective and efficient manner. For this, it has to rely on several lenders like financial institutions, banks and investors. They are considered as the non – accounting users and financial statements of the company are helpful to check the creditworthiness of the company as they depict the debts, profits, assets related information about the company. Investors can effectively use financial statements to evaluate the finances in order to determine the solvency position of the firm. Good financial position attracts large amount of funds from investors (Brooks & Oikonomou, 2018). The policies made by the government with regard to corporations rely heavily on the financial statements. They can be used to establish taxation and other regulatory policies. Thus, they can be effectively used by the non – accounting users to undertake informed decisions.
Capital structure of the company comprised of both debt and equity. This indicates that some portion of total funds are acquired for debt sources and some from equity (Ardalan, 2017). Scentre Group has raised debts related funds by issuing commercial papers and uncommitted facilities, notes payables, loans from banks and mortgages. On these debts, it is liable to pay the interest at regular intervals of time irrespective of the amount of profits being earned by the firm. This is the reason; they are also known as interest bearing liabilities. They amounted to $13819.7 million (Annual report, 2019). Funds are also acquired by issuing equity shares in the market. Equity holders tend to have ownership stake in the company. Total number of ordinary shares accounted to 5305155689. Total amount of funds being raised with the help of issuing equity amounted to $10164 million (Annual report, 2019). Total cash and cash equivalents amounted to $253 million. Therefore, total enterprise value of the company is calculated as –
Enterprise value = Equity value + Debt value – cash and cash equivalents
Enterprise value = $10164 million + $13819.7 million - $253 million
Enterprise value = $23730.7 million
Proportion of debt = 58.2%
Proportion of equity = 42.8%
Cost of equity will be determined with the help of dividend paid to the shareholders.
Dividend paid = $1187.1 million
Cost of equity (Ke) = $1187.1 million / $10164 million * 100 = 11.68%
Cost of debt will be determined with the help of interest expense.
Total interest expense = $622.8 million
Cost of debt (Kd) = $622.8 million / $13819.7 million * 100 = 4.51%
Tax rate = 30%
WACC = Ke * weight of equity (%) + Kd * weight of debt * (1-tax rate) (Chyba, 2020)
WACC = 11.68% * 42.8% + 4.51% * 58.2% * (1 – 0.30)
WACC = 4.99% + 1.84% = 6.83%
After analysing the cost of securities, it has been estimated that it would be beneficial for the firm to finance the proposed acquisition amounted to $1 billion with the help of debt related instruments as cost of debt is lower in comparison to cost of equity. However, it can raise some minimum proportion of funds by issuing equity shares in the market as if it raises such huge amount through debt then interest expenses will also rise that will influence its profitability. Therefore, it can raise funds in the ratio of 30:70 in the form of equity and debt respectively.
The various instruments through which the funds can be raised are listed below –
It can be concluded that the major strategy of Scentre Group is to own interest in the high quality regional living centres available in the market and to undertake investment in these assets through the opportunity of redevelopment. It works with leading retail and prestigious brands to establish a leisure and unique shopping experience. It has been analysed that the annual report of the Scentre Group reflects the true state of affairs of the company and is considered helpful to acquire essential financial information. Land and building are considered to perform the investment function and thus, are considered as a composite asset whose complete value will be influenced by several factors. It would be beneficial for the firm to finance the proposed acquisition amounted to $1 billion with the help of debt related instruments as cost of debt is lower in comparison to cost of equity.
Annual report. (2019). 2019 Annual financial report. Retrieved from https://www.scentregroup.com/getmedia/1eca105d-02a3-408b-9745-faea95f67d48/2019-Annual-Financial-Report_18Feb20_2.pdf
Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International Business and Finance, 39, 696-710.
Brooks, C., & Oikonomou, I. (2018). The effects of environmental, social and governance disclosures and performance on firm value: A review of the literature in accounting and finance. The British Accounting Review, 50(1), 1-15.
Chyba, J. (2020). Impact of Capital Structure and Its Changes on the Value of Companies Obtained Through the Discounted Cash Flow Formula.
Crick, J. M., & Crick, D. (2018). Angel investors’ predictive and control funding criteria. Journal of Research in Marketing and Entrepreneurship.
Knežević, S., Mitrović, A., & Cvetković, D. (2019). The role of auditing profession in detecting frauds in financial statements. NBP. Nauka, bezbednost, policija, 24(2), 97-109.
Montgomery, N., Squires, G., & Syed, I. (2018). Disruptive potential of real estate crowdfunding in the real estate project finance industry. Property Management.
Nking, C. O. U. B. (2019). Commercial Banks, Savings Banks, Cooperative Banks, and Credit Unions. The Oxford Handbook of Banking, 321.
Scentre Group. (2020). About us. Retrieved from https://www.scentregroup.com/about-us/about-page
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