For the financial year ending 30 June 2017, Sigma Healthcare Ltd (SIG) reported the following sources of financing in its balance sheet. 

 

Sigma Healthcare Ltd Balance Sheet (as at 30 June 2017)

 

	Financial Structure  ($ thousands)
Liabilities
Current liabilities
Accounts payable	$523,770
Short-term/current debt	14
Other current liabilities	50,823
Total current liabilities	$574,607
Long-term debt	1,061
Other long-term liabilities	4,627
Long-term liabilities	$5,688
Shareholder's equity	$538,587
Total liabilities and shareholder's equity	$1,118,882

 

 

Moreover, the firm's 2017 income statement reported net profit of $53.5 million with interest expense of $4.3 million. 

 

 

Sigma Healthcare Ltd Income Statement (for the year ended 30 June 2017)

 

	($ thousands)
Earnings before interest and tax	$80,955
Interest expense (net)	(4,286)
Profit before tax	76,669
Income tax expense	(23,163)
Net profit	$53,506

 

 

If Sigma's management were considering the possibility of using significant debt financing for the first time, it might look at CSL Ltd (CSL), Australia's largest pharmaceutical company, as a benchmark firm for comparison purposes. CSL used debt financing, as shown on the following balance sheet and income statement.

 

CSL Ltd Balance Sheet (as at 30 June 2017)

 

	Financial Structure  ($ thousands)
Liabilities
Current liabilities
Accounts payable (incl. other payables)	$1,155,800
Short-term/current debt	122,500
Other current liabilities	339,800
Total current liabilities	$1,618,100
Long-term debt	3,852,700
Other long-term liabilities	488,100
Long-term liabilities	$4,340,800
Total liabilities	$5,958,900
Shareholder's equity	$3,163,800
Total liabilities and shareholder's equity	$9,122,700

 

CSL Ltd Income Statement (for the year ended 30 June 2017)

 

	($ thousands)
Earnings before interest and tax	$1,768,900
Interest expense (net)	(79,100)
Profit before tax	1,689,800
Income tax expense	(352,400)
Net profit	$1,337,400

 

Question 

 

Describe the capital structure of CSL, using both the debt ratio and the interest-bearing debt ratio. 

 

Question

Suppose that Sigma has decided to issue debt financing and use the proceeds to purchase some of its shares from the open market. What fraction of the firm's 993 million shares does the firm need to repurchase to make its interest-bearing debt ratio equal to that of CSL? 

If Sigma had carried out the transaction by issuing bonds with an annual interest rate of 8%, what would its earnings per share have been in 2017? 

 

Question 

Do you think Sigma's proposed change of capital structure makes good financial sense? Why or why not?

Answer rating: 100% (QA)

Answer to Question 1 The capital structure of CSL can be described using the debt ratio and the interestbearing debt ratio The debt ratio of CSL is De... View the full answer