Case critique
Hutchison Whampoa Limited
The Capital Structure DecisionCase Study Solution
Hutchison Whampoa Limited: The Capital Structure Decision
1.Assume Hutchison Whampoa will require US$1 billion of financing in 1996. Assumethat equity can be raised at $48.80 a share and that a long-term debt issue will carry aninterest rate of HIBOR plus 70 basis points. How would an equity or debt issue impactHutchison’s financial position and performance?
Hutchison Whampoa Limited (HWL) had multiple major long-term projects that would requiresubstantial funding in the future. Previously, HWL would finance these projects with cash on hand,internal cash generation and short to medium term bank financing. Because these projects werelong-term, the previous way of funding these projects would not be feasible. HWL would have toguarantee that their spending would not dry up and halt the project. The amount that was estimatedto be used by investment analysts was as high as $5 billion. So HWL was not able to use the samemethods of financing projects as they have done in the past, this was going to be a much bigger undertaking.I analyzed the financials to determine the impact of raising US$1 billion in two different scenarios.The first scenario is if they issued US$1 billion in stock. The second scenario is if they financedtheir US$1 billion spending need with long-term debt. In order to analyze these two scenarios, Iforecasted the financial statements to 1996.
Scenario 1 - Equity Offer
The first analysis was the impact of the US$1 billion equity offer on HWL’s financial position and performance. Based on appendix A, the average exchange rate for US$1 to HK$ in 1996 was7.73485. US$1 billion would be HK$7.8 billion. When new shares are created and then sold by thecompany, the number of shares outstanding increases and this causes dilution of earnings on a per share basis. Usually the gain of cash inflow from the sale is strategic and is considered positive for the longer term goals
The Capital Structure DecisionCase Study Solution
Hutchison Whampoa Limited: The Capital Structure Decision
1.Assume Hutchison Whampoa will require US$1 billion of financing in 1996. Assumethat equity can be raised at $48.80 a share and that a long-term debt issue will carry aninterest rate of HIBOR plus 70 basis points. How would an equity or debt issue impactHutchison’s financial position and performance?
Hutchison Whampoa Limited (HWL) had multiple major long-term projects that would requiresubstantial funding in the future. Previously, HWL would finance these projects with cash on hand,internal cash generation and short to medium term bank financing. Because these projects werelong-term, the previous way of funding these projects would not be feasible. HWL would have toguarantee that their spending would not dry up and halt the project. The amount that was estimatedto be used by investment analysts was as high as $5 billion. So HWL was not able to use the samemethods of financing projects as they have done in the past, this was going to be a much bigger undertaking.I analyzed the financials to determine the impact of raising US$1 billion in two different scenarios.The first scenario is if they issued US$1 billion in stock. The second scenario is if they financedtheir US$1 billion spending need with long-term debt. In order to analyze these two scenarios, Iforecasted the financial statements to 1996.
Scenario 1 - Equity Offer
The first analysis was the impact of the US$1 billion equity offer on HWL’s financial position and performance. Based on appendix A, the average exchange rate for US$1 to HK$ in 1996 was7.73485. US$1 billion would be HK$7.8 billion. When new shares are created and then sold by thecompany, the number of shares outstanding increases and this causes dilution of earnings on a per share basis. Usually the gain of cash inflow from the sale is strategic and is considered positive for the longer term goals