About Wheelock and Company Limited

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Any of the operations undertaken by Wheelock and Company Limited include land development, asset management, and property investment. The company's operations are concentrated in Singapore and Hong Kong. Using subsidiaries, the firm develops a variety of residential ventures. The group also develops luxury residential facilities in Singapore using the interests gained from the firm's investments in its Singapore operations. In addition, the company makes a number of investments in Hong Kong.

The company is well-known for its work in the film, advertising, and networking industries. The company engages in travel agency services, commercial services, and treasury management services. The company is a merger of Thomas Wheelock Company and the Marden Company that plays a crucial role in ensuring the success of the firm in the different investment activities. The two founders noticed that if they merge the two companies, there is a high probability of making high profits. There is the necessity for understanding the capital structure of a company before an individual decides to invest in the firm. Investors can use various theories to evaluate the capital structure of the company they want to invest in (Adrienn, 2014, p. 918). The paper focuses on the provision of the literature review of Wheelock and Company Limited. The paper further focuses on the evaluation of the capital structure of Wheelock and Company Limited using Modigliani-Miller theory (M&M).

Literature Review

Modigliani-Miller theory (M&M)

The Modigliani-Miller theory asserts that one has to know the earning power and the risks that underlie the assets of the company if they want to determine the market value of the firm (Hasan, et al. 2014, p. 184). The market value of the company is independent of the distributed dividends as well as the financial investments done by the enterprise. A company can get its finances in many different ways. Some of the ways of generating income include using the profits, borrowing, or investing the shares of the shareholders of the firm (DeAngelo, H. and Stulz, R.M. 2015, p. 219). The dividends include the profits that need to be shared with several shareholders of the company.

The theory tends to exhibit complexity at times. However, all the concepts of the theory point to the fact that the method assumes the absence of difference between a company financing itself and borrowing funds. As such, there is no significant difference between equity and debts.

Franco Modigliani and Merton Miller developed the theory in the 1950s. They created the theory to encompass the Corporation Finance, the Cost of Capital, and Theory of Investment (Becker 1978, p. 65). It was published in the American Economic Review in the 1950s. Franco Modigliani and Merton Miller were graduate professors at Carnegie Mellon University (Saeed, Gull and Rasheed, 2013, p. 393). The two were mandated to teach business classes about finance. However, none of them had an idea concerning corporate finance. Therefore, the two professors had to read the available information concerning corporate finance. In their reading, they noticed the apparent ignorance of the contemporary information regarding corporate financing. Thence, they wrote down what they understood what corporate finance should entail (Arasteh and Nourbakhsh 2014, p. 8).

The information they provided to the students was ground breaking. Their idea was published in review journals to help students understand the concepts of corporate finance. Their publication was thus branded the M&M theory. Modigliani and Miller also wrote various articles concerning corporate finance to ensure that they make up for the mistakes previously done. The corrections were published in the 1960s.

The theory has many assumptions. The concept states that the capital structure should not include any instances of taxes or bankruptcy costs. Having the assumptions in mind, the weighted average cost of capital should remain constant when an individual wants to determine the capital structure of a given company (Brusov, Filatova and Orekhova, 2013, pp. 94). It is considered that no matter how much the company borrows, the interests and tax do not influence the weighted average cost of capital in any way. The capital structure does not affect the stock price of the company since changes in debts does not influence the capital structure of the enterprise. Capital structure has no relationship with the price of the company’s stock.

Capital Structure

Capital structure entails the procedures in which the company follows to ensure that it gets the funds that are necessary for its operations. The equity of the enterprise, on the other hand, refers to the stocks of a firm. The debts of corporation include long-term notes or even bonds. The short-term bonds that are crucial for the day-to-day running of the company are also included in the capital structure. The capital structure of a company might involve all the possible sources of funds (Robb and Robinson 2014, p. 153). It might be a mixture of the long-term notes, short-term notes, equity, and bonds. The short and long-term debts of the company make a greater share of what it needs to include in its business structure.

In most instances, analysts refer to the debt- equity ratios of the company when they indicate the capital structure of the enterprise. The debt-equity ratios help in the determination of the level of risks associated with dealing with a particular company. In most instances, the businesses that have acquired most of their capital through debts are considered having relatively aggressive financial structures that might result in great losses to the investors (Wheelock, Switch Bulb Company, Inc. 2014, p. 25). Investors consider such companies very risky and might opt not to invest in them. In addition, companies might be very cautious when they want to merge with other firms that have high debt-equity ratios. Sometimes, the debt might be the reason why various companies are growing. The debts further assist the companies in retention of their status for a longer time (Zeitun and Tian 2014, p. 201).

Unlike equity, companies might be closed down if their operations are lower. When in debts, the company might be left running until it reaches a time whereby it is unable to cover its debts. Companies also prefer getting into debts at times whereby there are lower interest rates because they would get more profits from the funds but pay back with very low interest rates (DeAngelo and Stulz 2014, p. 109). Companies further exhibit the preference for financing their activities using debts because of the tax advantages. The advantage of debt financing arises from the fact that the companies do not need to pay taxes for the debts because the interests made by the individuals who give out the debts deduct the fees. It is argued that bonds are less expensive than equity when the interest rates are low. However, the major advantage of investment is that the organization does not need to pay it back in case there is a decline in the sales. In addition, equity is crucial in predicting the probable future earnings of the company.

The equity and debts are both present in the balance sheets of the enterprise. Of the assets that are typically acquired by the company, one can be obtained through equity while other through the debts. The businesses that have massive debts are characterized with high advantage and highly aggressive. The company is described as a very increased risk of losing a greater portion of its assets. However, the large forces are also characterized with higher profits if the trades go in the normal direction. Companies that are relatively conservative of the advantages that they take are characterized by both low profits and risks. The companies need to understand various concepts involved making an appropriate capital structure to ensure that the enterprise enjoys maximum benefits and suffer minimal losses.

Company Background

The Wheelock and Company is a merge of two companies. The company specializes in sales and marketing, management of assets of the Wheelock and Wharf Group properties and property development (Horn, Moylan and Wheelock 2014, p. 985). The organization was founded in 1857 and has its main headquarters in Hong Kong. The Wharf Group properties deal majorly with infrastructure and capital investments in China and Hong Kong.

Currently, the company has investments in real estates situated in Singapore, China, United Kingdom, and Hong Kong. It further engages in the development of various hotels and shopping centers through subsidiaries of the two merged enterprises. Wharf also has an interest in media and communication art from the property holdings. The Wharf Company is said to be holding more than sixty-seven percent of the Modern Terminals used in South China.

Capital Structured Evaluation

The earning power of the organization and the risks that are likely to befall the properties that are being run by the enterprise plays a crucial role in defining the market value of a firm. Wheelock and Company Limited specialize in property development whereby they invest majorly in housing. The houses built by the organization are permanent. Therefore, there is a little probability that company is going to have high risks on the assets that might make it likely to fall (Wheelock Street 2002, p. 1). The companies earning potential is relatively high given that they deal with housing which is an essential need. Individuals would check what to eat and where to live without considering any other products. The company has recorded significant profits in the past years. However, the earnings in 2016 are lower than the profits of 2015. This is tied to the fact that there has been lower interest rate in 2016. This is a clear indication that the company greatly depend on equity to ensure that it gets the necessary finance to run its projects. Enterprises that operate in debts tend to experience higher profits when there are lower interest rates because the little payback amount of cash at the end of the day.

For the companies to merge, the debt –equity ratios of the two companies must have been well calculated to determine whether they can exist as one without making losses (Hasan, Ahsan, Rahaman and Alam 2014, p. 184). If the organization was operating in debts, then the company could have realized small profits at a particular period and could have been mandated to pay its debts, a situation that has not been recorded in the company history.

The core profit of Wheelock considerably dropped from about four million dollars to three million dollars in 2016 due to the smaller GFA. The Wheelock group experienced an 11 percent increase in profit in 2016 because of the higher Hong Kong and China resilient revenues. The business gains that are attributable to the shareholders were noted to have increased by 14 percent (DATAMONITOR: Wheelock and Company Limited' 2012, p. 6). The shareholders are the individuals who determine the equity of the organization since the enterprise considers the total amount invested through shares before a particular business decision is arrived at.

Revenue and Operating Profit

The group revenue as well as the operation profits was noted to have increased by 5 percent in 2016 as compared to 2015. The company uses equity to run the organization. It puts profit in the operation of the business. The profits are dividends that belong to the shareholders.

Investment Property

The operating profits and revenues increased by 5 and 6 percent for the two companies. The profits are realized from the stable positive rental reversions. The value of housing is still expected to increase and this gives the organization higher probabilities of realizing greater profits late on. The Mainland Investment also noticed an increase in the overall profits and the investment properties.

Development Property

Under development property, there was noticeable increase in both revenue and profits that the organization got in 2016 as compared to 2015. The increase in the operating profits and revenue was 7 percent and 8 percent respectively. However, in Hong Kong, there was significant drop in the profits that the company got in 2016 as compared to 2015 most probably due to low sales. Low sales are among the factors that lead to less profit in the companies that depend on equity as their major source of capital. Areas like Mainland realized higher profits that lead to overall realization of the profits by the organization due to higher sales.

Hotels

The overall operating profits and revenue increased by 4 and 2 percent respectively. The markets in Hong Kong were adversely impacted by the soft markets. The newly established hotels in Mainland have also started to bring revenue and profits to the company.

Logistics

The operating profits increased by 4 percent in 2016. However, the revenue was noted to have decreased by 4 percent. The low revenue was noted to be due to lower operation costs of the modern cables.

Communications, Media and Entertainment

The operating profits and the revenue decreased by 47 and 10 percent respectively from 2015. The Wharf T&T decided to reduce the amount of revenue it invests in the sector. The risks that can be incurred by the media and communication fields might be relatively high. Therefore, Wharf T& T decided to withdraw the amount of capital that they invest in the sector. The operating costs are also noted to have increased. The losses in the communication sector are in line with the M&M theory that illustrates that the marketing value of the company is directly related to the risk probability of the goods offered by the business. Higher losses have a great impact on the market value and the overall capital structure of the business.

Investment and Others

The operating cost of other investments was noted to amount to about $719 million dollars and was majorly the interests and dividends. The company majorly depends on its equity as the major source of finances. The book value of the company was noticed to have increased by about 1 percent in 2016.

Finance Costs

The company finance cost statement in 2016 was indicated to be about $1,484 million. This was the total cost excluding the gains that were indicated throughout the year. The company is noted to have an effective borrowing rate of about 3.2 percent per annum.

Share of Results of Associates and Joint Ventures

The shares profits associates was noted to have a decrease of 4 percent. Small share contribution was noted to be from Mainland. Higher amounts of share profits were noted to be from Hong Kong under the supervision of Mount Nicholson.

The company paid a high amount of tax last year following the fact that it deferred taxes in the previous years. Apart from the differed taxation costs, the company paid taxes higher than the previous year by 11 percent. The profits that were linked to the non-controlling interests were about 15 percent following increased net profit that was provided by Wharf. The profits brought to the company as a result of equity was noted to have increased by about 14 percent. The average cost of every share was determined to be about $8.02.

Liquidity, Financial Resources, and Capital Commitments

The total equity shareholders and the shareholder number increased leading to an increase of the company’s equity by about 7 percent.

Comparison with competitors

Source: (Morningstar, 2017, p. 1)

The table above indicates the financial position of Wheelock and Co Ltd. relative to its competitors. Relative to its competitors, Wheelock and Co Ltd. The company bears the advantage of being the most trusted brand having served the people for more than 150 years. Furthermore, the company has a strong presence in the market attributable to its recognition through the CSR activities that it engages in. The stable dividend stream of the firm coupled with the excellent track record in the property development in Hong Kong plays a crucial role in providing the company competitive edge.

Conclusion

The Wheelock and Company Limited is a well-organized company that has invested in assets of small risks. According to M&M theory, the Wheelock and Company Limited have a higher probability of having a stable market value given that the company ensures invests in less risky projects. In addition, the stability of the market value of the company is likely to be maintained due to the earning ability of the projects that they engage in. The technological field is rapidly growing while housing is a basic need. This is a clear indication that the company has a high possibility of not suffering from severe debts. The company gets its finances from its equity, and this gives it lower debt-equity ratio.

References

Adrienn, H 2014, 'SUMMARY OF THEORIES IN CAPITAL STRUCTURE DECISIONS', Annals Of The University Of Oradea, Economic Science Series, 23, 1, pp. 912-918, Business Source Complete, EBSCOhost, viewed 25 June 2017.

Arasteh, F. and Nourbakhsh, M.M., 2014. The Study of Relationship between Capital Structures, Firm Growth with Financial Leverage of the Company Listed in Tehran Stock Exchange. Kuwait Chapter of Arabian Journal of Business and Management Review, 3(5), pp.1-9.

Becker, J 1978, 'General Proof Of Modigliani-Miller Propositions I And Ii Using Parameter-Preference Theory', Journal Of Financial & Quantitative Analysis, 13, 1, pp. 65-69, Business Source Complete, EBSCOhost, viewed 25 June 2017.

Brusov, P.N., Filatova, T.V. and Orekhova, N.P., 2013. Absence of an optimal capital structure in the famous tradeoff theory!. Journal of Reviews on Global Economics, 2, pp.94-116.

'DATAMONITOR: Wheelock and Company Limited' 2012, pp. 1-8, Business Source Complete, EBSCOhost, viewed 25 June 2017.

DeAngelo, H. and Stulz, R.M., 2014. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks.

DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), pp.219-236.

Hasan, M.B., Ahsan, A.M., Rahaman, M.A. and Alam, M.N., 2014. Influence of capital structure on firm performance: Evidence from Bangladesh. International Journal of Business and Management, 9(5), p.184.

Horn, D., Moylan, C.R. and Wheelock, G., Switch Bulb Company, Inc., 2014. Liquid displacer in LED bulbs. U.S. Patent 8,820,954.

Morningstar, (2017). Wheelock and Co Ltd WHLKF. Retrieved from: http://financials.morningstar.com/competitors/industry-peer.action?t=WHLKF®ion=USA&culture=en_US On [26 June 2017]

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Saeed, M.M., Gull, A.A. and Rasheed, M.Y., 2013. Impact of Capital Structure on Banking Performance (A Case Study of Pakistan). Interdisciplinary journal of contemporary research in business, 4(10), pp.393-403.

'Wheelock and Company Limited SWOT Analysis' 2016, Wheelock & Company Limited SWOT Analysis, pp. 1-7, Business Source Complete, EBSCOhost, viewed 25 June 2017.

Wheelock Street, C 0002, 'Hudson Valley Property Group, Red Stone and Wheelock Street Capital Acquire and Preserve 1,009 Units of New Jersey Affordable Housing', Business Wire (English), 2, Regional Business News, EBSCOhost, viewed 25 June 2017.

Wheelock, G., Switch Bulb Company, Inc., 2014. Partitioned heatsink for improved cooling of an LED bulb. U.S. Patent 8,740,415.

Zeitun, R. and Tian, G.G., 2014. Capital structure and corporate performance: evidence from Jordan.

November 09, 2022
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