Q1) Assess Hutchison Whampoa current capital structure in light of its future financing needs Hutchison Whampoa is a growth

firm. It has growth opportunities in almost all the markets it is currently operating. To support this large growth Hutchison Whampoa needs a sufficient stream of funds. Apparently corporates of Hong Kong are not very open to all sources of finance. Firms like to rely on funds they have internally generated. In case of Hutchison Whampoa however it was necessary to raise funds externally in order to have sufficient funds when the firm undertakes new projects. At present Hutchison Whampoa was about to undertake many projects which would require long term funding. Therefore it was necessary for the firm to raise funds with long term nature. It was forecasted that the firm would require almost US five billion dollars over the future five years. The companys traditional way of financing i.e. raising cash internally and raising funds through short or medium term bank financing were therefore no longer suitable If we analyze the companys balance sheet we will be able to see that it is currently financing most of its capital from equity. The company currently has an equity value of 59 billion Hong Kong Dollars whereas the almost 26 billion Hong Kong Dollars have been raised from debt. However in future five years Hutchison would require almost 39 billion Hong Kong Dollars. And if we look at companys profit and loss account we can see that it was only able to retain approximately 5 billion Hong Kong Dollars. This amount may just not be enough for future funding. This is also because most projects when they start do not provide cash flows. Hence it is important for the company not to rely completely on internally generated funds.

Q2) Assume Hutchison Whampoa will require US$ 1 Billion of financing in 1996. Assume that new equity can be raised at $58 a share and that a long term debt will carry an interest at HIBOR plus 80 bps. How would an equity or debt issue impact on Hutchis ons financial position and performance?

Hutchison Whampoa is currently financing most of its capital needs from equity. If it has to raise US$ one billion at the price of 58$ per share it will have to issue a large amount of new shares. This would mean company will have to issue almost 1,7241,379 new shares. Hence this large amount of shares would result in the dilution of the companys current control system. The financial position of the company will change as the company will show an increase in equity with the amount of 7.8 billion Hong Kong Dollars. Also the asset side will also increase by similar amount which would balance the both sides. The effects on the financial performance of the firm will be very difficult to forecast. This is because the capital raised will be invested in the different new projects company is undertaking. The future cash flows from these projects i.e. how much revenue will they produce in the coming year or will they even produce any or will they have negative cash flows all seems to be uncertain. However it can be seen that currently the company is paying a 1.18 dividend per share. If company goes forward and issues new shares it would mean that company will have to give out an additional dividend of almost 20 million Hong Kong Dollars. The second option the company has to raise the current the one billion US $ from debt. Raising debt would put some stress on the financial performance of the firm as it will have to pay out interest for this borrowing. Currently the company has almost 26 billion Hong Kong Dollars in long term debt financing. One billion US$ increase in debt would mean a 7.8 billion increase in the long term liabilities. The effect on the financial position will be such that the total long term liabilities would increase from 26 billion Hong Kong Dollars to 33.8 billion Hong Kong Dollars. The effect on financial performance would be in increase in the interest expense for the company. After the borrowing of additional 7.8 billion this expense would increase by 477 million Hong Kong $. Company

HIBOR Rate Basis Points Addition HIBOR Rate New New Debt Interest Payable

0.0532 0.0080 0.0612 $7,800,000,000 $477,360,000

Q3) Compare the debt financing options. Explain why you are in favor or against Yankee bonds option.

Hutchison Whampoa had a number of options in which they could raise debt. The first option was the syndicated bank. Syndicate bank financing works such that different banks both local and international group up to finance a single borrower. However this method was not very feasible as these banks only loaned for a time limit of five to seven years where as Hutchison Whampoa required loans with maturities of ten years and beyond. Second option that Hutchison Whampoa had was to issue bonds. The problem here was that companies from Hong Kong did not raise debt with long maturities. It was believed that long term debt obligations restricted the financial flexibility of the company. Also for Hutchison Whampoa this was the first time the firm would issue bonds longer than 10 years. Hutchison Whampoa could issue bonds in the United States. But the problem was that Hutchison Whampoa was not very well known in the United States. Therefor in order to issue bonds there it had to become well known. This would mean preparing promotional strategies. Also it would have to change its financial statements in accordance with the US-GAAP. The third option was to raise debt from bonds issued in Hong Kong in local currency. This would not require any new promotional costs and would be very cost effective. But the market was now dominated by bong issues of companies from Peoples Republic of China. Chinese firms because of their size had been offering bond issues at much higher rates as compared to local Hong Kong firms. One very attractive market for Hutchison Whampoa was the Eurobond market. Eurobond market had a large investor base as bonds issued in this market were offered to investors in multiple countries simultaneously. Also this market was growing and many large multinationals were joining in. Yankee bonds were a very attractive option as well. They provided the company with the option to raise debt in United States. I would favor the Yankee bond option because it allows companies to raise debt with having without having to fulfill the liabilities of the Securities and Exchange Commission. Hence if a firm can find a good institutional investor or negotiate a bond sale contract with an institutional investor it would be very cost and time effective.

Q4) What kind of capital structure would you propose to Hutchison and Why I would propose that the company goes for the debt issue option. The first reason for that is the company already is relaying very much on equity. Offering more equity would make them more reliant on only one type of financial source. Adding more debt to their capital structure would provide company with a variety of financial options and would better balance the capital structure. More equity offering would also raise the question of dilution of the control of current shareholders. As the company does not want the control of current shareholders to dilute, raising funds through debt financing would perfectly satisfy this requirement.