Capital Structure Analysis Of Danaos Shipping Company Finance Essay

This study will look into the capital construction of Danaos Corporation, a transportation company based in Piraeus, Greece. Since its chief activity is renting its vass to other companies, this study will look into the manner in which it maintain a immature fleet, the procedure of selling an old vas and purchasing a new one, the manner in which the company finances its investings and it will reason with the ratio analysis of the company.

The chief decisions drawn by the research in Danaos are:

The residuary life of the vass was 195.8 million $ and 178.2 million $ for the old ages 2008 and 2007, severally.

In 2007 the company funded its operation 50 % by equity and 50 % by debt.

In 2008 the company funded its operation 27 % by equity and 73 % by debt.

From 2007 to 2008 the WACC increased from 7.39 % to 8.56 % and therefore the company requires investings with higher returns.

In 2007 the stock monetary value was $ 35 and because of the fiscal crisis it dropped below $ 5.

ROA and ROC both decreased in the period examined by 6 % and 6.5 % severally.

ROE increased by 10.5 %

When compared to Diana, the TIE of the company is significantly lower than the rivals ‘ .

Introduction

DANAOS Corporation is a taking international house which owns more than 40 container ships and has an purpose to add another 20 container ships in the direct hereafter. Additionally, charters vass to many line drive companies such as MAERSK, COSCO and China transportation. The intent of the company is to go the greatest and the most profitable charter company in the universe. DANAOS has a cardinal office in Piraeus, Greece but besides has offices in several other states like Germany and Ukraine. DANAOS Corporation is headquartered in the Republic of The Marshall Islands and is listed in the NYSE from October of 2006.

In 1972 Dimitrios Coustas, an investor with immense experience in the transportation sector founded DANAOS Corporation. From 1987 John Coustas, the boy of the laminitis is the Chief executive officer of DANAOS to day of the month. Nowadays, DANAOS has a repute of operational support to liner companies and other charterers all over the universe.

Fleet Replace and Acquisition

The house in order to hold a immature fleet sells the old vass and replaces them with new or 2nd manus vass but younger. The tabular array below presents the gross revenues of the house that took topographic point in 2008.

Date

Gross saless

Age

Sum

Addition OR ( LOSS )

15/01/08

APL Belgium

6 old ages

44.5 million $

0.8 million $

25/01/08

Winterberg

30 old ages

11.2 million $

4.8 million $

20/05/08

Maersk Constantia

29 old ages

15.8 million $

9.3 million $

26/10/08

Asia Express

31 old ages

10.2 million $

3.5 million $

10/12/08

Sedeberg

30 old ages

4.9 million $

( 1.5 ) million $

The following tabular array shows the acquisitions of vass of the house in 2008

Date

Purchase

New Building OR SECONDHAND

Sum

11/02/08

Hyundai Progress

Secondhand ( 10 old ages old )

30.4 million $

18/03/08

Hyundai Highway

Secondhand ( 10 old ages old )

31.0 million $

20/03/08

Hyundai Bridge

Secondhand ( 10 old ages old )

31.0 million $

04/07/08

Zim Rio

New edifice

63.8 million $

22/09/08

Zim Sao Paolo

New edifice

63.8 million $

03/11/08

Zim Kingston

New edifice

63.8 million $

Beginnings of Support

The chief beginning of financess the house uses is equity provided by shareholders, long term bank loans and runing hard currency flows. The house normally uses its financess for capital outgos. The company aims at making wealth for its stockholders through its growing.

In 2008 the house in order to finance the building and the acquisitions of new vass entered into recognition installations with several Bankss and for assorted sums of dollars:

On 15/02/08 the house entered into a recognition installation with Emporiki Bank of Greece S.A for $ 156.8 million at LIBOR plus a border due June of 2021.

On 09/05/08 the house entered into a recognition installation with Credit Suisse for $ 221.1 million at LIBOR plus a border due December of 2019.

On 30/05/08 the house entered into a recognition installation with Deutsche Bank for $ 180.0 million at LIBOR plus a border due October of 2018.

On 29/07/08 the house entered into a recognition installation with Fortis Bank, Lloyds TSB and National Bank of Greece for $ 253.2 million at LIBOR plus a border due July of 2018.

Debt of the Company

A feature of the maritime industry is hazard. Due to the fact that transporting companies are really susceptible to competition, cyclicality of the economic system and capital strength, it is common for the bulk of companies to hold a low recognition evaluation. When a transportation company seeks to acquire a loan from a bank, the loaning normally depends on a figure of factors. Research ( Grammenos et al, 1998 ) has shown that the most of import factor that Bankss take into history when make up one’s minding whether to give a loan to a transportation company or non, is the repute of the company. Furthermore, Bankss take into history recognition worthiness, securities given as collateral, hard currency flow projections and experience and clip length in the market among others. As mentioned above approximately DANAOS, the bulk of companies in the transportation industry finance their investings and operations through debt instead than equity.

Capital Structure of DANAOS

At this point we have to stipulate that the market value of equity is equal to the figure of portions outstanding times the mean monetary value of the stock during the twelvemonth. Furthermore harmonizing to A. Damadaran ( 2005 ) , we make the premise that the book value of debt is equal to the market value of debt. At last the steadfast value is equal to sum of M.V of equity and the M.V. of debt.

2007

Market Value of equity = 26,45 * 54.600.000 = 1.444.635.514

Market Value of Debt = 1.446.900.000

Firm Value = 2.891.535.514

2008

Market Value of equity = 18,15 * 54.500.000 = 989.088.834

Market Value of Debt = 2.609.400.000

Firm Value = 3.598.488.834

The figures above depict the capital construction of the company in 2007 and in 2008. It is clear than the per centum of debt increased from 2007 in 2008 dramatically. In 2007 both the market value of debt and the market value of equity were 1.4 billion dollars. While in 2008 the market value of debt was 2.6 billion dollars and the market value of equity was about 1 billion dollars.

Cost of Equity

‘The cost of equity is the rate of return that investors require to put in the equity of a house. ‘ ( A. Damodaran, pp92 ) . DANAOS cost of equity will be calculated utilizing the Capital Asset Pricing Model ( CAPM ) . The CAPM expression is the followers:

K=Rf+? ( Rm-Rf )

The Rf is the riskless rate used in the 10 twelvemonth us t-bond. In order to cipher the Rf we took the mean monthly monetary values of the annualized outputs for 10 old ages from Bloomberg.

The beta ( ? ) used is the statistical step of the volatility of the security ‘s return in relation to market returns. The beta for 2007 was 0.82 and for 2008 was 1.95. Finally, the hazard premium is the minimal difference between the hazard free rate ( Rf ) and the market return ( Rm ) that an investor requires in order to bear the hazard of the investing. At this point we have to underscore that we took every bit granted that the hazard premium is 5.5 % for both old ages.

Cost of equity 2007

Ke = 4.64 % + 0.82 * 5.5 % = 9.15 %

Cost of equity 2008

Ke = 4.52 % + 1.95 * 5.5 % = 15.25 %

From this consequence there is grounds that an investor required at least 9.15 % and 15.25 % return in order to put in DANAOS for 2007 and 2008 severally.

Cost of Debt

The cost of debt measures the cost a house has when borrowing financess in order to finance a undertaking. In order to cipher DANAOS ‘ cost of debt, one of Damodaran ‘s spreadsheets for evaluation computation was used. This spreadsheet uses the involvement coverage ratio, the estimated bond evaluation and the estimated default spread in order to happen the estimated cost of debt. In 2007 the house had a recognition evaluation of A. This basically means that DANAOS had a strong capacity in refunding its debt in the short term but in the long term it can be affected by economic conditions. DANAOS default spread is 1 % which means that an investor would necessitate 1 % on top of the 10 twelvemonth T-Bond ‘s involvement rate in order to put in DANAOS bonds. From the consequences generated by Damodaran ‘s spreadsheet, there is grounds that, in order to finance its undertakings, DANAOS borrowed financess at an mean involvement rate of 5.64 % about. In 2008 because of the excess purchase the house had a evaluation of BBB. This means that the company had equal capacity to refund its debt, but it was hazardous. DANAOS default spread for 2008 was 1.5 % therefore an investor would necessitate 1.5 % more than the 10 twelvemonth T-Bond ‘s involvement rate in order to put in DANAOS bonds. From the consequences generated by Damodaran ‘s spreadsheet, there is grounds that, in order to finance its undertakings, DANAOS borrowed financess at an mean involvement rate of 15.25 % .

Weighted Average Cost of Capital ( WACC )

The cost of capital is a step of the composite cost of raising money that a house faces ‘ ( A.Damodaran, pp150 ) . Harmonizing to Damodaran ( 2005 ) , the expression used to cipher the cost of capital of a house is:

Cost of Capital = kE [ E/ ( D+E+PS ) ] + kD [ D/ ( D+E+PS ) ] + kitchen police [ PS/D+E+PS ) ]

Where:

KE: Cost of Equity

KD: Cost of Debt

KPS: Cost of Preference Shares

Tocopherol: Entire Equity

Calciferol: Entire Debt

Postscript: Number of Preference Shares

WACC 2007

WACC = ( 1444635514/2891535514 ) * 9.15 % + ( 1446900000/2891535514 ) * 5.64 % = 7.39 %

The leaden mean cost of capital can be defined as the return an investor expects if he were to put in a portfolio that includes all the securities of a specific company. DANAOS is funded 50 % by equity and 50 % by debt.

WACC 2008

WACC = ( 989088834/3598488834 ) * 15.25 % + ( 2609400000/3598488834 ) * 6.02 % = 8.56 %

In 2008 DANAOS is funded 27 % by equity and 73 % by debt. Therefore, there is grounds that DANAOS is progressively funded by debt alternatively of equity.

Danaos Stock in 2007-2008

The figure below depicts the monetary value of the house ‘s stock for 2007 and 2008. It is clear that in 2007 when the universe economic system was dining the stock monetary value was increasing and in 2008 because of the fiscal crisis the stock began to diminish. In July 2007 the stock had a monetary value of about $ 35 and at the terminal of 2008 the monetary value of the stock chap below $ 5. As mentioned antecedently, this shows how sensitive the transportation companies are to economic cyclicality.

From the figures above it is clear that Diana, the rival of DANAOS Corporation, has besides lost value due to the recognition crunch. The monetary value of the stock in October 2007 was close to 35 $ and at the terminal of 2008 the monetary value was near to 10 $ .

Danaos Ratio Analysis

In our assignment we use the ratio analysis to supply the high spots of the fiscal statements. We define the most relevant ratios such as profitableness and pitching ratios and we explain with their usage the place of the house compared to the old twelvemonth and to one of the house ‘s rivals.

The figures illustrated above show that there has been a diminution in both ROA and ROC which means that the returns for every plus of the company are lower for 2008 when compared to the twelvemonth earlier and in the instance of the ROC there are lower returns for the capital invested. On the other manus there is an addition in ROE which means that the returns for every dollar invested from equity are higher than the old twelvemonth.

Profitability Ratios

2007

2008

ROA

11.47 %

5.40 %

Roe

34.45 %

52.60 %

Roc

10.3 %

4.07 %

EPS decreased over the twelvemonth which means that each portion paid out a lower return. In contrast, dividend output increased due to a lessening in the portion monetary value. Finally the P/E ratio increased. This was due to the fact that the rate at which the portion monetary value decreased was lower than the rate at which the EPS decreased.

Investing Evaluation Ratios

2007

2008

EPS

3.94

2.11

DIVIDEND Output

13 %

20 %

P/E

1.90

3.55

Due to the big loans that Danaos took out, the company ‘s debt increased significantly and therefore the D/E ratio recorded a crisp rise. In 2007, Danaos could refund its debt 9.61 times, but since the debt increased through loans this ratio decreased and in 2008 it was able to refund its debt merely 3.05 times.

Debt Ratios

2007

2008

D/E

100 %

263 %

Necktie

9.61

3.05

The current ratio shows the liquidness of the company decreased over the twelvemonth because the current liabilities of the company increased significantly. Finally, the working capital ratio increased during the twelvemonth which means that because the company has more capacity to refund its current liabilities.

Other Ratios

2007

2008

CA/CL

2.60

2.05

CA-CL

81900000

128000000

Comparison with rivals in 2008

When comparing Danaos to Diana, figures show that Diana has a higher ROA and ROC but lower ROE than Danaos. This means that Diana has higher returns for every plus the company owns and higher returns for the entire capital invested. On the other manus the figures show that Danaos has higher returns for every dollar of equity invested.

Profitability Ratios

DANAOS

Diana

ROA

5.40 %

21.41 %

Roe

52.60 %

28.58 %

Roc

4.07 %

21.50 %

Diana had higher EPS and P/E ratio but lower dividend output than Danaos. These figures seems sensible because the Diana ‘s stock monetary value did n’t diminish at the same rate as it did for Danaos.

Investing Evaluation Ratios

DANAOS

Diana

EPS

2.11

2.95

DIVIDEND Output

20 %

12.81 %

P/E

3.55

7.16

The debt ratios clearly reflect the higher debt of Danaos compared to Diana. This is chiefly due to Diana ‘s policy of funding its investings through equity instead than debt. All these combined show that Diana has the significantly higher capacity to refund its debt.

Debt Ratios

DANAOS

Diana

D/E

263 %

16.25 %

Necktie

3.05

40.30

Finally, Diana had higher liquidness than Danaos and both companies have equal capacity to refund their current liabilities.

Other Ratios

DANAOS

Diana

CA/CL

2.05

3.43

CA-CL

128000000

48542000