Elementis plc is engaged in fabrication of forte such as rheological and surface chemical additives and Cr chemicals. The company chief activities are to fabricate and sale forte chemicals ( Datamonitor 2010a, p.4 ) . It is headquartered in London, the UK and employs approximately 1.500 people at more than 30 locations in 8 states and is listed on the London Stock Exchange ( Hoover, 2010a ) . Elementis chiefly operates through three concern divisions ( Elementis, 2009 ) :
Elementis forte merchandises division is engaged in fabrication of organoclays, rheological additives, compounded merchandises and colourants. It has approximately ten fabrication sites across Europe, the US and Asia Pacific and its forte merchandises are used in industrial coatings, oilfield, building, architectural coating and personal attention and house clasp applications.
Elementis wetting agents division is engaged in bring forthing of surface active ingredients that are used in industrial cleansing, oilfield chemical, leather and fabrics, household/domestic detergents, mush and paper applications.
Elementis Cr division is a manufacturer of Cr chemical. It has fabrication installations in the UK and the US and is the lone manufacturer of the complete scope of Cr chemicals that are used in figure of applications including leather tanning, timber intervention and metal coating.
Kronos Worldwide Inc
Kronos worldwide Iraqi National Congress ( Kronos ) engages in the fabrication and selling of Ti dioxide ( TiO2 ) pigments that are used for leaving brightness, whiteness and opacity for merchandises including plastics, surfacing, fibres, documents, nutrient, cosmetics and ceramics ( Datamonitor 2010b, p.5 ) . Kronos produces over 40 different TiO2 classs under the Kronos trade name name. The TiO2 is produced in two crystalline signifiers – rutile and anatase. The rutile TiO2 is preferred for usage in coating, inks and plastics ; the anatase TiO2 is preferred for usage in ceramics, selected documents, semisynthetic fibres, gum elastic tyres, nutrient and cosmetics. Kronos besides industry and sell ilmenite, which is a natural stuff used straight as a feedstock, and iron-based chemical, which are co-products and processed co-products of TiO2 pigment production, every bit good as titanyl sulfate and Ti oxychloride, which are side-stream merchandises from the production of TiO2 pigments ( Kronos, 2009 ) .
It is headquartered in Dallas, Texas and employs about 2.450 people and is listed on the New York stock Exchange. Kronos ‘ production installations are located throughout the US, Canada, Germany, Belgium, Norway and Europe and besides operates in approximately 100 states with the bulk of gross revenues in Europe and North America ( Hoovers, 2010b ) .
Table 1 – Quick position of companies ( Elementis Vs Kronos )
Kronos Worldwide Inc
New York, USA
( ?195 million )
( ?148 million )
Internet Operating Assetss
( 2009 )
( 2009 )
( 2009 )
( 2009 )
( Buildings & A ; Machinery )
( 2009 )
( 2009 )
Net Financial Liabilities ( Assets )
( 2009 )
( 2009 )
Stockholders ‘ Equity
2. Specialty Chemical Industry
In specialty chemical industry, batch procedures are of considerable importance. Batch procedures are in general used when isolation is required for grounds of safety or asepsis, when the production volumes are low and when conversions are necessary often. With recent tendency in constructing little flexible workss, the major companies including Elementis and Kronos broke up their big works sites into smaller sites ( Bonvin 2001, p.4 ) . Other cardinal points in patterned advance of forte chemical industry are aggregate production, professional merchandises, mass hole assets and mass warehouse ( Natural stuffs, finish goods, work in advancement ) ( Researchandmarket, 2007 ) .
The forte chemical industry is really competitory and has been capable to great trade of acquisition and amalgamation activity. Most of the largest companies focus on ‘core ‘ activities such as concluding preparation of merchandises and specialized synthesis and besides tend to buy specialist chemicals from external providers instead than bring forthing the stuffs themselves ( Keynote, 2009 ) .
The forte chemical industry is besides a cyclical concern. Therefore, the universe economic system exerts a critical influence over its lucks. As seen below to chart 1, The UK and US GDP existent growing rates are following in the same manner with the universe GDP existent growing rates. Not merely higher authorities disbursement has been supportive for growing but besides consumer disbursement has been the cardinal driver of growing. The economic system continued to execute good until 2007 due to ‘credit crunch ‘ that started to impact the economic system in 2008. As a consequence of ‘credit crunch ‘ , the universe, UK and US GDP existent growing rate declined between 2008 and 2009. Because of The impact of economic stagnancy and the diminution in GDP existent growing, consumer disbursement has become more selective ( Highbeam, 2010 ) .
Graph 1: GDP existent growing
World GDP existent growing
UK GDP existent growing
US GDP existent growing
Beginnings: The World Bank, 2010
On the other manus, the planetary economic environment has proven to be supportive since the terminal of 2008. For case, the figure of unemployment people in the UK for the three months to December 2009 fell by 34,000 to make 2.47 million ( statictics, 2009 ) . The US unemployment rate remained unchanged at 9.7 % in 2009 and lower than 10 % rate reported in the old twelvemonth ( financemarkets, 2009 ) . Besides the UK rising prices rate fell to 2.17 % in 2009 from 3.61 % in 2008. The US rising prices rate fell to 0.36 % in 2009 from 3.84 % in 2008 as good. Therefore, the new state of affairs of both of the UK and US economic system encourage consumers to exchange more shopping and disbursement more money on chemical industry ( Rate rising prices, 2010 ) .
Graph 2: Inflation Ratess
Resource: Rate Inflation, 2010
The forte chemical industry is besides dependent upon natural stuffs manufactured by the oil and gas industry and is dominated by tremendous transnational companies such as Shell, Total, Exxon Mobil and Chevron Texaco. Therefore the net income border of the chemical industry is strongly affected by planetary oil monetary values. Crude-oil monetary values reached record highs of $ 125 per barrel in 2008. After 5 old ages of rises in crude-oil monetary values, rough oil monetary values fell $ 53 per barrel in 2009. However, Goldman Sachs Group Inc forecast oil monetary values to make between $ 90 and $ 95 per barrel in 2010 because of expected energy deficit and a wider planetary economic recovery ( Hemmerling, 2009 ) .
3. Literature Reappraisal
3.1. Theory on Capital Structure
Capital construction theory is one of the most important countries of corporate finance. Fiscal literature defines a houses ‘ purpose as “ to maximise stockholders ‘ wealth ” . Shareholders ‘ wealth is the value of the house represented by the market monetary value per portion of the house ‘s common stock, which in bend, is a contemplation of the house ‘s funding, investing and plus direction determinations ( Graham and Harvey 2001, p.10-11 ) . Capital construction is defined as the specific mix of debt and equity a company uses to finance its operation. Optimum capital construction is the best funding place, which increases the house value and public presentation through worsening cost of capital and increasing net economic returns. There is a negative correlativity between the cost of capital and the market value of the house. If fiscal directors win to diminish the cost of capital, market value will increase hence optimum capital construction provides the maximal market value of the house ( Brealey et al. 2008, p.424 ) .
The determination of understating the cost of capital is besides consistent with the maximizing stockholders ‘ wealth. However, minimal cost of capital may non ever attracts investors and in add-on there are some factors act uponing the determinations of house ‘s right debt and equity mix pick which is required to understate the cost of capital ( Watson and Head 2007, p.242 ) .
Since Modigliani and Miller published their seminal documents in 1958, there have been several arguments on the right mix pick of capital construction. The MM proposition I states that the value of a house is unaffected by the dept-equity pick in complete and perfect market that means in the absence of bankruptcy costs, revenue enhancements and asymmetric information ( Modigliani and Miller 1958, p.261-297 ) . Debt has fiscal purchase consequence that means debt increases the rate of return on equity nevertheless, at the same clip the fiscal hazard additions therefore hazard and return balance out ( Frank and Goyal 2007, p.5 ) .
Even though the premises of MM proposition I seems to be unrealistic, this theory is of import because it provides a model and valuable theoretical benchmark for research worker to see the factors impacting the capital construction. Alternate capital construction theories have emerged and are based on revenue enhancement benefits associated with dept usage, bankruptcy cost, bureau cost and asymmetric information. The first three are described in footings of the inactive tradeoff theory while the last one is rooted in the pecking order theory ( Abor 2008, p.9 ) .
Inactive tradeoff theory added to the MM proposition I the thought about revenue enhancement shield and bankruptcy cost. The trade-off theory provinces that the optimum capital construction is a tradeoff between the revenue enhancement benefit of debt and the bankruptcy costs of debt. Capital construction determinations of houses are affected by revenue enhancement policy. Tax benefit derived from debt would take houses to be wholly financed by debt. Therefore, revenue enhancement shield thought addition market value of house with increasing of debt ratio. However the hazard of finance hurt is really important and bankruptcy is extremely possible ( Frank and Goyal 2007, p.11 ) . The value of the house can be increased by the usage of debt until involvement payments can be deducted from nonexempt corporate income, however increasing debt consequences in high chance of bankruptcy. The value of the house is reduced by such bankruptcy costs ( Modigliani and Miller 1963, p.442 ) .
The usage of the debt in the capital construction of the house besides leads to bureau costs. Harmonizing to bureau costs, there are two types of struggles. ‘Conflicts between directors and stockholders arise because directors own less than 100 % of the residuary claim. Consequently, directors could non capture the full addition from their net income sweetening activities nevertheless they bear the full cost and the hazard of these activities ‘ ( Abor 2008, p.11 ) . As a consequence of this, directors can reassign the resources as their ain involvement alternatively of increasing the house value. Furthermore, directors do non desire to work under force per unit area of the involvement payments. They prefer the equity finance despite the benefits of debt funding. On the other manus, struggles between equity holders and debt holders originate because the debt contract gives equity holders a inducement to put bomber optimally. The debt contract provides that if an investing outputs big returns, more than involvement of return, equity holders obtain the all addition after the involvement. However, when the investing fails, debt holders bear the effects because of the limited liability. Consequently, the optimum capital construction could be obtained by tradeoff the benefit of debts and the bureau costs ( Harris and Raviv 1991, p.301 ) .
While inactive tradeoff theory by and large back up the thought that extremely profitable houses with safe touchable assets has more nonexempt income to screen and the house can utilize more debt capital without put on the lining fiscal hurt ( Lemmon and Zender 2001, p.6 ) , there are many established, profitable houses runing for old ages with superior recognition evaluations at low debt ratios. It was found that profitable houses tend to borrow less in cross-sectional trial for the US, UK, France and German ( Myers 2003, p.89 ) . This shows that the inactive tradeoff theory is weak in explicating the fiscal activities of profitable houses.
Pecking order theory has come away as alternate theory to inactive tradeoff theory. Asymmetrical information is the cardinal premise of the picking order theory. Harmonizing to asymmetric information premise, capital construction is affected by asymmetric information between insider and foreigner investors. Directors and inside investors have more information about operation than outside investors who demand a higher rate of return on equity than debt. Therefore their actions provide a signal to outside investors about the company ‘s chances. Directors besides attempt to maximise their value. And directors will fund their investing in conformity with the picking order theory is that there is a hierarchy of house penchants sing the funding of their investing. This hierarchy of penchants suggests that Firms finance their investing foremost by undistributed net incomes, followed by debt and eventually by equity as a last resort ( Myers and Majluf 1984, p.5-7 ) . The ground for puting equity at the underside is that the stock market tends to look equity issue as a mark of jobs ( Arnolds 2002, p.51 ) . The decision drawn from the picking order theory is that profitable houses use less debt because they do non necessitate external financess as undistributed net incomes is adequate for their demands and stop up with small debts. Less profitable houses have non adequate net income and necessitate debts or even equities.
However, Pecking order theory perfectly is non right. Because practical analysis says that there are many profitable companies that prefer equity issues instead than debt funding. In this work it can be seen that same company may bespeak utilizing both theories for the same period of clip.
3.2. Institutional environments differences between the UK and US
Capital construction picks of a house are besides the consequence of institutional environment differences between states such as bankruptcy codifications, revenue enhancement statute laws and accounting patterns. These differences between the UK and US non merely have direct effects on the houses but besides indirect effects through impacting the factors of capital construction as it is discussed the undermentioned subdivision. Looking at briefly these differences between them is to garner adequate information to back up the grounds found in this survey on the relation between the analysed factors and the capital construction.
Bankruptcy: Even though that the US and UK are both developed and have financially good structured economic systems, their bankruptcy Torahs are significantly different specially the weight given to the creditors and the debitors. The UK jurisprudence is described as “ creditor-friendly, ” favoring the settlement of the debitor ‘s assets to pay off creditors in the order of their precedence. In contrast, the US jurisprudence is described as “ debtor-friendly, ” oriented towards reorganising the bing company ( for illustration, giving the debitor a 2nd alteration ) and accustomed to diverting from contractual final payment precedences ( Smith and Stromberg 2004, p.2 ) .
Franks and Torous compare the UK bankruptcy codification with that in the US, and conclude that “ the US codification appears to hold strong inducements to maintain the house as a traveling concern even when it is worth more in settlement [ while ] the UK codification, by stressing the rights of creditors — and in some instances giving precedence to one creditor – is likely to take to excessively many remature settlements ” ( Franks and Torous 1993 p.96 ) . Because of this feature of the US codification, one can anticipate more bureau struggles in the US ( between stockholders and debt holders ) such as hazard permutation and under investing.
Tax System: In general revenue enhancement systems can be classified into classical systems and imputation systems. In classical systems, involvement payments are revenue enhancement deductible at the corporate degree, but dividends are non. At the personal degree dividends and involvement are non deductibles. Therefore dividends are dual taxed in classical systems ; foremost in the corporate degree and so in personal degree. The United States is runing in this system. Empirical grounds support the thought that in the US revenue enhancements affect corporate fiscal determinations ( Graham 2003, p.4-6 ) .
Imputation systems cut down or extinguish revenue enhancement of dividends by allowing a revenue enhancement recognition to receivers of dividends, equal to some fraction of the corporation revenue enhancement paid on net incomes used for dividends. This prevents the double-taxation of dividends and theoretically decreases the attraction of debt funding. The United Kingdom is runing in this system. The empirical factors of capital construction pick were investigated through analyzing the houses in the UK. It was found that for the UK markets, the revenue enhancement advantage of debt funding plays a relevant function in capital construction determinations ( Panno 2003, p.97-112 ) .
These systems both may hold different impact on the capital construction determinations of the houses. Double revenue enhancement on dividends makes debt financing more attractive in classical systems.
Comparison of Accounting Policies and Fiscal Statements: Fiscal accounting in the UK is regulated by authorities establishment which is the Accounting Standards Boards ( ASB ) and the ASB issues Financial Reporting Standards. On the other manus, fiscal accounting in the US is regulated by a private sector organic structure which is the Financial Accounting Standards Board. While both of The UK and US are classified as common-law states, the UK was characterized as exhibiting the least political influence on accounting because of several establishment factors. Therefore, the UK GAAP seems likely to be less conservative than US GAAP in footings of comparative impact on net incomes due to politicization of accounting standard scene and enforcement addition the demand for conservative and timely accounting income ( Ball et al. 2000, p.3-4 ) .
The relation between conservativism and capital construction comes from the thought that the more conservative the fiscal statements the more unostentatious the stockholders fund, therefore take downing the comparative purchase degree. In the Appendix 1, the chief differences between the United Kingdom and the United States general accepted accounting patterns are discussed to explicate major parts of the differences between them to back up Ball et Al. ( 2000, p.3-4 ) statement of UK GAAP to be less conservative than US GAAP in footings of comparative impact on net incomes.