Improvement of the capital structure through the implementation of an investment project
Table of contents: The Kazakh-American Free University Academic Journal №10 - 2018
Grishaev Ilya, Kazakh-American Free University, Kazakhstan
Nepshina Victoriya, PhD, Kazakh-American Free University, Kazakhstan
In a market economy, the process of capital formation, the
optimization of its structure, the establishment of a rational balance between
various sources of financing and, in this connection, the quality of resource
management become particularly important.
Relying on the research of scientists, it is necessary to emphasize
the importance of the optimal structure of capital for the effective operation
of the organization .
A sufficient level of capital helps maintain the viability of the
business entity throughout the entire period of operation, preserving its
liquidity, stability and solvency. The possibility of increasing investments in
the economy of the country, expanding the market of goods and services depends
on the size of its own funds.
Capital is a part of the financial resources advanced and invested
in production for profit. Capital is one of the most widely used economic
categories in financial management. It is the basis for the creation and
development of the enterprise and in the process of functioning it ensures the
interests of the state, owners and personnel.
Capital acts as a combination of means of production (balance asset)
and as one of the factors of production. It could be:
- main capital;
- working capital;
- borrowed capital.
The theoretical research and practice of forming the optimal
structure of capital is based on the theorem of F. Modigliani and M. Miller,
who argues that in an ideal economic environment, the capital structure does
not affect the value of the organization, which depends only on the
profitability of its activities and the risks associated with it.
The cardinal importance of taking reasoned and weighted decisions on
the formation of the structure of sources of financing of investment activity
is due to the multi-vector influence of this factor on the development of the
- with a non-optimal structure of the company's invested capital, it
is necessary to pass its life cycle with higher requirements to its
profitability, therefore, to establish more stringent criteria for selection of
- if there are additional restrictions on investment opportunities,
the company will not be able to be dynamical and flexible;
- imbalance in the structure of the invested capital leads to the
production of agency conflicts, conflicts of interests of owners and
- when the share of borrowed capital is too high, the attitude
towards the stakeholder company is transformed, which can begin to search for
other options for cooperation, which is fraught with deterioration of economic
relations, contractual conditions, a decrease in sales, a reduction in
revenues, and a decrease in cash flows.
The key conceptual approaches to optimizing the structure of sources
of investment financing in the economic literature are based on the analysis of
the ratio of the company's own and borrowed capitals, as well as their
components (profits, depreciation, issue of shares, bonds, bank loans,
commercial loans, leasing and other sources).
The justification of the investment project financing strategy
presupposes the choice of financing methods, the definition of the sources of
investment financing and their structure. Financing could be:
The following items can be considered as methods of financing
- the state budget.
In some cases, financing can be mi-xed, that is, based on several
methods. For example, 50% of the project is self-finan-cing, 50% due to loans
Improvement of the capital structure through the implementation of
an investment project can be researched on the basis of the “Zhairem Mining and
Concentrating Complex” JSC. It develops iron-manganese and barite-polymetallic
Most of the iron-manganese concentrates produced by the company are exportted
to near and far abroad:
The company is among the first three largest enterprises of the
mining industry of the Karaganda region and is one of the main producers of
manganese concentrate in the Republic of Kazakhstan.
The capital structure of the company is shown in the figure 1.
1. Capital structure
As an investment project for the modernization of the factory, it is
proposed to introduce technologies for enriching small classes.
The operating Zhairem concentrating mill was put into operation in
the 70s. In the future, the concentrator was repeatedly reconstructed.
In recent decades, due to the depletion of the reserves of
non-ferrous metals and the constant decline in the quality of minerals in
continental deposits, it became necessary to search for new technologies for
the processing of mineral raw materials.
The site for ore dressing in heavy suspensions is intended for
preliminary concentration of ore.
Laboratory studies of the ore of the Zhairem deposit (ore minutiae)
indicate the possibility of preliminary obtaining dump tailings when separating
ore fines in special equipment.
The main goal of enrichment of ore fines is the removal of the
filling concrete from the ore, which comes from underground mining together
with the ore to the factory. When the filling concrete enters the process of
flotation enrichment, the efficiency of the process is sharply reduced .
The project provides for the creation of a new site for the
enrichment of ore fines in the building of the existing factory. The creation
of this site will allow the removal of filler concrete from the ore, which will
significantly increase the efficiency of the flotation enrichment process, and
will reduce the amount of heavy fraction in the grinding and flotation area.
The main technological operations included in the scheme of
enrichment of small classes are presented in Figure 2.
2. The main technological operations
The scheme of enrichment allows allocating in a light fraction a
breed with a dump content of valuable components.
The choice of process equipment is made according to the following
- ensuring the implementation of technological operations in
accordance with the requirements of process parameters;
- reliability in operation during the inter-repair cycle;
- chemical resistance of equipment;
- the possibility of automation of processes.
The projected equipment (electric motors, lighting lamps, etc.) meet
the requirements of energy saving and energy efficiency.
General lighting is performed by lamps with energy-saving lamps.
Types of fixtures and wiring products are selected depending on environmental
conditions, the power of the lamps, depending on the standards of illumination.
The growth of commodity output, in relation to the existing
position, is due to an increase in the extraction of basic metals into similar
The implementation of the project "Introduction of technology
of preliminary enrichment of small classes at the concentrator" will not
lead to a change in the number of operating technological personnel.
The implementation of the investment project will not have an
additional negative impact on the environment.
The key risks of the project are:
- a decrease in metal prices (LME),
- an increase in operating and capital costs.
Let’s calculate the economic efficiency of the project, and also
evaluate its impact on the capital of “Zhairem Mining and Concentrating
The calculation will be performed using the main indicators:
- net profit value;
- internal rate of return;
- payback period;
- efficiency of investments.
Net discounted income (NPV) is the current value of the cash flows
of an investment project, taking into account the discount rate, less
investment. The essence of the indicator is a comparison of the present value
of future revenues from the project with investment in the project. NPV is
calculated by the formula 1.
ãäå n, t -
number of time periods;
CF - Cash Flow;
r – rate.
The internal rate of
return (IRR) is the interest rate at which the present value of all cash flows
of the investment project (i.e. NPV) is zero. IRR is calculated by the formula
ãäå CFt – the project's cash flows at the
t, n – number of time
Payback period (T) is
the period of time necessary to ensure that the revenues generated by
investments cover investment costs. It is calculated by the formula 2.
ãäå Ñ – invested capital;
P – profit.
The efficiency of
investments (ARR) is an indicator reflecting the profitability of an investment
object without discounting. The higher the ARR, the higher the attractiveness
of this project for the investor. ARR is calculated by the formula 4.
ãäå P – average annual profit;
I – amount of initial investment.
All the data necessary for the calculations are given in Table 1.
Let’s calculate the indicators using formulas 1-4 (Table 2).
Thus, having obtained the data it can be concluded that the
investment project is economically feasible.
This project can be implemented only at the expense of own funds:
- net profit;
- undistributed profits.
Let’s consider the impact of this project on the capital structure
of “Zhairem Mining and Concentrating Complex” Draw up a cash flow plan with two
components in mind:
- income from additional marketable output that will be added to
- income from saving operating costs, which will be subtracted from
the cost price.
It is planned that the net profit will remain at the disposal of the
enterprise and replenish its own capital (undistributed profit) in the amount
of 6418343 thousand tenge. Table 4 presents a change in the structure of capital
due to the investment project.
There was an increase in equity capital by 6418343 thousand tenge or
Thus, the investment project of modernization of the concentrator is
recognized economically feasible, and the calculation shows that the capital
structure has changed for the better - there is an increase in equity, which
would lead to increased financial stability and independence of the enterprise
from borrowed capital and liabilities.
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Table of contents: The Kazakh-American Free University Academic Journal №10 - 2018