HI5002: Finance for Business

Unit Code:  HI5002
Unit Name:  Finance for Business
Venue    :  HOLMES Institute
Trimester 2 2018
Group Assignment

INSTRUCTIONS

Students are required to form a group to study, undertake research, analyse and conduct academic work within the areas of business finance covered in learning materials Topics 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the corporate financial performance. Your group is strongly advised to reference professional websites, journal articles and text books in this assignment (case study).

Tasks

This assessment task is a written report and analysis of the financial performance of two selected listed companies on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of corporate financial performance based on update financial statements of the chosen companies.

Group Arrangement

This assignment must be completed IN Group. Each group can be from 2 to maximum 4 student members. Each group will choose two companies and once the companies has been chosen, the other group cannot choose the same two companies. First come first served rule applies here, it means you need to form your group, choose two companies from the list of ASX and register them with your lecturer as soon as possible. Indicate your group leader when registering your group with your lecturer for assignment administration and submission. Once your lecturer registers your chosen companies, they cannot be chosen by any other group. Your lecturer then will put your group on Black Board to enable you to interact and discuss on the issues of your group assignment using Black Board environment. However, face to face meeting, discussion and other methods of communication are needed to ensure quality of group work. Each group needs to have your own arrangement so that all the group members will contribute equally in the group work. If not, a Contribution Statement, which clearly indicated individual contribution (in terms of percentage) of each member, should be submitted as a separate item in your assignment. Your individual contribution then will be assessed based on contribution statement to avoid any free riders.

BACKGROUND

You’re a group of investment analysts who work for a large investment consulting firm based in Australia. There’s one big institutional investor from overseas that is interested in investing in the Australian market. You’ve been asked to choose two large companies operating under the same industry in Australia (the industry you think will have the most promising future for investment) then evaluate and compare them. Finally make a recommendation through your Report to the investor which one is more superior fundamentally.

Create your group’s “business name” under which your group will be providing the financial advisory services. Choose two listed companies that your group will investigate/analyse for the purposes of possible recommendation to your client. The group should obtain all information about the selected companies from this web site: www.asx.com.au.

Required:

Obtain copies of Financial Statements including Income Statements, Balance Sheets, and Statement of Changes in Equity, Cash Flows Statements and Notes for three (3) financial year 2014-2015, 2015-2016 and 2016-2017. Your group can download these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc.). The assignment should cover the contents described in Part 1 to 7 bellows.

STAGES TO BE COMPLETED

Description of operation and comparative advantages of the two chosen companies.
Calculation and comparison of performance ratios of the two companies
Analysis of monthly share prices movements of the two companies within 3 years
Identify any significant factors which may have influenced the share price of your chosen companies during the time frame.
Calculation of Beta values and expected Rates of Return using the CAPM of the two chosen companies
Identify and compare dividend policy of the two chosen companies
Letter Recommendation

Details of financial analysis tasks:

1. Description of operation and comparative advantages of the two chosen companies: Prepare a brief description of the chosen companies, outlining the core activities, the market(s) in which they operate within and any factors in the companies’ history which you consider help present the pictures of your companies. Identify and compare their comparative advantages.

2 marks 2. Calculation and comparison of performance ratios: using financial data obtained from current financial statements of your selected companies for the past 3 years. Annual reports are accessible via company websites or ASX website. Your client is strongly interested in the three groups of ratios:

Liquidity ratios;
Profitability ratios
Capital structure (leverage) ratios You need to provide charts and/or tables for analysis and justification.

3. Analysis of monthly share prices movements: Using the information from the ASX website, complete the following tasks:

- Prepare graphs for movements in the monthly share price over the last three years for the companies that you are investigating. Plot them against movements in the All Ordinaries Index.
- Write a report which compares movements in the two selected companies’ share prices to each other and to the All Ords Index. For instance, how are the prices of the two selected moving? In the same trend or diverse trends? How closely are they correlated with the All Ords Index. Above or below? More or less volatile?

4. Significant factors which may have influenced the share price: Research via the internet or financial/business publications:

From research via the internet (using credible sources) or financial/business publications, identify at least 2 significant announcements which may have influenced the share price of your selected companies within 3 years. These factors could include merger or acquisitions, positive or negative earnings forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the companies, impact of competitors or law suits etc.

5. Calculation of beta values and expected Rates of Return using the CAPM: Go online to http://www.reuters.com/finance/stocks/ and type in the code for your companies into the Search Stocks field and click on the magnifying glass button.

What is their calculated beta (β) for your companies?
If the risk free rate is 5% and the market risk premium is 6%, use the Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the companies’ shares.

6. Dividend policies:

Discuss what dividend policies appear to be implemented by the companies’ management boards. Explain any reason related to that particular dividend policies.

7. Recommendation letter: Based on your analysis above, write a letter of recommendation to your client, providing an explanation as why you would like to include one of selected the companies in his/her investment portfolio. Please refer to the ratio results calculated earlier and any other trends or factors that you believe to be important.

8. Presentation, structure and academic writing

Academic Writing, Referencing and Plagiarism

Presentation of written work

The report must have an academic written structure including an introduction, body and conclusion.

Use numbers to structure body of the report (e.g., “2.5. Research via the internet”).
Provide an explanation on each of these issues (points) and explain how they confirm the underlying theory, particularly related to the ownership, financial measures, riskreturn, and capital structure and dividend policy.
You are required to use Times New Roman font, size 12 with 1.5 lines spacing.
Please insert page numbers into your assignment and use 3 cm margins. A high standard of work is always expected, so poorly presented work may be returned unmarked with a request to re-submit.

Referencing

When writing your assignments, a reference must be included every time you use someone else’s ideas or information. In-text referencing of ALL sources, whether academic books, journal articles, newspaper articles, material from the Internet etc., must be cited in the main text of the assignment itself. Harvard Style referencing is required for this assignment.

A reference must be included when you:

Paraphrase (express someone else’s idea in your own words).
Quote (express someone else’s idea in their exact words).
Copy (financial statement, reproduce a diagram, graph or table from someone else’s work).

Example:

Titman, S., Martin, T., Keown, A.J., Martin, J.D, Financial Management: principles and applications, 7th Edition, Pearson Education, Melbourne, 2016, Australia.

Halili, E, Saleh, A and Zeitun, R (2015), 'Governance and Long-Term Operating Performance of Family and Non-Family Firms in Australia', Studies in Economics and Finance, vol.32, no.4, pp.398-421.

History of ASX, viewed Nov 07 2017, https://www.marketindex.com.au/history

Unit Code: HI5002
Unit Name: Finance for Business
Venue : HOLMES Institute
Trimester 3 2017

Assignment Description

Students are required to study, undertake research, analyse and conduct academic work within the areas of business finance covered in learning materials 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the firm financial performance. You are strongly advised to reference professional websites, journal articles and text books in this assignment (case study).

Obtain a copy of the last Financial Statements including Income Statements, Balance Sheets, Statement of Changes in Equity, Cash Flows Statements and Notes. You can downloaded these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc).

You are required to do the following tasks:

1. A description of the company

Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you consider help present a “picture” of your company.

2. Specify ownership-governance structure of the company:

Name the main substantial shareholders:
- With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and
- With higher than 5.00% of shareholdings.
Name the main people involved in the firm governance:
- The Chairman
- Board members
- CEO.
Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance.

Whether any of shareholders with more than 5% share capital are involved in firm governance.

3. Calculation of Performance Ratios

Calculate the following key ratios for your selected company for the past 4 years. Annual reports are accessible via company websites ( show all working out):

Return on Assets (ROA) = (NPAT / Total Assets)
Return on Equity (ROE) = (Net Profit After Tax / Ordinary Equity)
Debt Ratio = Total Liabilities / Total Assets
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/ OE
Be sure that you have “proven” the above equation.
Explain what phenomenon is being “captured” by the variable TA/OE, and how it is impacting on the relationship between Return on Assets and Return on Owners Equity.
Explain why the ROE (EBIT) is significantly greater than or less than the ROA (EBIT).

4. Using the information from the ASX website: asx.com.au you must complete the following tasks:

Prepare a graph / chart for movements in the monthly share price over the last two years for the company that you are investigating. Plot them against movements in the All Ordinaries Index.
Write a report which compares movements in the companies’ share price index to the All Ords Index. For instance, how closely correlated is the line with the All Ords Index. Above or below? More or less volatile?

5. Research via the internet or financial/business publications:

From research via the internet (using credible sources) or financial/business publications, note any significant announcements which may have influenced the share price of your company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors or law suits etc. (Restrict the number of announcements to 5).

6. Calculation of ’ beta values and expected Rates of Return using the CAPM

Go online to http://www.reuters.com/finance/stocks/ and type in the code for your company into the Search Stocks field and click on the magnifying glass button.

What is their calculated beta (β) for your company?
If the risk free rate is 4% and the market risk premium is 6%, use the Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the companies’ shares.
Is the company you have chosen a “conservative” investment? Explain your answer.

7. Weighted Average Cost of Capital (WACC)

Using information from the latest company report for the company (i.e. interest rate on their major source of long-term loans) and the estimated cost of equity capital calculated (in part 6ii above), calculate the WACC for your company.
Explain the implications that a higher WACC has on management’s evaluation on prospective investment projects.

8. Consider the debt ratio for your company over the past two years:

Does it appear to be working towards the maintenance of a preferred optimal capital structure? (i.e., does it appear to be “stable”?). Explain your answer.
What have they done to adjust/amend their gearing ratio? Increase or repay borrowings? Issue or buy back shares? Has the Director’s Report given any information as to why they have made any adjustments?

9. Dividend policy

Discuss what dividend policy of the management of the company appears to be implemented. Explain any reason related to that particular dividend policy.

10. Letter Recommendation

Based on your analysis above, write a letter of recommendation to your client, providing an explanation as why you would like to include this company in his/her investment portfolio. Please refer to the ratio results calculated earlier and any other trends or factors that you believe to be important.

11. Formal structure and referencing.

Referencing

A reference must be included when you:

Paraphrase (express someone else’s idea in your own words).
Quote (express someone else’s idea in their exact words).
Copy (financial statement, reproduce a diagram, graph or table from someone else’s work)

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