ACC515 Accounting and Finance-Analysis of Financial Ratios of AMC Outd

The management team of Online Jeans Sales have just received a new proposal from one of the firm's marketing managers. The proposal outlines a new investment to create a Custom Finish Laboratory. Through the lab, online customers will be able to select an option to personalise their jeans in a range of finishes. This proposal was made following the completion of market research costing $100,000.The capital cost to establish the Custom Finish Lab will be $1,650,000. This cost will depreciated on the straight-line basis to zero over the 8 year productive life of the lab. It is estimated $100,000 will be recovered at the completion of the project as the salvage value of the lab.

In the first year of operations, the new lab is expected to increase the firm revenues by $1,445,000. In addition to depreciation, the costs to run the lab will include additional staff costs ($900,000 p.a.), materials costs ($210,000 p.a.), marketing costs ($46,000 p.a.), and other costs ($25,000 p.a.). Over the 8 year life of the lab, these revenues and expenses are expected to change. The following summarises the base-case, worst-case and best-case scenarios concerning these changes:

Revenues

Increase by 10% p.a.

Increase by 6% p.a.

Increase by 15% p.a.

Costs (other than depreciation)

Increase by 6% p.a.

Increase by 10% p.a.

Increase by 3% p.a.

The firms tax rate is 30% and all analysis should be based on after-tax figures. The firm requires a 16% required rate of return on all potential investments.

Required:
For the base-case, worst-case, and best-case scenarios calculate the following:â—¦After-tax cash flows
â—¦Payback periods 
â—¦Discounted payback periods 
â—¦Net present values
â—¦Profitability index 

Other than modelling best case and projections, discuss and describe what other capital budgeting approaches could be taken to allow for the increased riskiness of the estimated future cash flows Discuss whether the above proposal should be accepted. Discuss any further information that you may require to help you make the accept/reject decision about this project.

 This report reflects the key understanding on the financial performance of APN Outdoor Company in the market. There are several financial tools such as capital structure analysis and ratio analysis and other tools which are used to evaluate the financial performance of APN Outdoor Company. This company has been running its business in Australia and providing advertisement business. In this report, capital structure and financial performance of APN Outdoor Company has been evaluated to determine the viability of business functioning of company throughout the time.

Comparing Firm’s Capital Structure

Capital structure is accompanied with equity, debt and reserve of company which is used by company to raise finance from the market. If company wants to increase the efficiency of business then management department needs to establish optimum capital structure. Ideal capital structure of company should be 30 % debt and 70% equity (Finance. Yahoo, 2017). If company is having more than 30% debt funding in its capital then it will increase the overall financial risk of company. APN Outdoor Company has to maintain its debt funding below 30% to reduce the overall financial leverage. The computation of WACC of company has been computed as below (Gitman, Juchau, & Flanagan, 2015).

After evaluating these data, it is determined that company has maintained total cost of capital 6.64%. In addition to this, capital structure of company is also 32% debt funding and 68% equity funding. This has shown that company has high financial leverage and reduced its overall cost of capital. Furthermore, QMS Media Company is the rival company which has maintained debt to equity ratio of 22:78. It provides that company has maintained 22% debt funding and rest of the capital has been raised from the equity financing. However, the overall cost of capital is 7.87% which is comparatively high. APN Outdoor Company has low level of cost of capital due to its debt funding but at the same time, simultaneously company has increased its financial leverage (Finance. Yahoo, 2017).

Analysis of Financial Ratios of AMC Outdoor Company

APN Outdoor Company has shown high amount of growth since last three years. After evaluating the annual report, it could be inferred that APN Outdoor Company has maintained effective liquidity ratio. Current ratio of company is 2.14 in 2014 which has gone down by .65 in 2017. Quick ratio of company is also reduced by .55 in 2017 comparatively. This level of reduction is made by company with a view to reduce the overall cost of capital. The gross profit margin has gone up by 2% in 2016 since last three years. The net profit of company was 6.04% in 2015 which has effectively converted into profit of 20% in 2016. Return on equity of company was -7.4% in 2015 which increased positively to 25% in 2016. Company has reduced its interest expenses by paying off its entire debts fund. Efficiency ratio of company reflects that inventory turnover of company is stable since last three years. On the other hand, creditor’s turnover rialto has been increased to 40% in 2016 to reduce the amount blockage (Brigham & Gerhardt, 2013).

Significant Changes in the Capital Structure in Past Three Years

APN Outdoor Company has maintained its equity capital on the increasing side and resulted to $58.15, $63.74, and $59.64 million in 2014, 2015 and 2016. The long term debts of company have also increased by 5% (Finance. 2017).

Wealth Maximization in Past Three Years

The stock price of AMC Outdoor Company has increased by 200% as compared to last three year data. It has shown that company has created value for the investors on their investment by having efficient business functioning. This increase in stock price of AMC Outdoor Company is based on the efficiency of business market share and effective business functioning.

Importance of Minimization of the Cost of Capital

The cost of capital is overall amount which is paid by company to investor to lender or investors. AMC Outdoor Company could reduce its overall cost of capital by injecting more debt funding and reducing equity share financing. This debt financing will save tax payment and reduce the cost of funding in determine manner (Finance. Yahoo. 2017)

Recommendations for Lowering the Cost of Capital

It is evaluated that AMC Outdoor Company has increase its business efficiency and increased its brand image. The main problem is related to its debt to capital structure. Company needs to have optimum level of debt to equity ratio. This will not only increase the business functioning but also increased the overall return on capital employed (Vernimmen, et al. 2014).

Conclusion

After evaluating all the computed figures and details of company, it could be inferred that AMC Outdoor Company has high growth in advertisement and media business. However, high debt funding may result to increased financial leverage of company. In addition to this, company should also inject more money in its assets with a view to create value in its investment.

References

Bodie, Z. (2013). Investments. McGraw-Hill.

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Finance. Yahoo. (2017). APN Outdoor Group Limited (APO.AX). Retrieved September 16, 2017 from, https://finance.yahoo.com/quote/APO.AX/financials?p=APO.AX

Finance. Yahoo. (2017). QMS Media Limited (QMS.AX). Retrieved September 16, 2017 from, https://finance.yahoo.com/quote/QMS.AX/balance-sheet?p=QMS.AX

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.