FIN201 Business Finance Case Study 3 Sample

FIN201 Business Finance Case Study 3

Assessment Task

metrics of two listed companies from the Appendix, compare financial and stock market performance, determine their capital structures and weighted average cost of capital (WACC). It also allows a comparative discussion of the use of Net Present Value (NPV) and Payback Period as capital budgeting techniques in OECD countries using journal articles published in the last 10 years.

Please refer to the Instructions for details on how to complete this task.

You are expected to apply yourself fully on this assessment in order to produce a draft that should be handed in for marking at the end of Week 9. It is viewed necessary to have this assessment in order to encourage students to commence early on Assessment 4 since the requirements of these two assessments are the same. The students will receive feedback from the Facilitator and should incorporate this in Assessment 4 if it applies.

Context

For the period 1 August 2022 to 31 July 2023, inflation has generally been high in many countries including OECD countries. While, there has been some decrease in
inflation in many OECD countries in the months of April and May 2023, core inflation has remained persistent. As a result, a number of OECD central banks have continued signalling a tighter monetary policy by increasing benchmark interest rates. This has put a significant burden on borrowers, among them mortgage holders.

It would be informative to check how the stock markets and share prices of a company listed on the Australian Securities Exchange and another on the New Zealand stock exchange behaved in the 12 months from 1 August 2022 to 31 July 2023.

Key aspects of the assignment are:

• Assessing the students’ ability to compare financial and stock market performance of two companies

• Testing the students’ ability to perform risk and return calculations based on historical stock prices of listed companies

• Identifying industry and company factors that could have contributed to good performance of the companies

• Determining the weighted average cost of capital (WACC) of the two companies and evaluating whether industry characteristics explain similarities or differences between them

• Assessing the students’ ability to perform a comparative evaluation of the use of Net Present Value (NPV) and Payback Period as capital budgeting techniques in any two OECD countries from the list given.

Instructions

You are assigned a pair of companies: one listed on the Australian Securities Exchange (ASX) and another on the New Zealand Stock Exchange (NZX) in order to address parts (a) to (f) below. The table of companies is in the Appendix.

(a) Using the companies’ annual reports in the last two years, compute the following measures: Changes in Revenue, Return on Assets, Return on Equity, Earnings Per Share and Dividends Per Share. (5 marks)

(b) Using daily stock market prices and S&P/ASX50 (the stock market index for the top 50 companies on the ASX), and S&P/NZX50 (the stock market index for the top 50 companies on the NZX), determine the daily stock returns, daily market index returns, arithmetic mean and geometric mean of the daily stock returns and index returns using data for the period 1 August 2022 to 31 July 2023. (10 marks)

(c) Using the Constant Growth Dividend Valuation model, determine the cost of equity of the two companies allocated to you. (10 marks)

(d) Using the latest Balance Sheets of the two companies, determine the capital structures of the companies and make a well-reasoned argument for similarities or differences in the capital structures of the two companies. In your discussion you are expected to refer to the industries that they belong to and also to other factors that influence capital structures. (10 marks)

(e) Having determined the capital structure of the two companies and using other relevant information, calculate the weighted average cost of capital (WACC) of the two companies and explain why the two companies have different WACCs. (10 marks)

(f) Based on the calculations in Part (a) and Part (b), provide reasons why there could have been differences in financial and stock market performance between the two companies. You are expected to refer to company and industry factors. (5 marks)

(g) Using two articles from peer reviewed journals, published in the last 10 years, perform a comparative analysis of the use of NPV and Payback period as capital budgeting techniques in any two of the following countries: Poland. Portugal, South Korea, Netherlands, Turkiye, Hungary, Finland, Ireland, Norway, Spain, Mexico and New Zealand. Highlight similarities and differences in use between the two countries. (10 marks)
Consider the following as you work on this assignment:

• Data sources are annual reports, yahoo finance (au.finance.yahoo.com) especially for companies listed on the ASX, www.investing.com for companies listed on the NZX, and any other relevant sources

• You are expected to do calculations on an EXCEL Spreadsheet but the Assessment will be presented in a report format in a Word document. (See instructions below of how to embed an EXCEL file into a WORD document).

Should you fail to embed the EXCEL document into the WORD document, you can upload the EXCEL document separately.

• Remember to cite, inside the text, the sources of information used. Also put the list of references at the bottom of the report.

• You will be assessed on how well you address the key questions in the assessments and how well you write the report.

• Ensure you strictly follow the Report Format and ensure you include an Executive Summary, Introduction and Conclusion that are properly written

Solution

Introduction

Business finance involves the credit and funds involved in the business as finance is considered the foundation of business. As per the MBA Assignment Expert, Interpretation of formalising the models of financial management of combinatorial effect areas helps to determine the need for actualising the process of assessing the proportionality of financial resources(Zaytsev et al., 2021).In this study, the financial evaluation of Origin Limited Company on the Australian Stock Exchange and Oceania Healthcare on the New Zealand Stock Exchange are being evaluated. Evaluating the stock market price of the two companies is conducted. For comparative evaluation, NPV and payback period as capital budgeting techniques are also analysed.

Task A: Financial Performance Analysis

Origin Limited is a listed company which is considered a major integrated electricity generator and natural gas retailer. It provides electricity and natural gas plans, commercial solar systems and LPG for business needs. The financial performance of Origin in the financial year 2022 has reflected the strength of the integrated performance with stronger commodity prices and generating higher earnings (Annualreports, 2023). The revenue for the years 2022 and 2021 was 8231 million USD and 7136 million USD. For the years 2021 and 2022, the return on equity came at .11 and,26. The return on Assets came at .047 and .011. The earnings per share came at 11.96 and 7.61. The dividend per share came at 1.49 and 1.84. Return on Assets helps in measuring the ability of the cabinet to generate income based on ratios to show how capable the company is of using existing assets(Saputra, 2022).

Fig 2: Annual Report of Oceania Healthcare
(Source: Oceaniahealthcare, 2023)

The total revenue of Oceania Healthcare for 2022 and 2021 was 231140 and 175417(Oceania Healthcare, 2023). The revenue of Oceania Healthcare for the years 2022 and 2021 came at 231140 and 175417(Oceania Healthcare, 2023). Oceania healthcare limited is considered a limited liability company which is incorporated in New Zealand. For the years 2021 and 2022, the return on equity came at .20 and .12. The return on Assets came at .089 and .05. The earnings per share came at .27 and .16. The dividend per share came at .14 and .11.The mean of the daily stock return for Origin Limited and Oceania Healthcare for 1st August 2022 and 31 July 2023 are evaluated (Refer to Appendix 1 and 2).

Task B: Stock market Price evaluation

Dividend Valuation model

The dividend growth valuation model is considered an effective way of valuing the stock of the company without considering any effect of the market conditions. It leaves out certain values like company reputation or brand value and focuses on dividend payments which shareholders will receive.Dividend growth valuation model has helped in determining a reasonable fair value for the stock of Oceania Healthcare and Origin Limited. Dividend valuation is considered a simple way of measuring the stock value. It is considered the most widely used for valuing equity. It will allow investors to compare the value of both Origin Limited and Oceania in different industries. Conducting Valuation with the Dividend Discount model involves using several assumptions which reflect the shared values and the number of dividend payments in the future as the fair value of shares represents the number of dividend payments with a particular rate of return(Sutjipto,  Setiawan,  Ghozali, 2020). Stock performance refers to the percentage increase in the value of the common stock of the company and an Index peer company for measurement boards. The mean of origin limited came at 5 to 5.5 and while the mean of Oceania healthcare ranged from 1 to 1.5. 

Task C: Determining capital structure

Capital structures refer to the particular combination of quality and which are used by a company for financing its growth and overall operations. Weighted Average cost of capital is considered as the average rate which a business pays for financing its assets. It will help in calculating the value of Oceania Healthcare and Origin Limited. It will help to evaluate opportunities which will help in representing the firm's opportunity cost of capital.It will provide investors with a detailed overview of investment opportunities for providing opportunities for the firms. It will help Origin Limited and Ocean Healthcare perform economic value-added calculations. The Weighted average capital of Origin Limited and Oceania Healthcare came at 6.48 and .42. After conducting an analysis of the balance sheets of Origin Limited and Oceania Healthcare it is found that Origin Limited has an equity capital cost structure and Oceania Healthcare has a debt capital cost structure. Weighted Average cost of capital is considered the single most important input parameter and it is considered the nominal weighted average cost of capital per annum(Vartiainen et al., 2020). Origin Limited and Oceania Healthcare have different WACC as their risk and investments are considered to be different and lower WACC implies safer companies.

Task D: Industry factors which affect Stock prices

Inflation and interest rates

The market price of the value of stock rates is proportional to the inflation rate as the inflation rate rises stock performance tends to get better. As interest rates rise, share prices tend to fall. In Dec 2023 the stock value of Origin Limited experienced a .67 % decline. Since May 2022 interest rates in Australia have risen by 4.25 percentage points (Janda, 2023).In December Oceania Healthcare also experienced a decrease in stock prices by .03 NZD. The Reserve Bank of New Zealand has maintained the official cash rate at 5.5%( Reuters, 2023).Emergence of COVID 19 has led to the social and economic crisis which have affected the stock markets similar to what happened in the 2008 global financial crisis(Anh and Gan, 2021). The current stock price of Origin energy is7.84 AUD(Finance, 2023).The current stock  price of Oceania Healthcare is .66AUD(Investing, 2023).The stock prices of  both Origin Limited and Oceania Healthcare have experienced significant decline over the year due to rise in interest rates in Australia and New Zealand.

Economic Indicators

A stronger GDP growth rate tends to indicate that the economy is on solid footing so the stock market is likely to perform in a good manner while the real GDP growth rate will indicate the economy is slowing down and the stock market will be at risk of a downturn. The GDP growth of the Australian economy has been less than what was expected a year ago. The GDP growth rate of New Zealand is expected to ease at a rate of 1% in 2023 as private consumption is supposed to be weakening due to rising mortgage servicing costs and power employment growth(Oecd, 2023).As the GDP forecast for Australia and New Zealand are lower investors are  wary of investing their money in companies from these countries as a result the stock prices are declining. 

Task E: Capital Budgeting techniques

NPV 

NPV is used for calculating the current values and future stream of payments from a project and company.NPV is used for conducting capital budgeting as an investment planning for analysing  the profitability of the project as it considers both the risk and time variables.NPV is involved in conducting discounted cash flow analysis which tends to make the NPV more processed rather than any capital budgeting methods which are considered as risk and time variables. While conducting capital budgeting NPV considers decision-making for making judicious decisions which help to understand the cash flow in future and will have less value than cash flow in the present. It will help in comparing similar projects and making informed decisions. Net present Value approximates the challenge of decision-making in project appraisal by creating project portfolios which offer the maximum net present value(Chrysafis,  & Papadopoulos et al., 2021).

Payback Period

The payback period is considered as the length of time which is required to recover the cost of investment as an investor will need to reach a breaking point. It implies the length of time required for any investment to recover its initial outlays in terms of savings and profits. The payback period in capital budgeting helps in evaluating the number of years for recovering the cost of investment.A simple payback period is assessed prior to adoption(Kessler, 2017).
Capital Budgeting in Poland and South Korea

Similarities

In Poland and South Korea NPV analysis is conducted by identifying the relevant cash flow , calculating the corporation tax liability and forecasting the future Exchange rates.In Poland and South Korea Capital budgeting is calculated By dividing the initial diving the cash outlay of the project by the amount of net cash inflow that the project will generate each year.

Differences

In Poland, NPV is calculated by measuring the profitability from the financial analysis and calculation of older analysis. In South Korea, NPV is calculated by analysing the features of the production capacity of the company which helps in differentiating the benefits and costs over the entire lifespan of the project which are estimated from the beginning of the project.

In Poland Payback is calculated by conducting research on profitability, and economic analysis of payback period in Poland after analyzing the cost and financial issues to assess the profitability of investments. In South Korea Payback period models are being deployed to assess how worthy the investment will be and if it is viable or not and the payback period is faster if the investment cost is more than 20 years.

Conclusion

Financial analysis has helped in evaluating the financial condition of Origin Limited and Oceanic Healthcare for determining its creditworthiness, ability to generate wealth and profitability. It helps companies determine the risk. Payback in capital budgeting helps in providing the number of years that will be required to recover the investment cost. The analysis of Origin Limited and Oceania Healthcare to determine the return on assets, return on equity, earnings per share and dividend per share for the financial year 2021 and 2022. The weighted average cost of Capital of Origin Limited and Oceanic Healthcare are also evaluated. 

References

Anh, D. L. T., & Gan, C. (2021). The impact of the COVID-19 lockdown on stock market performance: evidence from Vietnam. Journal of Economic Studies, 48(4), 836-851. https://www.emerald.com/insight/content/doi/10.1108/JES-06-2020-0312/full/html

Annualreports, 2023 Annual reports for 10,183 international companies AnnualReports.com. Available at: https://www.annualreports.com/HostedData... (Accessed: 06 December 2023). 

Chrysafis, K. A., & Papadopoulos, B. K. (2021). Decision making for project appraisal in uncertain environments: A fuzzy-possibilistic approach of the expanded NPV method. Symmetry, 13(1), 27. https://www.mdpi.com/2073-8994/13/1/27?src=227745

Finance, 2023 Origin Energy Limited (ORG.AX) stock price, news, quote & history – Yahoo Finance. (n.d.). Yahoo Finance – stock market live, quotes, business & finance news. https://au.finance.yahoo.com/quote/ORG.AX?ltr=1

Investing, 2023 Oceania Healthcare Ltd Share Price Today | ASX OCA Stock - Investing.com India. . Investing.com India. https://in.investing.com/equities/oceania-healthcare-ltd

Janda, M. (2023) RBA gives Australians a break after biggest decline in spending power in 40 years, ABC News. Available at: https://www.abc.net.au/news/2023-12-05/interest-rates-on-hold-until-february-as-rba-pauses/103190584#:~:text=Since%20 May%202022%2C%20 interest%20rates,a%2025%2nd Year%20term%20 remaining. (Accessed: 06 December 2023). 

Oceania Healthcare, 2023 Believe in better. - Oceania healthcare. Available at: https://images.oceaniahealthcare.co.nz/wp-content/uploads/2021/06/03144159/Annual-Report-Final.pdf (Accessed: 06 December 2023). 

Oecd, 2023  New Zealand Economic Snapshot - OECD. Available at: https://www.oecd.org/economy/new-zealand-economic-snapshot/ (Accessed: 06 December 2023).  

Reuters, 2023  New Zealand keeps rates on hold but warns hikes may not be over. Available at: https://www.reuters.com/markets/rates-bonds/new-zealand-keeps-rates-hold-warns-hikes-may-not-be-over-2023-11-29/ (Accessed: 06 December 2023). 

Sutjipto, E., Setiawan, W., & Ghozali, I. (2020). Determination of Intrinsic Value: Dividend Discount Model and Discounted Cash Flow Methods in Indonesia Stock Exchange. Eddy Sutjipto, Wawan Setiawan and Imam Ghozali, Determination of Intrinsic Value: Dividend Discount Model and Discounted Cash Flow Methods in Indonesia Stock Exchange, International Journal of Management, 11(11). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3782294

Vartiainen, E., Masson, G., Breyer, C., Moser, D., & Román Medina, E. (2020). Impact of weighted average cost of capital, capital expenditure, and other parameters on future utility‐scale PV levelized cost of electricity. Progress in photovoltaics: research and applications, 28(6), 439-453. https://onlinelibrary.wiley.com/doi/abs/10.1002/pip.3189

Zaytsev, A. A., Blizkiy, R. S., Rakhmetova, I. I., & Dmitriev, N. D. (2021). Building a model for financial management of digital technologies in the areas of combinatorial effects. Economies, 9(2), 52. https://www.mdpi.com/2227-7099/9/2/52

Originenergy, 2023 Origin energy. (n.d.-b). https://www.originenergy.com.au/wp-content/uploads/Annual-Report-FY2022_FinalWeb.pdf 

Oceaniahealthcare, 2023 Believe in better. - oceania healthcare. (n.d.). https://images.oceaniahealthcare.co.nz/wp-content/uploads/2021/06/03144159/Annual-Report-Final.pdf