Accounting and Finance for Business Corporate Finance

Question: Discuss about the Report for Accounting and Finance for Business of Corporate Finance. Answer: Case Study 1 The relevant data for the given case study is summarised below (Yahoo Finance, 2016) Date Adjusted Closing Price Dividends Paid ($) Domino RFG Domino RFG June 30, 2010 4.12 1.7 June 30, 2011 5.04 1.67 0.317142 0.192857 June 30, 2012 8.79 2.01 0.35 0.228572 June 30, 2013 10.19 3.25 0.422858 0.264285 June 30, 2014 20.67 3.99 0.472857 0.3 June 30, 2015 35.09 5.04 0.622857 0.325 1. Formula for Holding Period Return (HPR) = [(P1 + D P0)/P0]*100 Where P1 = Next year price, P0 = Current year price , D = Dividend Hence, using the above formula the HPR for the two companies is as shown below. Year HPR (%) Domino RFG 2010-2011 30.03% 9.58% 2011-2012 81.35% 34.05% 2012-2013 20.74% 74.84% 2013-2014 107.49% 32.00% 2014-2015 72.78% 34.46% 2. Expected returns (Domino) = (30.03+81.35+20.74+107.49+72.78)/5 = 62.48% Expected returns (RFG) = (9.58+34.05+74.84+32.00+34.46)/5 = 36.99% 3. The risk of each company is measured by the calculation of the standard deviation of the sample returns calculated above (Damodaran, 2008) The standard deviation for Domino based on sample return is captured in the table below. X (X- Mean)^2 30.03% 0.105286 81.35% 0.035622 20.74% 0.174203 107.49% 0.202598 72.78% 0.010611 Total 0.528319 Hence, standard deviation = (0.528319/4) = 0.3634 = 36.34% pa The standard deviation for RFG based on sample return is captured in the table below. X (X- Mean)^2 9.58% 0.075107 34.05% 0.000864 74.84% 0.143297 32.00% 0.002485 34.46% 0.000637 Total 0.22239 Hence, standard deviation = (0.22239/4) = 0.2358 =23.58% pa 4. Total Return to Shareholders (Dominos) = [(35.09 + 2.185714)/4.12]1/5 -1 = 55.35% pa Total Return to Shareholders (RFG) = [(5.04 + 1.310714)/1.7]1/5 -1 = 30.16% pa 5. It is apparent that in terms of returns the performance of Dominos is comparatively superior in comparison with RFG. However, the underlying risk in case of Dominos is also more as indicated by the higher standard deviation of the returns of the stock. As a result, in order to compare the performance of the two stocks we need to compute the risk adjusted shareholders return for each of the stock as shown below (Brealey, Myers Allen, 2008). Risk adjusted shareholders return (Dominos) = (55.35/36.34) = 1.52 Risk adjusted shareholders return (RFG) = (30.16/23.58) = 1.28 Based on the above computation, it is apparent that performance of Dominos stock is significantly superior to RFG during the given period. Case Study 2 1. Contribution Margin = Sale Price Variable Cost Unit sale price of cupcake (Given) = $ 3 Royalty Expenses = 8% of sales = (8/100)*3 = $ 0.24 Contribution to marketing cost = 5% of sales = (5/100)*3 = $ 0.15 Cost of ingredients per unit = $ 0.38 Hence, unit variable costs = 0.24 + 0.15 + 0.38 = $ 0.77 Hence, unit contribution margin = 3 -0.77 = $ 2.23 2. Let the breakeven volume be x cupcakes Then, according to the breakeven condition Unit contribution margin * x = Total fixed costs The calculation of the total annual fixed costs is shown below. Yearly rental = 350*52 = $ 18,200 Annual outgoings = $ 3,500 Total wages = (16+17)*8*252 = $ 66,528 Superannuation = (9.5/100)*66528 = $ 6,320.16 Hence, total fixes costs = 18,200 + 3,500 + 66,528 + 6,320.16 = $ 94,548.16 Hence, 2.23x = 94,548.16 Solving the above, we get x = 42,399 units 3. No. of cupcakes produced in a day = 144 Hence, annual pre-tax profit = Total contribution margin Total fixed costs = 144*2.23*252 - 94,548.16 = - $ 13,625.9 Hence, the pre-tax annual loss would be $ 13,625.9. 4. New selling price = 3.70 Unit contribution margin = 3.70 (0.13*3.70)- 0.38 = $ 2.839 No. of cupcakes produced in a day = 134 Hence, annual pre-tax profit = Total contribution margin Total fixed costs = 134*2.839*252 - 94,548.16 = $ 1,319.19 Thus, the pre-tax annual profit would be $ 1,319.19 5. New selling price = 2.70 Unit contribution margin = 2.70 (0.13*2.70)- 0.38 = $ 1.969 Pre-tax profit desired = $ 10,000 Let the cupcake required to achieve the above profit be x Hence, 1.969x (94,548.16 +17*8*252*1.095) = 10000 Solving the above, we get x= 72,157 Thus, the annual sales of cupcakes need to be 72,157 in order to earn an annual pre-tax profit of $ 10,000. Case Study 3 1. The assumptions for computation of discounted payback are as follows. All cash inflows and outflows are expected to occur at the end of the year only. Further, the initial investment on fittings has been depreciated on a straight line basis over a period of 10 years. The discounted value of the incremental cash flows arising from the business during the first 12 years is summarised in the table shown below (Petty et. al., 2015) It is apparent from the above table, that discounted payback period cannot be found out in the given case as the years increase the discounted value of the cash flow would keep on decreasing and the vendor would not be able to ever recover the initial investment of $ 200,000 using the discounted cash flow. The analysis has been extended to future years (i.e. upto 50 years) and then also the discounted cash flows are not sufficient to meet the initial investment. Hence, the discounted payback period cannot be computed in the given case since it does not exist (Damodaran, 2008). 2. In this case, since the business is sold in third year only, hence depreciation is considered to be absent in this case. The NPV of the business is calculated using the table below. Year 0 1 2 3 Cash inflow Number of cupcakes sold 70000 80000 90000 Unit Price ($) 2.7 2.7 2.7 Total Revenue ($) 189000 216000 243000 Sale price of business ($) 150000 Cash outflow Royalty Payment ($) 15120 17280 19440 Contribution towards marketing 9450 10800 12150 Cost of ingredients 26600 30400 34200 Annual Rental 18200 18200 18200 Annual Outgoings 3500 3500 3500 Annual Shop Assistant Wage 32256 32256 32256 Annual baker wage 68544 68544 68544 Annual superannuation contribution 9576 9576 9576 Initial investment in fittings and equipment 200000 Total cash outflow($) 200000 183246 190556 197866 Net cash inflow/(outflow) pre tax -200000 5754 25444 195134 Tax @ 30% 0 1726.2 7633.2 58540.2 Post tax net cash inflow ($) -200000 4027.8 17810.8 136593.8 PV of discounted cash flow -200000 3472.241 13236.33 87509.87 NPV ($) -95781.57 The NPV of the given business is -$ 95,781.57 3. The formula for profitability index is as shown below. Profitability index = (NPV + Initial Investment)/Initial Investment Profitability index = (-95781.57 + 200000)/200000 = 0.52 4. The investment in not financially viable since the NPV of the project is negative. Hence, Jane should not make an investment in the project (Parrino Kidwell, 2011). 5. From the article, it is apparent that there are significant business risks that are attached with the cupcake business. In order to overcome these risks, it is imperative that Jane should look to build up a brand and there focus on the whole value chain. This is imperative due to the low entry barriers and difficulty in differentiation. Thus, Jane should try to a premium baker with a strong brand so that it could differentiate itself from the competitors whose offering may be quite similar (Petty et. al., 2015). Thus, the current strategy of Jane of low price volume model may not be suitable as the market share in the cupcake market tends to be dynamic. Case Study 4 1. The requisite table is shown below (Dominos, 2015; RFG, 2015). Particulars EPS ($) Growth Rate (EPS) % Dominos RFG Domino RFG 30th June 2010 0.25 0.25 30th June 2011 0.3 0.25 20.00% 0.00% 30th June 2012 0.372 0.26 24.00% 4.00% 30th June 2013 0.391 0.26 5.11% 0.00% 30th June 2014 0.505 0.27 29.16% 3.85% 30th June 2015 0.742 0.22 46.93% -18.52% Dominos Enterprises (Dominos, 2015) Net profit margin = Net profit/ Total Revenue = (68421/539138)*100 = 12.69% Asset Turnover Ratio = Total Revenue/ Total Assets =539138/630600 = 0.85 Leverage Ratio = Total Liabilities /Total Equity = 325544/305056= 1.067 Return on Equity = Net profit/Total Equity =(68421/305056)*100 = 22.43% RFG (RFG, 2015) Net profit margin = Net profit/ Total Revenue = (34219/120768)*100 = 28.33 Asset Turnover Ratio = Total Revenue/ Total Assets = 120768/680048 = 0.177 Leverage Ratio = Total Liabilities /Total Equity = 276266/403782 = 0.68 Return on Equity = Net profit/Total Equity =(34219/403782)*100 = 8.47% Quick Ratio (RFG) = (Current Assets Inventory)/Current Liabilities = (90182-20901) /97025 = 0.71 Net debt to equity ratio (RFG) = Total Liabilities /Total Equity = 276266/403782 = 0.68 Quick Ratio (Dominos) = (Current Assets Inventory)/Current Liabilities = (116547-12282) /131131 = 0.795 Net debt to equity ratio (Dominos) = Total Liabilities /Total Equity = 325544/305056= 1.067 2. It is apparent from the above stats especially the EPS, that the performance of Dominos has been significantly better than that of RFG. This is apparent from the fact that in 2010, both companies had an EPS of $0.25. However, five years hence, the EPS of Dominos has enhanced to $ 0.742 while that of RFG has further languished to $ 0.22. This robust increase in the business and corresponding profitability has also reflected in the share prices of the shares of the both the companies over the period of five years (Parrino Kidwell, 2011). 3. The Total Return to Shareholders over the last five years for the two companies is summarised below. Total Return to Shareholders (Dominos) = 55.35% pa Total Return to Shareholders (RFG) = 30.16% pa The variables that impact the total return to shareholders are the dividend payments and share price. Since the EPS of the Dominos has witnessed a stupendous growth, this has also reflected in the stock price and the dividend paid. Normally, the higher the profits of the company, the higher would be the absolute dividend payouts to shareholders. This trend is also reflected in the below shown data. Date Adjusted Closing Price Dividends Paid ($) Domino RFG Domino RFG June 30, 2010 4.12 1.7 June 30, 2011 5.04 1.67 0.317142 0.192857 June 30, 2012 8.79 2.01 0.35 0.228572 June 30, 2013 10.19 3.25 0.422858 0.264285 June 30, 2014 20.67 3.99 0.472857 0.3 June 30, 2015 35.09 5.04 0.622857 0.325 In the last five years, the dividend payments for Dominos have become twice unlike RFG. Also, the stock price of Dominos has become almost 9 times since 2010 unlike PFG where the price has become only thrice in the last three years. The above difference is mainly linked with the respective financial performance of the two firms (Damodaran, 2008) Case Study 5 1. The completed table is shown below. DMP RFG Date 16 August, 2016 16 August, 2016 Last Price (AUD) 74.11 5.84 Shares Outstanding (M) 87m 164.97m Market Cap (B AUD) 6.45 0.96 Earnings Per Share (AUD) (TTM) $0.74 $0.26 Current P/E Ratio (TTM) 100.15 22.46 Dividend (AUD) (TTM) $0.518 $0.3536 Current Dividend Yield (%) 0.70 6.05 2. The completed table is shown below (Brigham Ehrhardt, 2013). Definition/Explanation Last Price (AUD) The last trading price of a particular share Shares Outstanding (M) It refers to the total number of shares that have been authorised and issued to the various shareholders of a given firm Market Cap (B AUD) It refers to the market value of the outstanding shares of the company. Market cap = Market price * Outstanding shares Earnings Per Share (AUD) (TTM) It is the amount of net profit that is attributed to each of the equity shareholder of the company during the last 12 months Current P/E Ratio (TTM) P/E ratio = Current Market Price/Earnings per share (TTM) Dividend (AUD) (TTM) The amount of money that the company pays from profit to company shareholders based on the number of shares held. Current Dividend Yield (%) Current Dividend Yield = (Dividend/Current Market Price)*100 3. It is apparent from the table above that market value of Dominos share is significantly greater than that of RFG. Additionally despite the difference in outstanding shares, the market capitalisation of Dominos is more than six times that of RFG which is indicative that amongst the two companies Dominos has more net worth as compared to RFG. The Dominos share is trading at a very high P/E in comparison with RFG which is indicative of the high growth potential of Dominos in the view of shareholders. Further, the main source of income for Dominos shareholders is expected in the form of capital appreciation as the dividend yield is very low. This is not true for RFG where the dividend yield at around 6% continues to be lucrative (Brealey, Myers Allen, 2008). References Brealey, R, Myers, S Allen, F 2008, Principles of Corporate Finance, 9th edn, McGraw Hill Publications, New York Brigham, EF Ehrhardt, MC 2013. Financial Management: Theory Practice, 14th edn., South-Western College Publications, New York Damodaran, A 2008, Corporate Finance, 2nd edn, Wiley Publications, London Dominos 2015, Annual Report 2015, Dominos Website, Available online from https://dominosinvestors.com.au/?utm_source=dominosutm_medium=websiteutm_term=investorsutm_campaign=menulink (Accessed on August 17, 2016) Parrino, R Kidwell, D 2011, Fundamentals of Corporate Finance, 3rd edn, Wiley Publications, London Petty, JW, Titman, S, Keown, AJ, Martin, P, Martin JD Burrow, M 2015, Financial Management: Principles and Applications,6th edn, Pearson Australia, Sydney RFG 2015, Annual Report 2015, RFG Website, Available online from https://www.rfg.com.au/images/investor_docs/RFG2015AnnualReport.pdf (Accessed on August 17, 2016) Yahoo Finance 2016, Historical Price of Stocks, Available online from www.yahoo.finance.au (Accessed on August 16, 2016)