Finance Questions
Question one (FINANCIAL ANALYSIS REPORT)
Your Task Select a company that is currently listed on the ASX. Write a Financial Analysis Report using an essay structure to interpret a company’s most recent annual report. Assessment Description Students will write a Financial Analysis Report for a stakeholder (external investor or internal manager) that interprets the annual report of an Australian company. The Report will clearly state recommendations about the company’s suitability for share investment or internal management. The company should be listed on the ASX. Students will be assessed on the thoroughness of the financial analysis. Thoroughness requires a logical justification of why financial and non-financial performance indicators are included in the analysis. The analysis will be formally written to meet the expectations of a stakeholder. The report is limited to 1000 words, plus or minus 10%, excluding title page and bibliography. Assessment Instructions Select a company that is currently listed on the ASX. Write a Financial Analysis Report that interprets the company’s most recent annual report. This report will need to be written for a stakeholder (external investor or internal manager). Research additional information beyond the annual report about the company’s performance. Use the group financial results if the annual report presents financial results for the group and parent company. Justify the selection of financial and non-financial performance indicators that are relevant for evaluating the company’s financial performance. Use a formal language and structure of your report. Refer to Resource A below. Include relevant non-financial analyses. Refer to Resource B below.
Resource A – Financial Analysis Report Content Executive Summary The executive summary should be approximately 10% of total word count. It provides a background of the company chosen, the main business activities and the purpose of the Financial Analysis Report. Analysis will present and discuss the financial results and performance indicators extracted from the company’s annual report. A concise commentary should explain the significant changes in the financial results. Interpretation The interpretation should be approximately 70% of total word count. Interpret the causes of the changes in the company’s financial performance. Justify the inclusion of financial and non-financial performance indicators in the Financial Analysis Report. Research additional non-financial performance indicators from a wider range of sources beyond the company’s own publications.
Discuss the company’s business activities and the financial implications of the activities. Apply financial and non-financial performance indicators to explain trends and issues in the company’s financial results. Conclusion The conclusion should be approximately 20% of total word count. State a clear recommendation that addresses the decision-making needs of a stakeholder. For example, recommend a decision to invest or not invest in the company if the Report is written for a potential shareholder. Or, recommend a decision to improve the financial performance of the company if the Report is written for an internal manager. Justify recommendations by explaining how it will meet the needs of the stakeholder. Bibliography and In-text Citations the Academic Integrity and Conduct Policy requires the appropriate use of intext citations and bibliography. You must cite all references (information sources) and comply with the expectations for academic writing. The bibliography and citations are excluded from total word count.
Resource B - Consider the following questions if they are relevant to the company’s financial performance.
• What are the core business area(s) and geographic locations in which the company operates?
• How have specific financial results improved or changed?
• Is there evidence from other sources that can verify the trends for the industry?
• What are the company’s current business strategy or strategies and key points of difference in the target market? Is there a specific skillset required of employees?
• What is the current and future market potential for the company? What influences have recent global events apparently had on the company? In which specific areas?
• Identify strengths of the company’s management team and how these may benefit the organisation in future financial years.
• What are the remuneration trends from last year to this year for the highest earners?
• Is there a difference in the wages that could be earned in a competitor’s business?
• What is the current management structure and ownership structure?
• Identify strengths of the company’s management team and how these may benefit the organisation in future financial years.
• What are the remuneration trends from last year to this year for the highest earners?
• Are there other non-wage-related benefits?
Question Two (CAPITAL BUDGETING)
Task 2 - Answer questions in the case study given below (Extracted from SAGE Business Cases - Varun Dawar (2018) - Capital Budgeting Decision Analysis. Some contents of the case have been altered to suit the local condition).
(Words Limit 2,500 - excluding statistical data)
CASE
CAPITAL BUDGETING DECISION ANALYSIS
Introduction
On May 30, 2020, Boon Mee, Senior Vice President of Tiger Land Textiles Ltd (TLT), was preparing for a meeting with the management committee scheduled the next week. On his desk was a capital budgeting and investment proposal – a new product line of branded shirts that the committee was considering for launch. As the head of the finance department, Boon Mee was required to work along with his team on a detailed capital budgeting analysis and present the findings to the management committee for their approval. As per standard company practice, each capital budgeting and investment project was evaluated using the traditional Net Present Value (NPV) approach and the Internal Rate of Return (IRR) criterion for determining whether the company would undertake the project or not.
Boon had a lot to think about as he considered the analysis of the capital budgeting project using the traditional Net Present Value (NPV) approach and the Internal Rate of Return (IRR) criterion. What would be the basis for calculating the after-tax operating cash flows for the capital project? How would he arrive at the depreciation and working capital requirements for computing the NPV? What would be the basis for calculating the terminal year cash flows? With all these questions in mind, Boon decided to focus on the proposed capital budgeting project for the next few days.
Company Background
TLT is a small, privately owned clothing company based in Cheng Mai, Thailand. It was founded in 1995 by Chaisee Benjawan, a retired executive. Since then, the company had grown steadily by catering to local and foreign tourists and local high to middle income consumers in the Cheng Mai Region (CMR). The company recorded a stellar growth of 17% in its sales during the last financial year of 2018/19. With a healthy operating margin ratio and low leverage levels, the company had been able to grow its profits at a compounding annual growth rate of 5% during the last 10 years. With a good brand name and healthy financial metrics, the company was now looking to expand its footprint to new product lines.
Project Investment Proposal Details
The project is estimated to be of 10 years duration. It involves setting up new machinery with an estimated cost of as much as Thai baht (THB) 375 million, including installation. This amount could be depreciated using the straight-line method (SLM) over a period of 10 years with a resale value of THB13.5 million. The project would require an initial working capital of THB15.5 million. With the planned new capacity, the company would be able to produce 150,000 pieces of shirts each year for the next 10 years. In terms of pricing, each shirt can initially be sold at THB 900 a piece, which considers the target segment and competitor pricing. The project proposal incorporates an annual increase of 3% in the price of the shirt to compensate for inflationary impact. With regards to the raw material costs and other expenses, the project estimated the following details:
Raw material cost for manufacturing shirts at THB325 per shirt, slated to rise by 2.5% per annum on account of inflation. Other direct manufacturing costs at THB55 per shirt with an annual increase of 2.5% per annum on account of inflation.
Selling, general, and administrative expenses (including employee expenses) at THB 24 million per annum, expected to increase by 6% each year. Depreciation expense on the basis of SLM.
Tax rate was assumed to be 30%.
Funding
For funding of the expansion project, the promoters agreed to infuse 50% in the form of equity with the rest (50%) being financed from issue of new debt. Based on the current credit position and market scenario, new debt can be raised by the company at 12% per annum. Cost of equity was assumed to be 15%. The requisite discounting rate or weighted average cost of capital (WACC) for NPV and IRR calculations can now be calculated with the help of the above assumptions.
Demand Scenario
Although the project proposal estimates maximum annual production of 240,000 shirts, Saurabh decided to do capital budgeting analysis under two demand scenarios: Optimistic and Expected. The likely annual demand estimated under each scenario is as follows:
| Scenario | Annual demand |
| Optimistic | 200,000 Shirts |
| Expected | 150,000 Shirts |
Discussion Questions
- Why are capital budgeting decisions important for a business firm? Discuss their concept and significance (5 marks)
- Discuss the types of information generally required for evaluating the capital budgeting decisions of a firm from a financial standpoint. (5 marks)
- What is meant by the Net Present Value (NPV) technique? Discuss its key assumptions and calculation methodology (including an estimation of the discount rate). (5 marks)
- Explain the concept of the Internal Rate of Return (IRR). What is the criterion generally used by firms while accepting or rejecting a capital budgeting project on the basis of the IRR technique? (5 marks)
- On the basis of the financial information given in the case, calculate the after-tax operating cash flows, NPV, and IRR under the Optimistic and Expected scenarios. Clearly specify the calculations required for the same. (40 marks)
- Based on your analysis, as Boon Mee, what recommendation would you make on whether the company should undertake the project or not? Clearly specify the decision based on both the NPV technique as well as the IRR criterion. (10 marks)
Further Reading
Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Abingdon, UK: Routledge.
Brealey, R., Myers, S. C., & Marcus, A. J. (1995). Fundamentals of corporate finance (p. 69), New York: McGraw-Hill.
Fabozzi, F. J., & Drake, P. P. (2009). Capital Budgeting Techniques. Handbook of Finance. Hoboken, NJ: John Wiley & Sons, Inc.
Gitman, L. J., & Forrester Jr, J. R. (1977). A survey of capital budgeting techniques used by major US firms. Financial Management, 6, 66–71.
Graham, J., & Harvey, C. (2002). How do CFOs make capital budgeting and capital structure decisions? Journal of Applied Corporate Finance, 15(1), 8–23
Harris, M., & Raviv, A. (1996). The capital budgeting process: Incentives and information. The Journal of Finance, 51(4), 1139–1174.
Myers, S. C. (1974). Interactions of corporate financing and investment decisions— implications for capital budgeting. The Journal of Finance, 29(1), 1–25