Evaluation of ‘Buddy’ project
Accounting and financial management is a process which focuses on the various financial evaluation tools on the business to make a better decision in order to improve the financial position of the business. In the report, the focus has been done on a case of Saturn Petcare Australia and New Zealand. The case brief about a new project of the company and a replacement option of the company where the management is confused to chose the project or not. The capital budgeting techniques have been applied on project “buddy” along with the different scenarios and changes in the sale position to evaluate the overall position of the business. Further, the replacement options of the business have also been discussed to reach over a conclusion.
The “Buddy” project evaluation explains that the different cash inflow and outflow of the business are associated with the business. The cash outflow and inflow of the project has been studied firstly in order to measure the cash level in the business. The 3 scenarios of the project has been discussed which are normal sales, more than 10% estimated sales and less than 10% estimated sales. Firstly, the normal scenario of the business has been studied and it has been found that the NPV worth of the project would be $ 1,535,956 and the future cash inflow of the project would be $ 35,656,185.
Further, in case of 10% higher sales than estimated sales scenario of the business, it found that the NPV worth of the project would be $ $3,420,137 and the future cash inflow of the project would be $ 40,271,803. Lastly, in case of 10% lower sales than estimated sales scenario of the business, it found that the NPV worth of the project would be $ -348,226 and the future cash inflow of the project would be $ 31,040,566 (Chandra, 2011).
It explains that if the sales would be normal or it would be improved than the project is beneficial for the business. But in case, the decrement occurred into the turnover of the business than it could lead to the business towards loss. It briefs that the business is required to focus on all the factors and must make decision accordingly. Business is suggested to not to invest in the project.
The Saturn Petcare Australia and New Zealand is in a complex situation because of a replacement option of the company. The project is asking to replace the old machinery with new one along with the different cash flows and outflows of the business. The NPV calculations have been applied on both the projects to measure that which project is better for the business. The project A explains that the NPV position of the project would be $ 16,732 whereas the project b explains that the NPV position of the project would be $ 69,135 (Rose & Hudgins, 2012). It leads to a discussion that the cash flow and the profits from project B are higher and thus the machineries must be replaced by the project B.
Replacement options of the business
On the basis of the Buddy project and the replacement options of the business, Business is suggested to not to invest in the project because of loss in case of lower sales and in case of replacement, cash flow and the profits from project B is higher and thus the machineries must be replaced by the project B.
In the report, the focus has been done on an Australian company, AMP limited. The report briefs about financial methods and techniques to measure the position and the industry level of the business. The capital structure level, cost of equity, weighted average cost of capital, financial position and performance, ratio analysis, material risk associated with the company etc has been studied in the report to measure the overall level of the business.
Capital structure is a financial gearing analysis tool that takes the context on different sources of funds of the business (Fridson & Alvarez, 2011). In case of AMP limited, the capital structure analysis is as follows:
It explains that the financial gearing position of the company is lowest which must be improved by the business in order to manage the risk and return position of the business.
The main competitor of the company is Australia and New Zealand bank. Capital structure of both the firms have been compared which are as follows:
It explains that the Australia and New Zealand bank’s capital structure is enough optimal in terms of financial risk and cost of the business. The AMP should follow the similar strategies in order to improve the position of the business.
The capital structure of Amp limited of last 3 years have been studied further in order to ensure the changes and the trend in the financial gearing and cost level of the business (Brigham & Houston, 2012). The changes are as follows:
The figure 3 explains that the debt level of the company has been improved a bit. The changes are nominal. And it is required for the business to improve the growth rate in the debt level to manage the optimal capital structure level of the business.
The cost of equity (CAPM model) of the business describes the 11.42% required rate of return from the business (Chandra, 2011). It explains that the minimum return from the stock of the company could be expected 11.42%. The company’s risk level is 1.47 and it is offering 11.42% return to the shareholders which are appropriate.
|
Calculation of cost of equity (CAPM) |
|
|
RF (Risk free rate) |
2.41% |
|
RM (Market return) |
8.54% |
|
Beta |
1.470 |
|
Required rate of return |
11.42% |
Capital Structure Analysis
(Annual report, 2017)
Further, the total cost of the business has been calculated in order to identify the minim return which must be earn by the business in order to assure the position and profit level of the business. The WACC position of the business explains 10.41% total cost of the business.
|
Calculation of cost of debt |
|
|
Outstanding debt |
1,116 |
|
interest rate |
5.50% |
|
Tax rate |
30.0% |
|
Cost of debt |
3.85% |
|
WACC calculations of AMP |
||||
|
(Amount in millions) |
||||
|
Price |
Cost |
Weight |
WACC |
|
|
Debt |
1,116 |
3.85% |
0.13 |
0.52% |
|
Equity |
7,202 |
11.42% |
0.87 |
9.89% |
|
8,318 |
Kd |
10.41% |
(Annual report, 2017)
The ratio calculations of the company have been given in the appendix area. Ratio analysis is the tools which make it easier for the investors to understand the current position and investment level of the business. On the basis of ratio analysis on AMP limited, it has been measured that the profitability level of the business is impressive. Further, the asset efficiency level explains that the company is managing the maximum of the available resources to maintain the performance in the industry (Arnold, 2008). In addition, on the basis of the short term and long term solvency position of the company, it has been found that the financial gearing and liquidity level of the company is bit higher which could be reduced in order to manage the overall performance of the business.
Material risk column has been presented by the company in its annual report 2017. The company has mentioned the 7 types of risk which includes strategic risk, credit risk, market risk, liquidity risk, operational risk, insurance risk and concentration risk. These types of risk are related to the different operations and the performance of the business. The risk reflects about the different situations and circumstances which could occur in the business at any time in order to affect the financial and non financial position of the business. All the given risk in the annual report (2017) has been studied in order to identify the affect of thru risk on the stock price position of the business.
While the meeting and disclosure in the Financial Services Royal Commission, the board of directors and CEO has admitted that because of their mistakes and ignorance of few facts, the loss position has been occurred in the business which has affected the capital market and the stock position of the business (News, 2018). The risk which was associated with the business at that time was operational risk, market risk and strategically risk.
The proper disclosure has been done in the meeting of Financial Services Royal Commission about the risks which have been faced by the business and even an apology has also been made by the board of directors of the company in order to developed and enhance the interest of the stockholders in the company’ stock (Home, 2018).
From the last 3 years, it has been found that the various changes have been made by the management in the strategies and the factors of the business to meet the common goals of the business. But along with the changes, few issues have been faced by the company in terms of the financial gearing position, liquidity level, credit risk etc which is overcome by the business at constant level in order to improve the stock position in the market (Annual report, 2017).
On the basis of the overall study on the material risk, evidences about the risk associated with the business, apologies, disclosure, changes into the risk level of the business etc, it has been found that the current changes in the business would neglect the affect of the material risk and it would improve the stock position of the business. The company has made some improvement in strategies in order to manage the risk level in the business. The changes would assist the business to maintain better capital market position.
Conclusion:
To conclude, the overall changes in long term and short term solvency position are required along with the some improvement in strategies in order to manage the risk level in the business.
References:
Annual Report. (2017). AMP Limited. [online]. Retrieved from: https://member.afraccess.com/media?id=CMN://2A1072055&filename=20180320/AMP_01963508.pdf
Arnold, G. (2008). Corporate financial management. Pearson Education.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner’s guide (Vol. 597). John Wiley & Sons.
Home. (2018). AMP Limited. [online]. Retrieved from: https://www.amp.com.au/
News. (2018). AMP Limited. [online]. Retrieved from: https://www.amp.com.au/news/2018/may/AMP-and-the-Royal-Commission
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill Education.
