INTRODUCTION TO ACCOUNTING AND FINANCE ASSIGNMENT HELP
INTRODUCTION TO ACCOUNTING AND FINANCE
Table of Contents
2. Conduct a literature search on the company. Summarize and explain how the company is being viewed by financial analysts and others in the press. Do you agree with the comments? Why/why not? Explain. 9
Calculation of the debt and interest of the debt for a construction company is very much important to calculate long term and the short-term debt it made in a particular financial year. In the study, the cost of capital and share valuation of a construction company Simonds group is done. In addition, the cost of debt and the market analysis of the performance of the company are also evaluated in the study. The study also consist the calculation of weighted average cost of capital.
(I) Debt Valuation
1. What are the short-term and long-term debts used by the firm?
Simonds group has taken amended debt facility from commonwealth bank of Australia amounting $8.210 million market rate loan having company credit card facility and amount of $ 24.500 million multi option facility incorporating a market loan having facilities of overdraft and bank guarantee (simondsgroup.com.au 2017). In addition, Simonds have taken assets leased and a fixed rate of 6.76% interest is payable annually on the leased assets.
2. Is the company’s debt structure consistent with the industry?
Simonds group debt structure is not consistent in the recent years (Easton & Monahan, 2016). As per the annual reports, the borrowing of Simonds have vastly exceeded on and after 2016. The amount of borrowings on 30.06.2015 was $187000 whereas the debt of 30.06.2016 has resulted in $9500000 (simondsgroup.com.au 2017). Therefore from this figures, it is clear that the debt amount of Simonds have increased much in one year and thus are not consistent is respect to the construction industry.
3. How does the industry the company operates in influence the proportion of short-term to long-term debts of the company?
In the construction industry, the requirement of long-term debt is more than that of the short-term debt. Huge capital of investment is required in the construction industry. Thus, the long-term debt is required more in the time of investing. However, the short term, debt also affects or gets utilized in the day to day monetary requirement in the construction industry. Weekly payment of labor and other expenses are done by the help of the short term debt.
4. What is the company’s the cost of debt?
As per Easton & Monahan (2016), the average overall rate of debts that a company has is said to be the cost of debt. The debt is mainly consists of bond and bank loans. In the respect of Simond group, the cost of debt is 6.76% as mentioned in the annual report of the company. This percentage of cost of debt covers the overall average rate of borrowings that it made from the Commonwealth Bank.
(II) Share Valuation
1. What is the company’s cost of equity?
The medium that measures the returns that the shareowners of the company demands for taking the risk of the company is the cost of debt. Cost of debt is a part of capital structure of the company. In the context of Construction Company Simonds group, the cost of equity is 19.71 %.
2. Evaluate and discuss a company’s revenue, earnings, EPS, dividends and growth expectations
The company’s revenue refers to the earning that the company gains in a particular financial year. In the Simond’s group, the revenue for the year 2017 is $587.37 m (simondsgroup.com.au, 2017). Based on the investment it made in the year, the revenue is comparatively low. However the revenue in 2016 and 2015 is more than this year’s revenue. The reasons behind the decrease of the revenue happened due to the excessive increase in the borrowings of the company. In the end of the previous financial year, it is found that the company has made a huge amount of loan more than that of the previous year and thus the increase in the debt has resulted decrease in the revenue of the company. The Earnings of the company is 2.08% in the current financial year (simondsgroup.com.au, 2017). The percentage of the earning is low as because the increase in the debt of the company has overvalued the liabilities of the company. Thus, the earnings are low for Simonds Group. The EPS is 2.7 in the current year, growth is 192.73 (). According to Goeminne et al. (2014), the Earning per share and growth depends on the revenue of the company. Therefore, the decrease in value of the revenue of the company has affected the EPS and the growth of the company.
3. Value the company’s stock using comparables approach (ie. P/E) and constant
dividend growth rate model. What are the factors that influence the company’s stock price and how are they captured in these models?
According to the P/E approach the value of stock is 13.4%.
Stock value as per P/E Approach=Market Value per Share / Earnings per Share
The value of stock according to the dividend growth model is 13.95%
The factors that mainly affected the stock valuation are likely, the new earnings and profits, and also the future estimation of the earnings are important for the calculation of stock valuation. The dividend amounts and the dividend growth are required to calculate the stock valuation of Simonds Group. Other than this the earning per share and the market value per share are relevant for the stock valuation.
4. Which of the values in question 3 appear most reasonable compared to the market price of the company’s stock?
Among the two calculation made on the stock valuation, the most reasonable result came out from the dividend growth rate model. The dividend growth rate model amounted more than that of the value of the stock in P/E approach. Easton & Monahan (2016) states, the main advantages that a company can earn from the dividend growth model are, the calculation makes easy to the shareholders to understand the stock value and the share price of the company. Again, the stock valuation in the valuation of the growth ate model are done not considering the market value of the stock. The exact value of the stock are thus calculated properly.
5. What additional data and information would you prefer for valuing the company’s stocks? Explain the reason(s)
Price earning to growth ratio- Price earning to growth ratio is also important for the stock valuation as because this uses the price, stock and the price earning on the stock for the valuation of the Stock.
Return on invested capital- Return on invested capital is also an important data that are utilized in the stock valuation as because this calculation involves the valuation of money that the company earns against the invested capital.
Return on asset- The calculation of return on asset are also required as because this calculation involves the amount of earning a company earned against the utilization of the asset in the company.
(III) Cost of Capital
1. Calculate the weighted average cost of capital (WACC) of the company?
The weighted average cost of capital of Simonds Group is 11.9% ().
The formula of Weighted average cost of capital is
WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
E = Company Equity Market Value
D = Company Debt’s market value
V = Company’s Total Market Value (E + D)
Re = Equity Cost
Rd = Debt Cost
T= Rate of Tax
2. Explain the company’s tax rate in the calculation of WACC?
The construction company’s tax rate is 10% in Australia and thus the tax rate of Simond’s is also 10% (ato.gov.au, 2017). The tax is based on the item sold and consumed and the services used and provided in Australia.
3. Why is there a difference in the cost of debt and the cost of equity?
The cost of debt is the cost of the borrowings that a company makes in a particular financial year for investing in the business. The cost of Equity is the cost of the equities por the shares that the company sold to the shareholders for investing in the company.
4. Should current liabilities be included in the cost of capital calculation? What are the pros and cons?
Current liabilities should not be included in the Cost of Capital as because the current liabilities consists other liabilities like short term, provisions in the balance sheet. The cost of capital only values the cost of the invested money for the business. Therefore, current liabilities cannot get involved in the calculation of the cost of capital.
5. What is the major value of the WACC calculation for the company and how is it applied in investment decision-making?
Evaluation of project with same risks- The evaluation of the risks that are associated with the investment in a new project is possible by the evaluation of the weighted average cost of capital.
Calculation of Economic value added- The average cost of capital calculation involves the addition of the economic value by adding the new market value of the capital and thus this gives the exact cost of capital.
6. Provide examples of how the company might have recently used WACC in its investment decision-making with reference to two projects recently undertaken by the company.
The recent two examples are, Simonds have taken loan from the Commonwealth bank ofamounting $8.210 million market loan with the credit card facility. Again, it has taken an amount of $ 24.500 million multi option facility incorporating a market loan having facilities of overdraft and bank guarantee (simondsgroup.com.au, 2017).
7. Define and explain capital structure of the company. Discuss whether it is consistent with the industry and why or why not.
Capital Structure of the company is the structure that is designed for getting a successful return on investment (Hidayat & MUHTAROM, 2017). Capital structure is not consistent to each and every company because the structure of capital is determined according to the level of investment that it makes in the business and therefore stays inconsistent.
8. What is the optimal capital structure and what economic circumstances will likely cause a change in it?
An optimal capital structure is the best debt-to-equity ratio for a firm that maximizes its value. The Optimal capital structure for a company is one that offers a balance between the ideal debt-to-equity ranges and minimizes the firm’s cost of capital (Hidayat & MUHTAROM, 2017). The change in the invested amount and changes in the valuation of assets that are also invested causes changes in the optimal capital structure.
(IV) Market Analysis
1. Comment on the chosen company’s financial performance relative to its industry.
The financial performance of the chosen construction company Simonds Group are evaluated and the different value like Earning per share, growth of dividend, WACC are found out and it is also found that the debt or the borrowings of the company has exceeded much in this financial year. For this profit or the revenue of the company has been decreased. The loan from the bank has covered much of the liabilities of the company and the company is currently highly based on the long-term borrowings.
2. Conduct a literature search on the company. Summarize and explain how financial analysts and others are viewing the company in the press. Do you agree with the comments? Why/why not? Explain.
The company Simonds Group is found to be a growing construction company and the news that emerging is quite satisfactory for the growth of the company. It is found from the financial statement that the amount of the debt that the company recently took from the commonwealth bank is relevant for the growth of the company. The investment that unit made is required for the better return in the future. The company is also increasing the share numbers so that more capital can be learned from the share and also the list of the shareholders exceed. Presently, the number of shareholders is more than 1000 (simondsgroup.com.au, 2017).
3. Comment on any other item that is important or different about the company
In discussing about the different thing, that Simonds emphasizes is it takes loan on long-term basis. Simond’s debt is mainly based on the long-term basis and the management of the Simonds group focuses in gaining more capital than to earn more profit. This is a very successful way of developing because more investment in a business makes the business works better and thus automatically the increment in the profit will occur.
In the study the different value of the different
financial position of the company are found out. The study includes the cost of
equity and the cost of capital including the best approach in valuation of
stock. Valuation of WACC or weighted average cost of capital is done in the
study and also the comments on the business performance of the company are
mentioned in the study. The significant matters that are present in Simonds
group are also explained in the study.
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Easton, P. D., & Monahan, S. J. (2016). Review of Recent Research on Improving Earnings
Forecasts and Evaluating Accounting‐based Estimates of the Expected Rate of Return on Equity
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Goeminne, P. C., Nawrot, T. S., Ruttens, D., Seys, S., & Dupont, L. J. (2014). Mortality in non
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on equity in CESEE and how does it compare to their cost of equity?. Financial Stability Report,
Hidayat, D. R. R. N., & MUHTAROM, M. (2017). Pengaruh Debt To Equity Ratio (DER),
Current Ratio (CR), Net Profit Margin (NPM), Return On Equity (ROE), Dan Return On Asset
(ROA) Terhadap Return Saham Syariah Yang Terdaftar Di Jakarta Islamic Index (JII)(Periode
2013-2015) (Doctoral dissertation, Universitas Muhammadiyah Surakarta).
simondsgroup.com.au (2017) Simonds group Ltd [Retrieved from:
http: //simondsgroup.com.au/reports accessed on 9Sept 2017]