- Internal Code :
- Subject Code : FINM4000
- University : Kaplan University
- Subject Name : Accounting and Finance
Finance Assignment
1. The "A2M" governance, according to the 2019 Annual Report of The A2 Milk Company Limited, is organized in such a manner that authority has been redistributed to the departments to promote accountability among the departmental managers.
Some of the strategies that aim to align manager and shareholder interests include regular meetings between these two to make participation in making decisions and ensuring that the company's stakeholders agree with planned company initiatives before implementation. For example, when the company wants to open a new retail outlet, the managers inform its stakeholders about this plan and implement it after the stakeholders have agreed. The tracking type of current asset management strategy includes listing all the assets and then managing their flow to avoid depletion.
Net working capital is the difference of current assets and current liabilities.
- In 2019, a2-Milk-Company reported $675,699,000 in current assets and $205,389,000 in current liabilities. So, its net working capital for 2019 will be $470,310,000.
- In 2018, a2-Milk-Company reported $499,702,000 in current assets and $160,389,000 in current liabilities. So, its net working capital for 2019 will be $339,313,000.
The pros and cons of this strategy are as follows;
Pros:
Relaxed current asset management strategy involves the process of investing more in the current assets. More investment in current assets ensures liquidity. One of the major advantages of this strategy is that in times of economic liquidity crunch, the companies (which follow relaxed strategy) are in a better position to counter the effects of liquidity crunch.
Cons:
Relaxed current asset management strategy brings more liquidity. Higher liquidity means lower profits. This is because the company has to invest more in the current assets to maintain liquidity and this investment brings down the profitability of the company. That is why, it is said that there is an inverse relationship between the liquidity and profitability.
In order to determine whether the share should be bought today, we need to compute the share's intrinsic value which is the present value of future dividends and terminal value using the company's cost of equity as the discount factor
Time 1 dividend= 0.5
Time 2 dividend=0.5*(1+g)
g is the growth rate of dividend in time which is 30%
D2=0.5*(1+30%) = 0.65
Time 3 dividend=0.65*(1+g)
g is the dividend growth rate which is 25%
Time 3 dividend=0.65*(1+25%) = 0.8125
Terminal value=D3* (1+g)/Ke-g
g is the constant dividend growth rate of 5%
Ke is the cost of equity which is computed thus:
Ke=Rf+Beta*Maximum Retail Price
Rf is risk free rate which is the interest rate on Australian treasury notes of 1.5%
Beta=0.80
Mrp is the market risk premium=10%
Ke=1.5 %+( 0.80*10%)
Ke=9.50%
Terminal value=0.8125*(1+5%)/ (9.50%-5%)
Terminal value=18.96
Present of a future cash flow=cash flow/(1+Ke)^n
N is the year the cash flow would occur for instance $0.50 AUD is for time 1 hence n is 1
Price=0.5/ (1+9.50%)^1+0.65/(1+9.50%)^2+0.8125/(1+9.50%)^3+18.96/(1+9.50%)^3
Price=$16.06
The intrinsic value of the share is lower than the market price of $17.15; hence, the stock is not a good buy as it is overvalued.
d) Closing price as on 1 June 2020 = 17.31
Number of Shares Outstanding as of end of 2019 FY = 735,048,405
Market Capitalization = No. Of share* Price of shares
17.31 * 735,048,405 = 12,723,687,891
e) The main source that the company is using to finance its long terms operations are that of trade payables and other payables to finance its operations. The main disadvantage of this strategy is that these sources of finance are not fixed in nature i.e. they can be demanded by the creditors for payoff immediately or the trade payables may not provide credit going forward.
f) The issuing price of the bond can be computed using formula below:
Price = face value/ (1+semiannual yield) ^n
+semi annual coupon*(1-(1+semiannual yield) ^-n)/semi annual yield
Face value = $1000
Semi annual yield = yield*6/12=4%*6/12=2%
N is the number of semi annual coupon payments in 5 years i.e. 5*2=10
Semi-annual coupon=coupon rate*face value*6/12=$1000*3%*6/12=$15
Issue Price of Bond = face value/ (1+semiannual yield) ^n
+semi annual coupon*(1-(1+semiannual yield) ^-n)/semi annual yield
Price=$1000/ (1+2%) ^10+$15*(1-(1+2%) ^-10)/2%
Price=$820.35+$134.74
Price=$955.09
Number of bonds=amount to be raised/price per bond
Number of bonds=$200,000,000/$955.09
Number of bonds= 209,404
Answers for part a, b, c, d is shown in the excel sheet. Please consult that.
e) Project A should be selected if company has a payback policy of 6 years as the IRR of project A is greater than that of Project B. Also, A2M management should select project A because Even if project A's NPV is less than that of project B, its value is positive. Other techniques or elements that can be taken into consideration are:
1) Competition related elements: Some sudden contender's activity likewise influences the capital planning choice, for example, decrease in cost by concocting new innovation or cycle.
2) Social pattern: We ought to likewise search for our general public's desire. In the event that individuals are going ahead for more green item and eco-accommodating item, it wouldn't be a great idea to go for venture that is risky to our condition.
3) Political angles: We ought to likewise consider political viewpoints that may influence our capital planning choices, for example, import and fare tax assessment.
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