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Answer:
Answer to Question No.1:-

The 5 years’ growth rate in operating revenues of JB Hi-Fi ltd. over the last 5 years is calculated below:

Computation of Growth Rate:

Particulars

 

Amount

Operating Revenue:

 

 

2015-16

A

$3,954,467

2011-12

B

$3,127,792

5 years' Growth Rate

C=[(A/B)^(1/5)]-1

4.80%

The expected operating revenue for the financial year 2020-21, based on the growth rate, computed above, is ascertained in the following table:

Estimation of Operating Revenue:

Particulars

 

Amount

Expected Operating Revenue:

 

 

2016-17

E=A*(1+C)

$4,144,365

2017-18

F=E*(1+C)

$4,343,382

2018-19

G=F*(1+C)

$4,551,956

2019-20

H=G*(1+C)

$4,770,545

2020-21

I=H*(1+C)

$4,999,632

Estimation of Operating Revenue:

Particulars

 

Amount

Operating Revenue in 2015-16

A

$3,954,467

5 yrs' growth Rate

B

4.80%

Period (in yrs.)

C

$5

Expected Profit in 2020-21

D=Ax[(1+B)^5]

$4,999,632

Answer to Question No.2:-

The annual interest rate of JB Hi-Fi is calculated below on the basis of the annual interest expenses and average long-term debt for the year 2015-16:-

Computation of Annual Interest Rate:

Particulars

 

Amount

Long-Term Debt:

 

 

2015-16

A

$109,736

2014-15

B

$139,461

Average Long-Term Debt

C=(A+B)/2

$124,599

Interest Expenses

D

$3,857

Annual Interest Rate

E=D/Cx100

3.10%

The monthly payment for repaying the 20 years amortized loan with the interest, as per the annual interest rate, computed above, is calculated below:

Computation of Monthly Payments:

Particulars

 

Amount

Amount of Amortised Loan

A

$800,000

Rate of Interest p.a.

B

3.10%

Period (in years)

C

20

No. of Monthly Payments

D=Cx12

240

Amount of Monthly Payments

E=PMT((B/12),D,(-A),0)

$4,475

The total interest expenses for the first year are computed in the following table:

Interest Expenses for the 1st Year:

Month

Opening Principal Loan

Interest Rate p.a.

Interest Amount

Monthly Payment

Principal Repayment

Balance Principal Amount

 

A

B

C=AxB

D

E=D-C

F=A-E

1

$800,000

3.10%

$2,063.70

$4,475.14

$2,411.45

$797,588.55

2

$797,589

3.10%

$2,057.47

$4,475.14

$2,417.67

$795,170.89

3

$795,171

3.10%

$2,051.24

$4,475.14

$2,423.90

$792,746.99

4

$792,747

3.10%

$2,044.99

$4,475.14

$2,430.16

$790,316.83

5

$790,317

3.10%

$2,038.72

$4,475.14

$2,436.42

$787,880.40

6

$787,880

3.10%

$2,032.43

$4,475.14

$2,442.71

$785,437.70

7

$785,438

3.10%

$2,026.13

$4,475.14

$2,449.01

$782,988.68

8

$782,989

3.10%

$2,019.81

$4,475.14

$2,455.33

$780,533.36

9

$780,533

3.10%

$2,013.48

$4,475.14

$2,461.66

$778,071.69

10

$778,072

3.10%

$2,007.13

$4,475.14

$2,468.01

$775,603.68

11

$775,604

3.10%

$2,000.76

$4,475.14

$2,474.38

$773,129.30

12

$773,129

3.10%

$1,994.38

$4,475.14

$2,480.76

$770,648.54

Total Interest Expenses in 1st Year

$24,350.23

 

 

 

The interest expenses for the fourth year are shown in the following table:

Month

Opening Principal Loan

Interest Rate p.a.

Interest Amount

Monthly Payment

Principal Repayment

Balance Principal Amount

 

A

B

C=AxB

D

E=D-C

F=A-E

2nd year:

 

 

 

 

 

 

13

$770,649

3.10%

$1,987.98

$4,475.14

$2,487.16

$768,161.38

14

$768,161

3.10%

$1,981.56

$4,475.14

$2,493.58

$765,667.80

15

$765,668

3.10%

$1,975.13

$4,475.14

$2,500.01

$763,167.79

16

$763,168

3.10%

$1,968.68

$4,475.14

$2,506.46

$760,661.33

17

$760,661

3.10%

$1,962.22

$4,475.14

$2,512.92

$758,148.41

18

$758,148

3.10%

$1,955.73

$4,475.14

$2,519.41

$755,629.00

19

$755,629

3.10%

$1,949.23

$4,475.14

$2,525.91

$753,103.10

20

$753,103

3.10%

$1,942.72

$4,475.14

$2,532.42

$750,570.68

21

$750,571

3.10%

$1,936.19

$4,475.14

$2,538.95

$748,031.72

22

$748,032

3.10%

$1,929.64

$4,475.14

$2,545.50

$745,486.22

23

$745,486

3.10%

$1,923.07

$4,475.14

$2,552.07

$742,934.15

24

$742,934

3.10%

$1,916.49

$4,475.14

$2,558.65

$740,375.49

3rd Year:

 

 

 

 

 

 

25

$740,375

3.10%

$1,909.89

$4,475.14

$2,565.25

$737,810.24

26

$737,810

3.10%

$1,903.27

$4,475.14

$2,571.87

$735,238.37

27

$735,238

3.10%

$1,896.63

$4,475.14

$2,578.51

$732,659.86

28

$732,660

3.10%

$1,889.98

$4,475.14

$2,585.16

$730,074.70

29

$730,075

3.10%

$1,883.31

$4,475.14

$2,591.83

$727,482.88

30

$727,483

3.10%

$1,876.63

$4,475.14

$2,598.51

$724,884.36

31

$724,884

3.10%

$1,869.93

$4,475.14

$2,605.22

$722,279.15

32

$722,279

3.10%

$1,863.21

$4,475.14

$2,611.94

$719,667.21

33

$719,667

3.10%

$1,856.47

$4,475.14

$2,618.67

$717,048.54

34

$717,049

3.10%

$1,849.71

$4,475.14

$2,625.43

$714,423.11

35

$714,423

3.10%

$1,842.94

$4,475.14

$2,632.20

$711,790.91

36

$711,791

3.10%

$1,836.15

$4,475.14

$2,638.99

$709,151.92

4th Year:

 

 

 

 

 

 

37

$709,152

3.10%

$1,829.34

$4,475.14

$2,645.80

$706,506.12

38

$706,506

3.10%

$1,822.52

$4,475.14

$2,652.62

$703,853.49

39

$703,853

3.10%

$1,815.67

$4,475.14

$2,659.47

$701,194.03

40

$701,194

3.10%

$1,808.81

$4,475.14

$2,666.33

$698,527.70

41

$698,528

3.10%

$1,801.94

$4,475.14

$2,673.21

$695,854.49

42

$695,854

3.10%

$1,795.04

$4,475.14

$2,680.10

$693,174.39

43

$693,174

3.10%

$1,788.13

$4,475.14

$2,687.02

$690,487.38

44

$690,487

3.10%

$1,781.19

$4,475.14

$2,693.95

$687,793.43

45

$687,793

3.10%

$1,774.25

$4,475.14

$2,700.90

$685,092.54

46

$685,093

3.10%

$1,767.28

$4,475.14

$2,707.86

$682,384.67

47

$682,385

3.10%

$1,760.29

$4,475.14

$2,714.85

$679,669.82

48

$679,670

3.10%

$1,753.29

$4,475.14

$2,721.85

$676,947.97

Interest Expenses in 4th Year

$21,497.75

 

 

 

Answer to Question 3:-

The investment value, required for the first investment alternative, is calculated in the following table:

Investment Value for 1st Option:

Particulars

 

Amount

Cash Requirement after 3 years

A

$2,000,000

Coupon Rate

B

4.20%

Nos. of Payments p.a.

C

2

Period (in years)

D

3

Total nos. of Coupon Payments

E=CxD

6

Investment Value

F = A/[(1+B/C)^E]

$1,765,532

The required amount for investing in the second investment alternative is as follows:

Investment Value for 2nd Option:

Particulars

 

Amount

Cash Requirement after 3 years

A

$2,000,000

Coupon Rate

B

4.14%

Nos. of Payments p.a.

C

12

Period (in years)

D

3

Total nos. of Coupon Payments

E=CxD

36

Investment Value

F = A/[(1+B/C)^E]

$1,766,784

Cash funds, required for purchasing bonds as per the third option, is computed below:

Investment Value for 3rd Option:

Particulars

 

Amount

Cash Requirement after 3 years

A

$2,000,000

Maturity Value per bond

B

$100

Nos. of Bond

C=A/B

20000

Curret Trading Price per bond

D

$88.45

Investment Value

E=Dxc

$1,769,000

The first investment alternative would require lowest amount of cash funds amongst the three alternatives. Hence, it can be concluded that the company should select the first investment option for raising fund of $2,000,000 within three years.

As per calculation, shown above, the company would require $1,765,532 for investing in the first alternative.

Answer to Question No.4:-
Requirement a:-

The yield on the company’s bonds, as per the stated scenario, is computed below:

Yield Rate on Bond:

Particulars

 

Amount

Yield Rate on Australian Bond as on 27/01/2017

A

2.78%

Add: Spread

B

0.33%

Yield Rate on Bond

C=A+B

3.11%

Requirement b:-

There are two types of bond yield rates. Current yield rate is the percentage of interest, earned from any bond, over its current market price. The yield-to-maturity is the estimated interest rate, which an investor would achieve for holding the bond till the maturity date.

Current yield rate is not affected by the holding period. However, yield-to-maturity highly relies on the holding period. The investor would receive more interest for bonds with longer period and therefore, such bonds would have higher yield-to-maturity.

Now, if the company bonds had been shorter term, then the total interest amount would become lower and such case, the yield-to-maturity would decreases in accordance to the short maturity period.

Requirement c:-

The Australian economy may face depression in the following year. If such situation arrives, then the government has to take additional initiatives to support the economy. Hence, it will not be able to provide high returns on the government bonds and the yield to government bond will fall gradually.

However, the coupon rate on company bond will remain unchanged. Therefore, due to the fixed interest payments and fall in yield on government bonds, the spread to the company bond will become higher.

Requirement d:-

As the company bond will provide fixed coupon rates irrespective of the economic depression, the investor can get higher return from the bonds in comparison to the risk-free investments, like govt. bonds and have to bear lower risk than the risky investments, like shares.

Therefore, the demand of the company bonds will increase and subsequently, it will cause rise in the market price of the bonds (Bodie et al. 2014).

Answer to Question No.5:-
Requirement a:-

Under CAPM technique, the required rate of return of JB Hi-Fi Ltd. as on 30th June, 2015, would as follows:

Required Rate of Return on 30/06/15:-

Particulars

 

Amount

Risk-Free Rate on 30/06/2015

A

3.21%

Market Risk Premium

B

6.80%

Beta of the company

C

0.58

Required Rate of Return

D=A+(BxC)

7.15%

Requirement b:-

The required rate of return of the company as on 30th June,2016, is computed below:

Required Rate of Return on 30/06/16:-

Particulars

 

Amount

Risk-Free Rate on 30/06/2016

A

1.98%

Market Risk Premium

B

6.80%

Beta of the company

C

0.58

Required Rate of Return

D=A+(BxC)

5.92%

From the two tables, shown above, it is clear that the required rate of return for the company has fallen down in financial year 2015-16 from 2014-15. It has been caused due to lower risk-free rate or the yield rate of 10-year Australian Treasury Bond as on 30th June,2016 in comparison to the yield rate on 30th June, 2015.

Now if it is assumed that all other factors would remain unchanged, then, the company would have to incur lower cost for maintaining the capital funds with the same revenue growth. In such scenario, it would generate more funds from its operational activities than the previous year, which would ultimately increase the net asset of the company and shareholder’s value. The higher shareholders’ value would, in return, affect the market value of the shares and influence it to increase significantly (Dhrymes 2017).

Requirement c:-

Share market is very volatile in comparison to other investment alternatives. Hence, the investors require higher returns from the share investment for bearing higher risk on investment. It has been observed that the shares with higher risk in terms of price fluctuation provide higher return also. The higher return can be defined as the premium for bearing higher risk. Under CAPM, the risk level is measured in the form of market risk premium.

Hence, if the average risk aversion would fell, the market risk level would become higher. Then, the company would have to pay higher risk premium to the investors for the attracting them. It would cause the share prices to rise at high rate (Zabarankin et al. 2014).

Answer to Question 6:-

The free cash flows of JB Hi-Fi Ltd. for the year 2016 and 2015 are computed in the following table:

Particulars

 

2013-14

2014-15

2015-16

EBIT

A

 

$201,459

$221,696

Tax Rate

B

 

30%

30%

Depreciation & Amortization

C

 

39124

40901

Current Assets

D

$578,147

$616,901

$702,518

Current Liabilities

E

$352,193

$380,336

$446,833

Working Capital

F=D-E

$225,954

$236,565

$255,685

 

 

F1

F2

F3

Change in Working Capital

G

 

$10,611

$19,120

 

 

 

G1=F2-F1

G2=F3-F2

Property, Plant & Equipment

H

$366,292

$384,510

$419,378

 

 

H1

H2

H3

Capital Expenditure

I

 

$18,218

$34,868

 

 

 

I1=H2-H1

I2=H3-H2

Free Cash Flow

J=(Ax(1+B))+C-G-I

 

$151,316

$142,100

The rates of return on invested capital for 2015 and 2016, on the basis of the computed free cash flows, are computed below:

Particulars

 

2014-15

2015-16

Net Profit for the period

A

136511

152181

Dividend

B

89085

98946

Total Assets

C

895013

992381

Less: Free Cash Flow

D

$151,316

$142,100

Less: Non-Interest Bearing Current Liabilities

E

$380,336

$446,833

Invested Capital

F=C-D-E

$363,361

$403,448

Return on Invested Capital

G=[(A-B)/F]x100

13.05%

13.20%

WACC

H

7.15%

5.92%

Excess Return to Investors

I=G-H

5.90%

7.27%

The ROIC of the company for both the years are above 13%, whereas, the cost of capital of both the years are 7.15% and 5.92%. Hence, it can be stated that JB Hi-Fi Ltd. has provided higher returns to its investors in comparison to the required return rates in both 2015 and 2016 (Bhimani et al. 2013).

References

Bhimani, A., Horngren, C.T., Sundem, G.L., Stratton, W.O. and Schatzberg, J., 2013. Introduction to Management Accounting. Pearson Higher Ed

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education

Dhrymes, P.J., 2017. Portfolio Theory: Origins, Markowitz and CAPM Based Selection. In Portfolio Construction, Measurement, and Efficiency (pp. 39-48). Springer International Publishing

Jbhifi.com.au. (2017). JB Hi-Fi | JB Hi-Fi Corporate. [online] Available at: https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/ [Accessed 17 Mar. 2017].

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning

Reserve Bank of Australia. (2017). Historical Data | RBA. [online] Available at: https://www.rba.gov.au/statistics/historical-data.html [Accessed 17 Mar. 2017].

Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517

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