JB Hi-Fi Ltd. Financial Analysis

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 30^th 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 30^th 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 30^th June,2016 in comparison to the yield rate on 30^th 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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