Discuss about the Accounting Reporting As Information Source.
Analysis of Bathurst and Wodonga project using Capital budgeting:
Evaluation of the two projects that is Bathurst and Woodonga project is done by the capital budgeting tool such as net present value, profitability index and payback period. It is depicted from the table that net present value of Bathurst project is more than that of Wodonga project at value of $ 9594827. When looking at the profitability index value, it can be seen that profitability index of Wodonga project is higher at value 1.34 than Bathurst project at value of 1.17. The payback period of Wodonga project is less than that of Bathurst project indicating that making investment in former project will enable organization to recover initial investment in less time as against later (Buncic et al., 2015).
Capital budgeting decision and product cannibalization:
Product cannibalization refers to the strategy implemented by organization for promoting the sales their new developed product by reducing the market share, sales volume and sales revenue of the existing product. This particular measures is adopted by organization to increase the sales volume of new product by using the techniques of capital budgeting. Any fall in profits from selling of new product should be treated as loss and this strategy considerably impacts the capital budgeting analysis of the new project that is undertaken.
Application of capital budgeting tool when analyzing the estimated sales errors:
The management of Saturn Pet Care has evaluated that the sales budget that have been estimated is unusually high that would have influence on the analysis of capital budgeting. Such errors inn estimation would have direct impact on capital budgeting analysis and ultimately impacting the investment decision. Therefore, in order to neutralize the impact of such errors in estimation, it is required by Saturn Pet Care to take proper measures. In this regard, Saturn should employ technique of net present value as it would help in neutralizing the effect of such wrong estimation.
Addressing the issues of original value of vacant Wodonga factory:
Considering the original value of vacant factory at the Wodonga site in the analysis of capital budgeting is one of the concerns faced by management of Saturn Pet Care. When computing the net present value, the original cost of such factory should be involved as opined by the strategy finance manager of company. Nevertheless, the inclusion of such original cost would significantly influence analysis of net present value. This would ultimate have an impact on the business decision taken by Saturn.
The report is prepared for evaluating the financial performance of ARB limited using the technique of ratio. It also demonstrates the change in capital structure by comparing with other firms in the industry. Cost of capital has been analyzed by computation of weighted average cost of capita using CAPM.
Categorizing ARB limited capital structure:
The capital structure of ARB limited comprises of 100% of equity and there is no reliance on the external borrowings by company. Total amount of capital stood at $ 272341.
The above table depicts that there is a change in weighted average cost of capital by considerable amount. WACC stood at 21.52% in year 2014 as against 18.05% in year 2017. It is suggested by figure that there is continuous fall in WACC.
Determination of appropriate return using CAPM:
The cost of equity determined using model of capital assets pricing stood at 7.906% as against the value computed using general method at 18.05%. Return provided by market stood at 8.54% as against equity cost of 7.906% indicating that return is more than cost.
Comparison of capital structure of ARB limited with other firm:
Under this section, the capital structure of ARB limited is compared with that of Modine limited operating in the same industry. There is difference between the capital structures of both the firms in terms of financial leverage. The capital structure of Modine limited comprised of both equity and short term and long term borrowings compared to capital structure of ARB limited having only equity in its capital structure (Mhedhbi & Zeghal, 2016). Therefore, it can be inferred that Modine limited has higher degree of financial leverage since it has higher proportion of total debt in its capital structure.
Analyzing key financial ratios of ARB limited:
Under this section, three financial ratios that are profitability ratios, efficiency ratios and solvency ratios have been computed.
When looking at profitability ratios, it can be seen that net profit margin, return on assets and return on equity has declined year on year. However, gross profit margin remained at same value of 0.454 for three continuous years. Therefore, the overall profitability position company has declined.
Solvency ratio has been analyzed by the computation of debt ratio, debt to equity ratio, time interest earned ratio and equity ratio. There has been considerable decline in all the ratios year on year and this is indicative of the fact that the solvency position of company have deteriorated.
The efficiency position of company has been analyzed by computing inventory turnover ratio, receivables turnover ratio and payables turnover ratio (Kucherkova, 2014). From the above table, it can be inferred that efficiency position of company has reduced.
Identification of changes in capital structure of ARB limited:
Capital structure of ARB limited has changed by considerable value since year 2014. Value of total capital stood at $ 197814 in year 2014 compared to $ 272341 in year 2017. In recent years, firm is not depending on any external borrowings for financing their operations.
Evaluation of success of ARM limited in generating shareholder wealth:
The value of net operating profit after tax has increased since 2014 from $ 42570 to $ 49152 in year 2017 respectively. Cost of capital has increased and this increase in cost is not regarded as favorable as it is associated with higher level of risks.
- It is recommended to ARB limited to reduce the cost of capital for lowering the risks associated with operations of company.
- The capital structure of firm should involve debt or external borrowings along with equity capital. This would take into account of taxation factor and provide advantage in terms of advantage of tax deductibility.
The above discussion demonstrates the evaluation of financial position of ARB limited. It can be inferred from such analysis that the capital structure does not have appropriate balance of equity and debt. Therefore, capital structure should be revised. In addition tom this, the firm is experiencing lower cost of capital.
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