Evaluation Of Shell's Working Capital Efficiency, Debt Financing, And Yield To Maturity In Essay.

Questions

This work has been divided among four members of the group. In order to perform the task effectively and efficiently all the task of the assignment has been read out carefully, after that the project was divided according to the strength of the group member. Second question of the report that is Company Perspective is done by the member 1 and he is having strong point in this area, while he was doing his project we all were there with him so that we can also understand that how this type of questions is solved. Further valuable suggestions of other members of the group are welcomed. 3 question of the report that is capital budgeting is done by two group member that is member 2 and member 3. Fundamental analysis of the report was done by all the group members. Preparation of the part 2 was done by member 4 as knows how to make attractive and good PPT. Further once the presentation was prepared it was given by the all the group members. 

Working capital efficiency

Working capital = current assets - current liabilities

Current assets
Inventories	21,775	15,822
Trade and other receivables	45,664	45,784
Cash and cash equivalents	19,130	31,752
Total	86,569	93,358
Current liabilities
Debt	9,484	5,530
Trade and other payables	53,417	52,770
Taxes payable	6,685	8,233
Retirement benefits	455	350
Decommissioning and other provisions	3,784	4,065
Total	73,825	70,948
Working capital	12,744	22,410

Working capital efficiency is shown by current assets divided by the current liabilities(PNC, 2017). This ratio clearly indicates that whether company is having adequate and optimum amount of short term assets(Maverick, 2015).

Working capital efficiency

1.172624

1.315865

From the above ratio it can be said that company's working capital efficiency is equivalent to idle ratio, hence it can be said that company does not have any problem in paying off its short terms liabilities. Company has maintained its short term liabilities and assets very effectively and efficiently (Kasiran, 2016).

Over the past three years, company is using short term debt and long term debt for the company. Long term debt in 2016 was 82992 and in 2015 it was 52849, thus it can be said that long term debt of the company has been increased. Long term financing is sued by the company to buy plant, machinery, and equipments (Neil Kokemuller, 2017). Thus long term debt has been used to maintain the long term sustainability of the business. Short term debt of the company has increased from 5530 to 9484. Short term debt is used by the company in meeting its daily operations (Ng & Monga, 2013).

YTM calculation
Face value		1000
Annual coupon rate		1.25%
Years to maturity		12
Bond Price		1002.3
YTM		1.229%

(Boerse-berlin.com, 2017)

Formula for YTM       = [C + (F-P)/n]/(F+P)/2

                                    = [(1.25+(1000-1002.3)/12)/(1000+10002.3)/2)]

                                    = 1.229%

C interest payment

Answers

F face value

P price

N years to maturity

YTM shows the total return that is anticipated on a particular bond, this value is calculated when bond is held till its end of life (Albany, 2017). In other words it can be said that YTM is the internal rate of return of the bond (Leonard N. Stern School of Business, 2017). It represents the IRR which investor will get if it keeps the assets till the maturity (Moneychimp, 2017). 

Free cash flows

	Free Cash Flow calculation
	Project A
		y1	y2	y3	y4	y5
	Sales	160	160	160	160	160
	Cost of sales	80	80	80	80	80
	Profit	80	80	80	80	80
less	crude oil expenses	40	40	40	40	40
less	Additional working capital	0.4
less	Depreciation	2000	2000	2000	2000	2000
	PBT	-1960.4	-1960	-1960	-1960	-1960
less	Tax (30%)	-588.12	-588	-588	-588	-588
	PAT	-1372.28	-1372	-1372	-1372	-1372
ADD	Depreciation	2000	2000	2000	2000	2000
	CFAT	627.72	628	628	628	628

	Project B
		y1	y2	y3	y4	y5
	Sales		190	190	190	190
	Cost of sales	85.5	85.5	85.5	85.5	85.5
	Profit	104.5	104.5	104.5	104.5	104.5
less	crude oil expenses	30	30	30	30	30
less	Additional working capital	0.4
less	Depreciation	2000	2000	2000	2000	2000
	PBT	-1925.9	-1925.5	-1925.5	-1925.5	-1925.5
less	Tax (30%)	-577.77	-577.65	-577.65	-577.65	-577.65
	PAT	-1348.13	-1347.85	-1347.85	-1347.85	-1347.85
ADD	Depreciation	2000	2000	2000	2000	2000
	CFAT	651.87	652.15	652.15	652.15	652.15

Calculation of NPV and IRR

WACC 12 %

Project A

CFAT	627.72	628	628	628	628
COC (12%)	0.8929	0.7972	0.7118	0.6355	0.5674
PV of inflow	560.46	500.64	447.00	399.11	356.34
Total PV (From y1 to y5)		2263.55
Recovery of working capital		0.2270
Total Pv of inflow		2263.777
NPV		-13486.223

Project A
PV of inflow	-1575	560.46	500.64	447.00	399.11	356.34
IRR	15%

 Project B

CFAT	651.87	652.15	652.15	652.15	652.15
COC (12%)	0.8929	0.7972	0.7118	0.6355	0.5674
PV of inflow	582.03	519.89	464.19	414.45	370.05
	Total PV (From y1 to y5)			2350.60
	Recovery of working capital			0.2270
	Total Pv of inflow			2350.827
	NPV			-11399.2

PV of inflow	-1375	582.03	519.89	464.19	414.45	370.05
	IRR	23%

 WACC 25 %

Project A

CFAT	627.72	628	628	628	628
COC (25%)	0.8000	0.7972	0.7118	0.6355	0.5674
PV of inflow	502.18	500.64	447.00	399.11	356.34
Total PV (From y1 to y5)		2205.26
Recovery of working capital		0.2270
Total Pv of inflow		2205.487
NPV		-13544.513

Project A
PV of inflow	-1575	502.18	500.64	447.00	399.11	356.34
IRR	13%

 Project B

CFAT	651.87	652.15	652.15	652.15	652.15
COC (25%)	0.8000	0.7972	0.7118	0.6355	0.5674
PV of inflow	521.50	519.89	464.19	414.45	370.05
	Total PV (From y1 to y5)			2290.07
	Recovery of working capital			0.2270
	Total Pv of inflow			2290.2970
	NPV			-11459.7

PV of inflow	-1375	521.50	519.89	464.19	414.45	370.05
	IRR	21%

Since NPV of the project is negative therefore no single project should be selected. However, if the two projects are compared then the project which is having less loss in NPV should be selected.

Australia is the key producers of iron ore, across the globe. Among all the resources, the country has a plenty of iron ore resources (The Conversation, 2016). The Australian iron ore industry has been emerged out to be a leading industry, in the past few years. Earlier, till the 1960s, the production of the iron ore in the country of Australia, as well as in the Western Australia was considered to be negligible. The production was said to be increased from the year 1990, and in the year 2003, the total iron ore production was marked to be 200 million tonnes. Since then, the iron ore industry has been witnessing a rapid growth rate. For the budget of the year 2008-09, the expenditure that were to be incurred for the exploration of the iron ore in the region of Western Australia witnessed an increase by 33% (The Conversation, 2011). Earlier, the country used to mine the premium brockman ore, but with the dynamic in the iron ore industry, and also due to the increased demand from Japan as well from Korea, the exploration as well as development of various other iron ores such as channel iron deposits, marra mamba, and hematite goethite has been initiated. The recent dynamism that the iron ore industry of Australia is witnessing, is the addition of the magnetite ores which has a total of 6.8Gt, recorded in the year 2008. This addition is expected to be a great contribution in the bright and promising future of the country’s iron ore industry. In the recent times the production of marra mamba as well as the channel iron deposits ores has been increased, but the production of the premium brockman type remains to be constant since the initial phase of the industry. It has been found that the iron ore have an average resource life of about 70 years. When the magnetite iron ore is being removed, the resource life of the iron ore is just near about 50 years.

Company Perspective

As a result of the current dynamic, the Australian iron ore industry has been an export oriented industry. Around 90% of the total production by the industry is being exported (industry.gov.au, 2017). In the year 2011, the iron ore industry of the country Australia was the largest exporter of the iron ore products, leaving behind the rivalry countries of India and Brazil. The iron ore industry of the country has evolved out so much towards expansion that among the top three exporters of the seaborne iron ore, the two leading exporters belong to Australia. BHP Billiton as well as Rio Tinto is the two major leaders in context of the export of the seaborne ore, across the world. Such companies carry out their operations in Pilbara, which is located in the western region of Australia.

Total of the roll number of the group members is 71 which is odd in number therefore the selected company is from real estate sector. Since the group total is 71 and last number of the sum total is less than 5 therefore company will be selected on the top 49 % which is based on the market capitalization of the sector.

The company which has been selected for this is Jones Lang LaSalle Incorporated (JLL).

JLL was established in 1783, it is the world's largest as well as most respected commercial real estate company. It has maintained long lasting relationships with the clients and partners due to hard work, excellence, and professionalism in execution. Gross revenue of the company in the financial year 2015 was $5.4 million. This company has been listed under fortune 500 list. JLL has an excellent specialization in thereal estate services as well as investment management(JLL, 2017). They create value for those institutions and companies that want to invest and make use of real estate industry. Company is having more than 78000 employees. Company is having around 300 corporate offices across the globe. They serve the global, local, and regional real estate requirements of corporates plus investors in 80 countries. Company is having deep understanding of the capital markets and real estate market. Further company is coordinated as well as consistent across geographies(JLL, 2017).

• Market dynamics relating to the real estate sector are
• Supply and demand equilibrium
• Simultaneous change in demand and supply
• Change in demand price
• Change in supply price (ISET, 2017)
• Demand curve in the real estate market is down ward sloping
• It has been observed that average selling price with respect to the residential properties is has been decreased as compared to the last year

Dividend of the last 12 months of the company

Date	Open	High	Low	Close	Adj Close	Volume
1/1/2016	157.49	160.33	131.79	140.72	140.72	6529100
2/1/2016	139.55	140.82	96.67	102.07	102.07	11883300
3/1/2016	103.81	120.8	100.73	117.32	117.32	11787200
4/1/2016	116.2	125.31	113.88	115.17	115.17	8561300
5/1/2016	115.35	118.86	104.24	117.86	117.86	8753400
6/1/2016	117.46	123.87	96.38	97.45	97.45	13628400
7/1/2016	97.43	110.43	90.07	109.47	109.47	11947700
8/1/2016	109.57	118.97	108.34	116.75	116.75	7494900
9/1/2016	117.13	120.83	109.01	113.79	113.79	7203400
10/1/2016	113.05	113.82	95.22	96.85	96.85	7583200
11/1/2016	96.64	102.9	86.62	101.28	101.28	12023700
12/1/2016	101.48	106.23	99.18	101.04	101.04	7701700

Growth rate of the company for 1 year is 5%

Discount rate for the company is 20%

Dividend Discount Model (DDM)

DDM is a procedure or process through which value or price of the stock is calculated. Predicted dividends are used in the DM model. These predicted dividends are discounted so that present value can be obtained.

DDM formula =Dividend per share /discount rate - growth rate of dividend

Average dividend for the company	110.81
Discount rate	20%
Growth rate	5.00%
DDM	738.7611

References

Albany. (2017). Yield to Maturity. Albany.

Boerse-berlin.com. (2017). 1,25% Shell International Finance BV (2028). Retrieved from https://www.boerse-berlin.com/index.php/Bonds?isin=XS1411401083

industry.gov.au. (2017). Iron Ore. Retrieved from Australian Government: https://industry.gov.au/resource/Mining/AustralianMineralCommodities/Pages/IronOre.aspx

ISET. (2017). Real Estate Market Dynamics. Retrieved from https://www.iset-pi.ge/index.php/en/real-estate-prices-index/1488-real-estate-market-highlights-1-january-june-2016

JLL. (2017). About Us. Retrieved from https://www.jll.com/about

JLL. (2017). The history of JLL. Retrieved from https://www.us.jll.com/united-states/en-us/about/history

Kasiran, F. W. (2016). How can an investor determine the efficiency of a company's working capital management.

Leonard N. Stern School of Business. (2017). Yield to Maturity. Retrieved from https://people.stern.nyu.edu/jcarpen0/courses/b403333/03yield.pdf

Maverick, J. (2015). How can an investor determine the efficiency of a company's working capital management.

Moneychimp. (2017). Bond Yield-to-Maturity. Moneychimp.

Neil Kokemuller. (2017). Why Do Companies Prefer Long-Term Debt. Retrieved from Why Do Companies Prefer Long-Term Debt: https://smallbusiness.chron.com/companies-prefer-longterm-debt-61041.html

Ng, S., & Monga, V. (2013). Companies Use Short-Term Debt to Advantage.

O’Brien, R. (2009). Australia’s Iron Ore Product Quality. Geoscience Australia.

PNC. (2017). Better Working Capital Efficiency. The PNC Financial Services Group Inc.

The Conversation. (2011, July 29). The Boom: Iron ore and Australia. Retrieved from https://theconversation.com/the-boom-iron-ore-and-australia-1847

The Conversation. (2016, March 21). Iron ore still has an important role to play in Australia’s economy. Retrieved from https://theconversation.com/iron-ore-still-has-an-important-role-to-play-in-australias-economy-54476