FINC20018 Managerial Finance

Various financial concepts and aspects have been studied in the report. It evaluates the financial statement, their understanding, importance, construction of financial statement, position of an organization, financial evaluation and financial comparison of an organization, time value of money, total risk of an organization, return from a particular security or portfolio etc.

Financial statements are prepared by the companies to present the financial performance of the company in a well manner. Cash flow statement is one of the financial statements which are prepared by the companies to identify the total cash inflow and total cash outflow of the organization in a particular time period. Cash flow statement makes it easier for the organization and the management to identify the liquid position and the cash positon of the company. It divides the cash flows of the company into 3 parts to identify the areas where the cash outflow of the company is higher or the area from where more cash is generated by the company.

There are various questions in an organization which could be answered by the organization and the management of the company on the basis of cash flow statement only. Cash flow statement makes it easier for the management and the organization to evaluate various questions related to cash flow statement and answers it properly. Following are some of the questions which could be addressed by the management on the basis of cash flow statement:

Thus, various questions could be answered by the company on the basis of cash flow statement.  

1. Quality of earnings ratio:

Calculation of quality of earnings ratio (WPL)
	2017	2016	2015
Cash flow from operating activities	3077	3575	3252
Net profit	1313	1200	36
Earnings ratio = Cash flow from operating activities / Net profit	2.34	2.98	90.33
Calculation of quality of earnings ratio (ORG)
	2017	2016	2015
Cash flow from operating activities	1289	1404	1833
Net profit	-589	-658	530
Earnings ratio = Cash flow from operating activities / Net profit	-2.19	-2.13	3.46

1. Earnings of both the firms:

The above calculations brief that the earnings of Woodside petroleum limited is way better than the Origin energy limited. Origin energy limited is facing huge losses from last 2 years and due to it, the earnings ratio of ORG is not good. So, I feel more comfortable with Woodside petroleum limited.

1. Capital acquisition ratio:

Calculation of Capital acquisition ratio (WPL)
	2017	2016	2015
Cash flow from operating activities	3077	3575	3252
Dividends	1059	391	2368
Cash paid for acquisition	0	965	4978
Capital acquisition ratio = (cash flow from operations - dividend) / Cash paid for acquisition	#N/A	3.30	0.18
Calculation of Capital acquisition ratio (ORG)
	2017	2016	2015
Cash flow from operating activities	1289	1404	1833
Dividends	2	418	547
Cash paid for acquisition	0	-1599	0
Capital acquisition ratio = (cash flow from operations - dividend) / Cash paid for acquisition	#N/A	-0.62	#N/A

(Morningstar, 2018)

1. Capital market analysis:

Through the analysis on the cash flow statement of Woodside petroleum limited and the Origin energy limited, it has been evaluated that the Woodside petroleum limited is spending less money on financial activities than Origin. It explains that the ORG relies more on capital markets rather than WPL.

Calculation of Cash flow to capital expenditure (WPL)
	2017	2016	2015
Cash flow from operating activities	3077	3575	3252
Capital expenditure	-1032	70	-79
Cash flow / capital expenditure	-2.982	51.071	-41.165
Calculation of Cash flow to capital expenditure (ORG)
	2017	2016	2015
Cash flow from operating activities	1289	1404	1833
Capital expenditure	-1371	-1223	1996
Cash flow / capital expenditure	-2.000	-1.148	0.918

1. Following is the income statement of CQU oil limited.

Income statement of CQU oil limited
Sales	25,00,000
Less; Cost of goods sold	7,00,000
Gross profit	18,00,000
Interest expenses	2,00,000
Cash operating expenses	1,50,000
Depreciation expenses	1,50,000
Profit before tax	13,00,000
Taxes	3,90,000
Net profit	9,10,000

1. Taxable income and taxable payable:

The above table explains that the total taxable income of the company is $ 13,00,000 out of which $ 3,90,000 has been paid by the company as tax amount.

1. Fully franked dividend and imputation credit:

The above calculations and the study of taxable income of the company explains that the fully franked dividend of the company is $ 9,10,000 which has been left after paying the tax amount.

The main motto of imputation credit is to eliminate the double tax system. In the case, the imputation credit of the company is $ 9,10,000 on which no extra tax would be levied by the government.

1. Income statement:

Through the income statement of CQU oil, it has been evaluated that how much the profit is generated by the company from different sources and taxable income of the company has also been evaluated. Income statement explains about all the activities related to operations of the company of a particular period.

1. Financial ratios:

Financial ratios of both the comapny evaluates about the position and the financial strength of the company. Through the evaluation and the study on the financial ratios of Wesfarmers limited and Woolworths limited, it has been evaluated that the position of Wesfarmers limited is quite better than Woolworths limited (Mpakaniye & Paul, 2014). The earnings per share of WES are 2.55 whereas the earnings per share of Wesfarmers limited are 1.19 which explains about the better position of Wesfarmers (Appendix).

1. Relative performance of both the firms:

Further, the performance and the position of both the companies have been evaluated on various bases such as liquidity position, asset management efficiency, financing practices and profitability level of the company. On the basis of calculations and evaluations, it has been found that the profitability level of Wesfarmers limited is much better than the position of Woolworths limited. Further, the liquidity level explains that the liquid position of WPL is better as they are using the minimum resources at their maximum.

In addition, assets efficiency ratios explain that the Wesfarmers is using the better strategy to manage the assets and daily operations of the company. Lastly, the ratio of capital structure ratio has also been evaluated to identify the capital structure position of the company so that the risk and return of both the companies could be evaluated and analyzed. Through the capital structure position of the company, it has been evaluated that the debt equity position of Woolworths limited is much better than Wesfarmers limited (Yahoo Finance, 2018).

Through the evaluation, it has been found that the performance and position of both the companies is better at different bases. Though, it has been found that the average performance of Woolworths limited is way better than Wesfarmers limited. And thus, it is suggested to the management of the company, Wesfarmers limited, to make some improvements in the financial position and performance of the company.

1. Price earnings ratio and market to book ratio:

Price earnings ratios explain about the total market price of the company on the basis of earnings per share. It evaluates about the market position of the company. On the other hand, market to book ratio evaluates about the market value per share against the book value per share to identify the position of the stock in the market. Price earning ratio of both the firms explains about different variables and through the analysis, it has been found that the position of the Wesfarmers is better in terms of earnings and on the other hand, market to book value ratio explain that the Wesfarmers is a good choice. Thus, investors should go for Wesfarmers limited as they depict about good returns.

1. Calculation of present value:

Calculation of future value:
Interest rate	10%
Compounded	Annually
Time	40
Calculation of future value:	20000 (1+0.10)^40
Future value
	$   9,05,185.11

It explains that if Emily would invest $ 20,000 today than the value of invested amount would be $ 9,05,185.11 after 40 years at 10% annual interest.

1. Calculation of present value:

Calculation of Present value:
Interest rate	6%
Compounded	Annually
Time	3
Amount	14000
Calculation of Present value:	14000*(1/((1+0.06)^3))
Present value
	$      11,754.67

It expresses that the Emily is required to invest $ 11,754.67 today to get $ 14,000 after 3 years for the down payment of car.

Calculation of present value:
Interest rate	10%
Compounded	Annually
Time	3
Amount	14000
Calculation of present value:	14000*(1/((1+0.10)^3))
Present value
	$          10,518.41

(Higgins, 2012)

Further, if 10% interest rate is taken into consideration than $ 10,518.41 should be invested by the company.

1. Calculation of future value:

Calculation of future value
Total trust fund amount	100000
Less: amount used for house deposit	50000
Net trust fund amount	50000
Interest rate	7%
Time (years)	30
Calculation of future value	(50000*(1+0.07)^30)
Future value	3,80,612.75

It explains that the future value of the trust fund would be $ 3,80,612.75 at the age of 60.

1. Discounting and compounding:

Discounting and compounding, both the techniques are used by the companies and the analyst to evaluate the time value of money. Both of these techniques are 2 sides of same coin. There is a slight difference among both the techniques as discounting technique is used to calculate the present value of future cash flows whereas the compounding technique is used by the analyst to calculate the future value of present cash flow (Brigham & Houston, 2012).

1. Actions:

Emily and Paul should not take the money for the wedding as it would enhance the future value of their savings and investments.

Emily and Paul should not withdraw the amount from trust fund and must manage the other funds to buy the house.

1. Calculations of return and standard deviation:

Calculation of expected return (Share A)
Possibility return	Probability (%)	Expected return
11.00%	30.00%	3.300%
15.00%	40.00%	6.000%
19.00%	30.00%	5.700%
		5.000%
Expected return	risk free rate  + (risk premium -risk free rate) * beta
Calculation of standard deviation
Expected return	Probability (%)	(Avg-X)	(Avg-X)^2	product
11.000%	0.30	-6.0000%	0.0036	0.0011
15.000%	0.40	-10.0000%	0.0100	0.0040
19.000%	0.30	-14.0000%	0.0196	0.0059
Variance				1.10%
Standard deviation	square root of ((average - X) ^ 2 / total number)			10.47%

Possibility return	0	Expected return
16.50%	20.00%	3.300%
10.50%	30.00%	3.150%
7.00%	30.00%	2.100%
22.00%	20.00%	4.400%
		3.238%
	Expected return	risk free rate  + (risk premium -risk free rate) * beta
Calculation of standard deviation
Expected return	Probability (%)	(Avg-X)	(Avg-X)^2	product
16.500%	0.20	-13.2625%	0.0176	0.0035
10.500%	0.30	-7.2625%	0.0053	0.0016
7.000%	0.30	-3.7625%	0.0014	0.0004
22.000%	0.20%	-18.7625%	0.0352	0.0001
Variance				0.0056
Standard deviation	square root of ((average - X) ^ 2 / total number)			7.48%

According to the above calculations, Share A is better than Share B in terms of total return and Share B is better is terms of risk. Now, it depends on the investors that whether he takes the concern of risk and generates less return in lesser risk or generates more return with more risk in terms of high revenue (Gropp & Heider, 2010).

1. Expected rate of return and realized rate of return:

Realized rate of return is subjective in nature and it varies from investors to investors whereas the expected rate of return is calculated on the basis of market return and probability distribution. Realized rate of return is the return which is desired by the investors which is nowhere linked with the financial data and stock value of the company and thus the expected rate of return and realized rate of return is different from each other.  

1. Impact of cash dividend:

Realized rate of return is the total return which is offered by the firm to its stockholders in a particular holding period. It includes interest payment dividend as well as cash distributions. The cash dividends do affect the realized rate of return as it is the part of realized rate of return. The more the cash dividend would be offered by the company to its stockholders the more the realized rate of return of an organization would be (Lemmon & Zender, 2010).

1. Risk of an investment:

In the case of investment’s rate of return, the main indication of the risk is Beta. It explains about the systematic risk of the security and explains that this risk would surely be bear by the company as company could not eliminate this risk. Beta is calculated on the basis of stock price of the security and the stock price of the market index. It makes it easier for the investor to make a decision about the risk and return of a particular security or a portfolio.

Systematic risk and unsystematic risk are related to investment into a stock. Systematic and unsystematic risk is a piece of marketplace. Systematic risk is perceived as market chance which is normally computed through examining the stock cost of an association. Systematic risk has an effect over the position and the aggregate cost of the organization. It incorporates day by day vacillations on the stock cost of the organization. This risk is an estimation of changes into the organization on consistent schedule. In the meantime, unsystematic risk is otherwise called specific risk. This risk is identified with the whole business and not with a solitary firm. These hazards could be decreased by an association through utilizing the methodologies of expansion (Fan, Titman & Twite, 2012). It explains that the systematic risk and unsystematic risk is the part of total risk of an organization and it should be considered by the investors while investing into the company.

In finance terms, the beta of a venture explains whether the investment is pretty much unpredictable than the market overall. When all is said in done, a beta under 1 demonstrates that the investment is less explosive than the market; while a beta more than 1 shows that the investment is more unpredictable than the market. Volatility is estimated as the variance of the cost around the mean: the standard deviation.

Beta is a measure of the risk emerging from introduction to general market developments rather than other factors. The market stock and portfolio of every single stock and resource has a beta of precisely 1. A beta underneath 1 can demonstrate either an investment with bring down unpredictability than the market, or an unstable venture whose value developments are not profoundly related with the market.

Security market line (SML) is used to represent the CAPM formula. It defines the total return which could be got by investors through investing into a particular security. Beta is plotted on X axis at the graph and expected return is plotted at Y axis. The point where both the line intercepts is called risk free rate and slope is called as market return. It could be understand through the following graph:

(Hamadani & Khorshidi, 2013)

Capital assets pricing model (CAPM) is capital resource valuing model which portrays the systematic risk and expected return connection among the normal return and fundamental risk of specific stock and resources. Capital asset pricing model is broadly utilized by the investors, analyst and administration of the organization to assess the cost of value of the organization. Following formula is used to calculate the CAPM:

It is measurement technique which assists the company and the investors to make better decision about the investment into a particular company.

To conclude, all the financial aspects and factors are quite important at various stages in an organization and in an individual life. It assists the related parties to evaluate the data and the factors and make a better decision about the investment, performance and position of an organization etc.

Abor, J. Y. (2017). Time Value of Money. In Entrepreneurial Finance for MSMEs (pp. 259-291). Palgrave Macmillan, Cham.

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.

Fan, J. P., Titman, S., & Twite, G. (2012). An international comparison of capital structure and debt maturity choices. Journal of Financial and quantitative Analysis, 47(1), 23-56.

Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of finance, 14(4), 587-622.

Hamadani, A. Z., & Khorshidi, H. A. (2013). System reliability optimization using time value of money. The International Journal of Advanced Manufacturing Technology, 66(1-4), 97-106.

Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.

Lemmon, M. L., & Zender, J. F. (2010). Debt capacity and tests of capital structure theories. Journal of Financial and Quantitative Analysis, 45(5), 1161-1187.

Morningstar. (2018). Origin energy Limited. Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=ORG&region=aus&culture=en-US&platform=sal

Morningstar. (2018). Wesfarmers Petroleum Limited. Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=WPL&region=aus&culture=en-US.

Morningstar. (2018). Wesfarmers Petroleum Limited. Retrieved from: https://finance.yahoo.com/quote/WES.AX/

Mpakaniye, D., & Paul, J. (2014). Time Value of Money. Pearson.

Yahoo Finance. (2018). Woolworths Limited. Retrieved from: https://au.finance.yahoo.com/quote/wow.ax?ltr=1