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The assignment is designed to enhance students’ skills in analysing and interpreting financial statements and other market-related financial information as well as facilitating students’ discussion of corporate governance in the finance sector.

  1. To demonstrate knowledge of broad business principles with depth of understanding of at least one business discipline.
  2. To develop effective oral and written communication skills.
  3. To develop the skills to demonstrate a broad understanding of business principles and demonstrate depth in at least one discipline.
  4. To develop and apply skills in critical thinking, complex problem solving and decision making.
  5. Use the above information to answer the following questions:
  6. a) At what price did ABC’s shares trade on the 30th June 2018?
  7. b) What was the market capitalisation of the company at this date?
  8. c) Compare ABC’s most recent Price/Earnings (P/E) ratio to the industry average and provide an explanation for any difference observed (remember to cite the source of your information).
  9. Analyse the company’s current and quick ratios.
  10. Evaluate the company’s working capital management over the three-year period. Use ratio analysis to support your conclusions.
  11. Use ratio analysis to identify and explain the trend in the company’s profitability.
  12. If you were a bank considering lending to ABC, what ratio(s) would give the best indication of the company’s solvency? Explain why you would or would not lend to ABC.

Assessment Criteria:

  • Demonstrated knowledge of the agency problem and shareholder wealth maximization.
  • Application of relevant financial theory to real world examples
  • Logical inferences drawn from information presented and appropriate justification of stance taken.
  • Overall presentation of the argument is relevant and appropriate.
Assessment Criteria
  1. Share price of ABC as on 30thJune 2018

P/E ratio = Share price / Earnings per share

Therefore, share price = P/E ratio * EPS

      Share price = 7.66 * 0.020 = $ 0.1532

  1. Market capitalisation

Particulars

Amount (000)

EBIT

 $       1,305.00

Less:

Interest expenses

 $       1,245.00

Profit before tax

 $            60.00

Less: Dividend paid

 $            20.00

Profit available to shareholder

 $            40.00

EPS

                 0.02

Number of outstanding share

        2,000,000

Market capitalization = Number of share outstanding * share price

Therefore, market capitalisation = 20,00,000 * $ 0.1532 = $ 3,06,400

  1. P/E ratio

Australian retail industry’s most recent P/E ratio is 15.8 whereas the P/E ratio of ABC Retail Company is 7.66. The difference may be due to the lower amount of profitability for the company and lower share price for ABC’s stock (Safitri 2013).

Ratios

Formula

2016

2017

2018

Current ratio

Current assets/current liabilities

2.13

2.98

3.34

Quick ratio

(current assets - inventory)/current liabilities

1.09

1.26

1.36

It is found from the current ratio and quick ratio of the company that both the ratios of the company are in improving trend and is indicating that the company’s liquidity position is good enough to pay off its short-term obligations (Van Den End and Kruidhof 2013).

Working capital management

Ratios

Formula

2016

2017

2018

Working capital ratio

Current assets/current liabilities

2.13

2.98

3.34

It can be identified that the working capital management ratio of the company is in improving trend. Well management of the working capital will enable the company to manage the cash shortfall in better way (Sagner 2014).

Profitability analysis

Ratios

Formula

2016

2017

2018

Operating profit ratio

Operating profit/sales

3.16%

3.26%

3.21%

Interest coverage ratio

EBIT/Interest expenses

1.12

1.05

1.05

From the profitability ratios of the company it is identified that the operating profit ratio of the company has not been changed much and it is moving around 3%. It does not have any specific trend as it is increased from 3.16% to 3.26% and again reduced to 3.21% over the last 3 years. However, the operating profit ratio of the company is quite low for long term sustainability. On the other hand, the interest coverage ratio of the company is in reducing trend and reduced from 1.21 times to 1.05 times over the last 3 years. However, the interest coverage ratio of the company for all 3 years is low and will not be sufficient for long term sustainability (Innocent, Mary and Matthew 2013).

Solvency ratios

Ratios

Formula

2016

2017

2018

Debt equity ratio

Total liabilities/shareholders equity

6.92

6.02

5.92

Debt ratio

Total liabilities/total assets

0.47

0.37

0.31

While considering lending to ABC Retail Company bank shall consider the solvency ratios like debt equity ratio and debt ratio. From the debt equity ratio of the company it is identified that the debt of the company is almost 6 times of its equities. On the other hand, looking into the debt ratio of the company it is identified that the company’s major portion of assets are financed through equity and less than 40% is financed through debt. Therefore, if the bank considers the debt ratio it shall lend the borrowing to the company (Brîndescu–Olariu 2016). However, considering the debt equity ratio it is found that as compared to each dollar of equity it has $ 6 debt and therefore the bank shall not lend any further borrowing to the company.

Particulars

Corporate governance is the surrounding concept that states the way in which the entity is controlled and managed. It issues a set of the rules that helps the entities to implement accountability, transparency, openness and honesty. Under the business activities ethics determine the applicability of morals while conducting the business of the entity. Therefore, the corporate governance provides ethical framework for the entity’s governance. Ethical approach improves the freedom for excellence that eventually corresponds with the spirit of law (Takacs Haynes, Campbell and Hitt 2017). Though it is not easy to determine that what is wrong or what is right subject to individual relativism and culture, the collapse or failure indicates that the concept of ethics will help the entities to take decisions those will be in best interest for the stakeholders.

Agency problem is interest conflict among the managers, creditors and shareholders. It leads to difficulty with regard to achievement of goal for maximizing the shareholder’s wealth. Shareholders are considered as the active principles whereas the managers are considered as the passive agents. Through the shareholders are the real owners of the business, they cannot manage the company actively as the number of shareholders are high and are dispersed over wide geographical location. Further, the stakeholders may not have the required knowledge, skill, experience and expertise to run the business successfully. However, the managers are concerned regarding personal wealth, salary, fringe benefits, job security and salary (Ferrell, Liang and Renneboog 2016). It may cause to potential wealth loss for the stakeholders that leads to conflict among the management and shareholders. Agency problem among them takes place as the management tends to act for gaining their own goals at the cost of others. Further, as the management have more information regarding the entity they are in the position to manipulate the data.

In case of AMP limited it was found that the company made false representation to ASIC regarding the ‘fee for no service’ scandal. While they were questioned by royal commission of banking, head of advice for the company lost the count while counting for the times the company misled the regulator of ASIC.  It informed ASIC that they charged fees for providing financial advice they did not received owing to administrative error instead of stating that it was their deliberate policy. Owing to this, AMP faced shareholder’s revolt at the AGM of the company (ABC News 2018).

The Hayne royal commission raised prospect that the super funds and banks who charged their customers fees for no service may face the criminal sanction in the bombshell that may have dramatic implication for multi-trillion dollar for the financial service sectors. The commissioner further raised question of criminal action against AMP Limited as it misled the regulator. When the CEO of the company was asked whether he was concerned for the eventual recommendation of royal commission, the CEO said that AMP is focussed on prioritising the customers as well as restoring their confidence regarding AMP (Clarke 2014).

Further, depended upon the flag raised by the ASIC treasurer, ASIC issued the AMP’s statement for fees - for - no – service approaches that misled the regulator. The report highlighted –

  • ASIC is investigating the conduct of the company with regard to fees - for - no – service as created in evidence given by the royal commission
  • ASIC is cooperating with Royal Commission on wide range of matters that included present as well as previous investigations.
  • In compliance with the general policy regarding public comment the commission will not make any further public statement regarding their investigation for the highlighted matters (Knaus 2018).
  • All the financial institutions shall understand the significance of co-operation with regulator and must comply with laws while providing information to ASIC. Providing misleading or false statements to ASIC may lead in criminal as well as civil sanctions.

Conclusion 

From the above discussion regarding the AMP’s scandal for fees - for - no – service, it is concluded that what was done by the company was deeply disturbing. They said that the y charged the customers basically for the services they did not actually provided. Further, they admitted that the statements were misleading for ASIC as well as for the stakeholders and that is significantly distressing. This behaviour shall attract penalties including jail.

Reference 

ABC News. (2018). 'Answer what you're asked': Commissioner loses patience with CBA witness. [online] Available at: https://www.abc.net.au/news/2018-04-18/banking-royal-commission-continues-amp-cba-grilling/9670432 [Accessed 12 Sep. 2018].

Brîndescu–Olariu, D., 2016. Solvency ratio as a tool for bankruptcy prediction. Ecoforum Journal, 5(2).

Clarke, T., 2014. The impact of financialisation on international corporate governance: The role of agency theory and maximising shareholder value. Law and Financial Markets Review, 8(1), pp.39-51.

Ferrell, A., Liang, H. and Renneboog, L., 2016. Socially responsible firms. Journal of Financial Economics, 122(3), pp.585-606.

Innocent, E.C., Mary, O.I. and Matthew, O.M., 2013. Financial ratio analysis as a determinant of profitability in Nigerian pharmaceutical industry. International journal of business and management, 8(8), p.107.

Knaus, C. (2018). AMP apologises to shareholders at AGM: 'We let you down'. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2018/may/10/amp-apologises-to-shareholders-at-agm-we-let-you-down [Accessed 12 Sep. 2018].

Safitri, A.L., 2013. Pengaruh Earning Per Share, Price Earning Ratio, Return On Asset, Debt To Equity Ratio dan Market Value Added Terhadap Harga Saham Dalam Kelompok Jakarta Islamic Index. Management Analysis Journal, 2(2).

Sagner, J.S., 2014. Working capital management. Applications and Cases, Willey, p.1.

Takacs Haynes, K., Campbell, J.T. and Hitt, M.A., 2017. When more is not enough: Executive greed and its influence on shareholder wealth. Journal of Management, 43(2), pp.555-584.

Van Den End, J.W. and Kruidhof, M., 2013. Modelling the liquidity ratio as macroprudential instrument. Journal of Banking Regulation, 14(2), pp.91-106.

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