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Carla: A 35-year old finance analyst called Carla has a permanent job earning \$85,000 p.a. wishes to buy her first home costing \$650,000. She has savings of \$100,000 in her bank account, which she wishes to use as a down payment on her loan. She approaches an Australian bank who is willing to give him a 15-year mortgage at 4.5% p.a., compounded monthly.

1. a) Calculate the i) monthly repayments and ii) total interest cost over the term of the loan, for Jane and Carla. Show your calculations.
2. b) Comment on the difference between the total interest expense that Jane and Carla have to pay. Why do you think this difference exists based on finance theory?

## Factors affecting the difference in total interest and payment period of two individuals

According to the given case, Jane and Carla are two people who are willing to buy a house. Both the citizen has bought the house of same worth but there are huge difference among the total interest and payment period. In this case, it has been analyzed that which factors have affected the similarity of both the cases:

 Question 2 Jane Interest rate per annum 6.50% Interest rate monthly 0.54% A Loan amount \$6,35,000 B Tenure (years) 20 C Months 240 D Monthly rate 0.54% D EMI amount \$ 4,734.39
 Question 2 Carla Interest rate per annum 4.50% Interest rate monthly 0.38% A Loan amount \$5,50,000 B Tenure (years) 15 C Months 180 D Monthly rate 0.38% D EMI amount \$ 4,207.46

(Moles, Parrino and Kidwekk, 2011)

Through the above calculations, it has been analyzed that the EMI amount of Jane is \$ 4734.39 and the EMI amount of Carla is \$4,207.46. It depicts that the Carla has to pay less amount as EMI.

The calculations have been shown in the appendix. Through the calculation of total inters cover of both the people, It has been found that the \$5,01,253 would be paid by the Jane as interest amount whereas the total amount paid by the Carla as an interest would be \$2,07,343 (Bromwich and Bhimani, 2005). This difference has taken place due to differences in the down payment, total payment period and the rate of interest.

According to the case, Jane and Carla are two people who are willing to buy a house. Both the citizen has bought the house of same worth but there is huge difference among the total interest. In this case, it has been analyzed that the main factors which have affected over the position and the performance of the company are initially the down payment due to which the loan amount of both the parties have been different (Borio, 2014). Further, Carla has chosen to pay the entire amount of Loan in fewer periods than Jane and thus the interest % of both the parties have been differed and due to which the interest amount of Jane has been higher.

Further, it has been analyzed that the total payment period, interest payment, net loan amount and the EMI amount has impacted over the interest expenses of both the parties. And through this analysis, it has also been found that the decision of Carla was far better than the decision of Jane as has saved a lot amount of interest.

Woodside petroleum is an Australian production and exploration company. This company is one of the largest companies of oil and gas industry of Australia. Headquarter of the comapny is in Perth, Australia and the company has registered its stock in Australian stock exchange. Mainly, this company is operating its business in exploration of oil and delivering the gas and oil in international market. In the market of Australia itself, this company is developing a number of the oil and gas industry of Australia briefs that Woodside petroleum is one of the natural gas projects. Further, it has been found that manufacturing companies and this company consists around 13.50% of share of the industry which is highest than any other company (Nobes and Parkar, 2008). Further, it has been found that the performance of the company is continuously raising and depict about a better position of the company. Further, it has been analyzed that the position and the performance of the company is far better according to the economy position and market condition.

## Evaluation of Woodside Petroleum's cash conversion cycle

Through the study over the operations of the company, it has been found that the main strength of this company is its huge share in the market and its innovational operating system. This system has helped the company t grab more market share and currently, this company has the great number of projects in hand (Damodaran, 2011). Further, it has also been found that the number of offshore projects have only been grabbed by the company due to its innovational technology. Further, the weakness of the company has also been analyzed and it is the bad relations of the company with its suppliers and the stakeholders. And at the same time, company is not concentrating on lower level buyers. Through the various articles, it has been found that this company has failed to manage good relationship with stakeholders and due to which the operations and the performance of the company has been affected.

Cash conversion cycle is a process which depicts about the working capital management and cash turnover of the company (Phillips and Stawarski, 2016). This expresses that how much time would it take to the company to get back the cash while operating he business. Following are the calculations of working capital management of the company:

 Calculation of cash conversion cycle of 2016 Sales £      4,075 COGS £      2,234 Inventories £             5 AR £         172 AP £         546 Days/year 365 Cash conversion cycle (CCC) = Inventory conversion period + Receivables collection period - Payables deferral period = Inventory/Sales per day + AR/Sales per day - AP/COGS per day = £                   0.45 + £                 15.41 - £                 48.91 = -£                 33.05

The above calculations brief that the cash conversion cycle of the company is -33.05 days in 2016 whereas the cash conversion cycle of the company in 2015 was -50.87 days which depicts about the average receivable day has been enhanced by the company. Through the calculations of cash conversion cycle of the company and evaluation over competitors’ cash conversion cycle, it has been found that BHP Billiton’s cash conversion cycle is the best (Davies and Crawford, 2011). Company need not to invest much amount for its current liabilities. The liquidity position of the company is far better as the payment done by the company is after so many days whereas the collection of amount is done by the company quickly. Further, it has also been found that the cash conversion cycle of Woodside petroleum limited is also far better but the level has been lower in 2016 in comparison of 2015 (Bierman, 2010).

Further short term and long term debt financing of the company has been evaluated and it has been found that the total short term debt financing of the company is Us \$ 963 million in 2016, US \$ 1304 million in 2015 whereas the long term debt financing of the company is US \$ 8128 in 2016 and US \$ 7510 in 2015. Thus, through the evaluation over short term and long term debt financing of the company, it has been evaluated that the main short term debt financing factor of the company is payables which has been lower in 2016 and the main long term debt financing factor of the company is interest bearing liabilities which are debentures and the borrowings of the company (Brealey, Myers and Marcus, 2007).

## Short-term and long-term debt financing of Woodside Petroleum

The discussed value briefs that company uses the short term as well as long term debts to manage the position and a good capital structure position of the company. But the level of short term debts have been reduced by the company to manage the cost whereas the level of long term has been enhanced by the company to manage optimal capitals structure and risk and return level.

Further, the bond valuation of the company has been evaluated and it has been found that the bind price of the company is quite higher than the Par value of the company. The par value of the company is \$ 913.61 per bond whereas the face value of the company is \$1000.

 Price of bond Bond-1 Face value 1,000 Coupon (half yearly) 1.83% Maturity 10 Maturity (half yearly) 5 Yeild (half yearly) 1.55% Valuation of bond 913.61 PV(D17,D19,D20,D16,0)

(Arnold, 2013)

Interest coverage ratio is normally used by the companies to evaluate the position of the company to pay all the interest expenses. Income coverage ratio is calculated through dividing the earnings before interest and taxes by total interest expenses of the company. The current interest coverage ratio of the company is 23.92 which express about the better performance of the company to repay all the interest expenses (Besley and Brigham, 2008). Further, it has also been analyzed that the interest coverage ratio of the company is quite competitive.

 Calculation of Interest coverage ratio Interest coverage ratio EBIT/Interest Expenses 2016 23.92857143 2015 4

Share price valuation is a process which is mainly done to evaluate that how the company is performing in the market and what is the position of the company in the market. This briefs that the current share value of the company is undervalued as:

 Required rate of return Risk free rate 2.50% Expected rate of return on market portfolio 9.07% systematic risk of common stock 1.37 Required rate of return 11.50% calculations: r= R(f)+ beta{E(R(m)-R(f)} Dividend Discount Model Dividend expected 83 Growth rate 3% Discount rate 11.50% Intrinsic Value 922 Share Price 34.53 Undervalued

The above calculations brief that the share price of the company must be \$ 922 but it is \$34.53. It is a god option for the investors to buy the shares of the company in current time as it would offer high return to the company.

Calculation of free cash flows of both the projects:

 Project A Year 1 Year 2 Year 3 Year 4 Year 5 Initial Outlay 157500000 Revenues 983680000 983680000 983680000 983680000 983680000 Expenses 491840000 491840000 491840000 491840000 491840000 Expenses 167000000 167000000 167000000 167000000 167000000 EBDT 324840000 324840000 324840000 324840000 324840000 Less: Depreciation 200000000 200000000 200000000 200000000 200000000 EBT 124840000 124840000 124840000 124840000 124840000 Less: Taxes 37452000 37452000 37452000 37452000 37452000 EAT 87388000 87388000 87388000 87388000 87388000 ADD: Depreciation 200000000 200000000 200000000 200000000 200000000 cash flow 1436940000 287388000 287388000 287388000 287388000 287388000 Changes in Working capital 400000 400000 Total cash flow 1279040000 287788000 Project B Year 1 Year 2 Year 3 Year 4 Year 5 Initial Outlay 137500000 Revenues 1168120000 1168120000 1168120000 1168120000 1168120000 Expenses 525654000 525654000 525654000 525654000 525654000 Expenses 125250000 125250000 125250000 125250000 125250000 EBDT 517216000 517216000 517216000 517216000 517216000 Less: Depreciation 200000000 200000000 200000000 200000000 200000000 EBT 317216000 317216000 317216000 317216000 317216000 Less: Taxes 95164800 95164800 95164800 95164800 95164800 EAT 222051200 222051200 222051200 222051200 222051200 ADD: Depreciation 200000000 200000000 200000000 200000000 200000000 cash flow 2110256000 422051200 422051200 422051200 422051200 422051200 Changes in Working capital 400000 400000 Total cash flow 1972356000 422451200

Through the above calculations, it has been found that the cash flows of project b is quite higher than total cash flows of project A. thus, it depicts that the performance of Project B is far better.

Calculations have been shown in the appendix. Through the calculations over discounted payback period of both the projects of the company, it has been analyzed that the project A and Project B, both would offer a great deal to the company. But on the basis of 12%, project A would recover the entire outflow in 0.54 year whereas the project b would recover the entire amount in 0.29 years. Further, if the 25% present value is considered than the project A would recover the entire outflow in 0.61 year whereas the project b would recover the entire amount in 0.33 years (Marginson, 2009).

## Bond valuation of Woodside Petroleum

Thus through this analysis, it has been found that the Project B is far better than Project A as the amount would be recovered in project B earlier.

Calculations have been shown in the appendix. Through the calculations over net present value and internal rate of return of both the projects of the company, it has been analyzed that the project A and Project B, both would offer a great deal to the company. But on the basis of 12%, the net present value of project A is \$1,01,34,75,502 whereas the total net present value of project B is  \$1,72,69,47,928. It depicts about a better performance of Project B and at the same time, it depicts that the performance of Project B is quite better and thus the organization should go for project B. Further, on the basis of 25%, the net present value of project A is \$716085715.2 whereas the total net present value of project B is   \$1,25,34,38,644 (Niu, 2006). It depicts about a better performance of Project B and at the same time, it depicts that the performance of Project B is quite better and thus the organization should go for project B.

Further, the internal rate of return of both the projects has been evaluated to identify the performance of both the projects. Through the analysis over both the projects, it has been found that in case of 12%, Project A’s internal rate of return is 10.28% which is quite lower than the total cost of comapny further, the analysis over project B depicts that the internal rate of the project is bit higher and it would offer the profit to the company. Thus, through this analysis it has been found that the Project B is far better than Project A as the internal rate of return is quite higher than the cost of the company.

Through the above calculations over the cash flows of the projects, discounted payback period, net present values and internal rate of return of both the projects, it has been analyzed that the project B is far better than project A as the cash flows of the project B is higher than the project A, at the same time, the discounted payback period explains that project b would receive the total investment amount in lesser period. Further, it has been added through analyzing the NPV that project b would offer high profit to the company and lastly, the internal rate of return explains that the profit of project B would be more than the total cost of the company and thus  it could be concluded that project B should be accepted by the company (Parrino, Kidwell and Bates, 2011).

References:

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-Western.

Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of equals. World Scientific.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.

Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley & sons, USA

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Marginson, D.E., 2009. Beyond the budgetary control system: towards a two-tiered process of management control. Management Accounting Research, 10(3), pp.203-230.

Moles, P. Parrino, R and Kidwekk, D,.2011, Corporate finance, European edition, John Wiley &sons, United Kingdom

Niu, F.F., 2006. Corporate governance and the quality of accounting earnings: a Canadian perspective. International Journal of Managerial Finance, 2(4), pp.302-327.

Nobes, C. and Parker, R.H., 2008. Comparative international accounting. Pearson Education.

Phillips, P.P. and Stawarski, C.A. 2016. Data Collection: Planning for and Collecting All Types of Data. John Wiley & Sons

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