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HI5002: Finance For Business Analyse

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Question:

You are an investment adviser, working to build a foundation of wealth for your clients. One of your wealthiest clients already has a diversified portfolio, which includes managed funds, property; cash/fixed interest and a few direct share investments in Australia and around the world. The investor wishes to expand his/her portfolio and is considering your company’s share to add to the portfolio. (The investor has an extra $10 million that wishes to invest into your company). The company which you will examine is allocated by your lecturer.

You are required to do the following tasks:
 
1. Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you consider help present a “picture” of your company.
 
2. Specify ownership-governance structure of the company:
 
i) Name the main substantial shareholders:
 
With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and With higher than 5.00% of shareholdings.
 
 

Answer:

Introduction 

In this report, financial analysis of Lefroy exploration limited has been taken into consideration. There are several financial analysis tools that have been taken to analysis the performance of company such as ratio analysis, bottom up analysis and share price movement analysis. This financial analysis of Lefroy exploration limited will help in evaluating the business performance of company. It will help investors to assess the financial performance of Lefroy exploration limited to determine whether they should include this company in their portfolio or not.

Present description of the company

Lefroy exploration limited is an international British Virgin Islands company having its registered office in Roadtown the capital of the BVI. This company has been running its business to provide best quality of Products to clients. This company has stable business functioning and faced high amount of loss in its gold and mining business.

Ownership and governance structure

The Present CEO of company is Alex A. Molinari who is running the business effectively.

There are several key persons who owns the shares of company.

Calculation of ROA and ROE

Lefroy exploration limited

Particulars (Amount in Million

2014

2015

2016

2017

 

AUD$

AUD$

AUD$

 

EBIT

0

0

1

1

Interest

0

0

0

0

Net profit

0

0

0

1

Total Assets

0

0

0

8.00

Total Liabilities

0

0

0

8

Shareholders' Equity

0

0

1

7.00

1.        Rate of Return on Assets

 

2014

2015

2016

2017

A.      Net income

0

0

0

1

B.      Total assets

0

0

0

8

          (A/B)

0.00%

0%

0%

13%

 Interpretation

It is considered that company has been earning zero net income. In addition to this, total asset of company is also zero. It is analysed that company has increased rate of return to 13% which is a very good improvement as compared to last four years. The ratio analysis is the most important tool to analysis the financial performance of company. It establishes the relation between two financial factors of business

Computation of return on equity

2.       Rate of Return on Equity

 

2014

2015

2016

2017

A. Net income available to equity shareholders.

0

0

0

1

B. Shareholder’s Equity

0

         17,981

1

7.00

(A/B)

0.00%

0.00%

0.00%

14.29%

 Interpretation

It is evaluated rate of return of equity has increased to 14.29% in 2017. However, since last four years, company has zero amount of rate of return on equity  

Computation of Debt to equity

3.    Debt Ratio

 

2014

2015

2016

2017

A.  Total Liabilities

0

0

0

8

B.      Total assets

0

0

0

8.00

(A/B)

0%

0%

0%

100%

 Interpretation

It is considered that debt to equity of company was zero since last two years. However, in 2017 company maintained it’s all assets equal to its liabilities. Company has high financial leverage company.

Proving the equation

This equation is hence proofed.

Providing equation

2014

2015

2016

2017

Net profit After tax/OE

0.11111

0.1

0.23077

0.25

EBIT/TA*NPAT/EBIT*TA/OE

0.11111

0.1

0.23077

0.25

(Please see the excel sheet for the proper calculation)

The equation given above reflects equation equal to each other

Providing euqation

2014

2015

2016

2017

Net profit After tax/OE

0

0

0

0.14286

EBIT/TA*NPAT/EBIT*TA/OE

0

0

0

0.14286


Comparison of share price movement of Lefroy exploration limited with the all ordinary shareholders index

It is analysed that share price movement of Lefroy Exploration limited is highly unstable. In November, company had high increase in its share price due to its investment in project investment. It is observed that share price fluctuation of the all ordinary shareholders index is stable  (Burns and Walker,  2015).

Regression Statistics

 

Multiple R

0.207257294

R Square

0.042955586

Adjusted R Square

-0.002617958

Standard Error

0.024854607

Observations

23

ANOVA

 

df

SS

MS

F

Significance F

Regression

1

0.000582

0.000582

0.942555319

0.342671825

Residual

21

0.012973

0.000618

 

 

Total

22

0.013555

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.009795951

0.005253271

1.864734

0.076256293

-0.001128823

0.020720726

-0.001128823

0.020720726

X Variable 1

-0.007397934

0.007620036

-0.97085

0.342671825

-0.023244666

0.008448798

-0.023244666

0.008448798

The beta value of company is -.0073. It reflects that share value of company will be highly fluctuated by the change in the market factors in negative directions with the % of -.0073. This beta is the good indicators to determine the share price trend of company in near future.

 

Computation of required rate or return of company using CAPM model 

E(R) =

E(R) = Expected rate of return

 = Risk free rate of return

β = Beta

= Market Risk Premium (Zhu, 2014).

Calculation of Required rate of return

Risk free rate (A)

4%

Beta (B)

-0.007397934

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

3.96%

The required rate of return of company is 3.96 which are very less and Help Company to increase its return on capital employed (Lefroy exploration limited, 2017). This required rate of return of company is very low which good indicator is. This will reduce the weighted average cost of capital of company.

Determination of conservative investment

It is observed that company has high profit in 2017. However, due to zero income, Lefroy exploration limited did not issue dividend to its shareholders. It has followed stable business. However, in 2017, Lefroy exploration limited company invested moderate amount of capital in its business. It has followed conservative investment policy in 2017 to increase the business efficiency.

Calculation of Required rate of return

Risk free rate (A)

4%

Beta (B)

-0.007397934

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

3.96%

Cost of Debt = 0%

WACC = Cost of debt (interest rate after tax) + cost of equity

WACC

Capital Amount

Cost of capital

% of portion

WACC

Equity

7

3.96

100%

3.96%

Debt

8

0

 

 

Total capital

16

WACC

3.96%

The cost of debt of company is zero as company has paid zero amount of interest. The weighted average capital of company is 3.96% as it is totally based on the cost of equity of company (Lefroy exploration limited company, 2016). This reduced weighted average cost of capital fo Lefroy exploration limited will increase the return on capital employed in determined approach.

It is evaluated that company has zero debt cost in its business. It is observed that company has low weighted average cost of capital. It will allow company to make effective investment decision. Company could easily accept the other projects which give higher return on capital employed.  This lower weighted average cost of capital will increase the overall return on capital employed of company.  

Consideration of debt ratio for the company

The Debt to equity of Lefroy exploration limited company is very high in 2017 which reflects that it has higher financial leverage

3.    Debt Ratio

 

2014

2015

2016

2017

A.  Total Liabilities

0

0

0

8

B.      Total assets

0

0

0

8.00

(A/B)

0%

0%

0%

100%

 Interpretation

It is considered that debt to equity of company was zero since last two years. However, in 2017 company maintained it’s all assets equal to its liabilities. Company has high financial leverage company.

Gearing ratio discussion 

It is found that Lefroy exploration limited company has zero interest payment. It will decrease the overall financial leverage and allow company to increase its debt funding to reduce the overall cost of capital (Lefroy exploration limited company, 2014) This zero gearing ratio helps Lefroy exploration limited to maintain its financial leverage low and also reduces overall weighted average cost of capital.

Gearing Ratio

 

2014

2015

2016

2017

Gearing Ratio

0

0

0

0

Divided policies of company

Lefroy exploration limited company has been following profit based dividend policy. It is observed that company has paid dividend to its shareholder in 2017. Since last four years, it had zero dividend payment as company had no profit in its business. The dividend distributions to its shareholders are highly based on the profit earned by company. This dividend policy helps shareholders to save it from all the negative impact of business in determined approach.  The dividend policy of company should be attractive. It is the set of guidelines of company which it uses to decide how much dividend it should distribute to its shareholders. Investors are not concerned about the dividend policy. They feels that if company is not distributing dividends then they will plugged back all of its profit which will eventually increase the value of the investors.

Letter of recommendation 

After evaluating all the details of the Lefroy exploration limited company, it is considered that company has been facing high amount of loss in its business since last four years. In 2017, Lefroy exploration limited company had profitable business which is good indicators for the shareholders. If a shareholder wants to invest their money in Lefroy exploration limited company then they should invest their money for long run. Therefore, it could be inferred that shareholders should not include this company in their portfolio of investment only for the long term purpose. Otherwise they would have to face loss of their value (Brigham and Ehrhardt, 2013). Now in the end, it would be advice to shareholders that company has weak earning capacity. Therefore, Investing in this company will surely result to loss of investors in their investment capital. These investors are advised that they should make proper portfolio to increase the value of their investment.

In the end, it could be inferred that Lefroy exploration limited company has no profitable business since last four years. In 2017, Lefroy exploration limited company has profitable business which is good indicator for the business. Now in the end, it could be inferred that Lefroy exploration limited has faced high loss in its business. Investors should reject this company for their investment purpose. This company is not good for the investment purpose otherwise investors have to face high amount of loss in their investment capital.

 

References

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

Lefroy exploration limited company, 2014  annual report, Retrieved on 29th November, 2017 from https://www.listcorp.com/asx/lex/lefroy-exploration-limited/news/2017-annual-report-1687628.html

Lefroy exploration limited company, 2015, annual report, Retrieved on 29th November, 2017 from https://www.listcorp.com/asx/lex/lefroy-exploration-limited/news/2017-annual-report-1687628.html

Lefroy exploration limited company, 2016, annual report, Retrieved on 29th November, 2017 from https://www.listcorp.com/asx/lex/lefroy-exploration-limited/news/2017-annual-report-1687628.html

Lefroy exploration limited company, 2017, annual report, Retrieved on 29th November, 2017 from https://www.listcorp.com/asx/lex/lefroy-exploration-limited/news/2017-annual-report-1687628.html

Yahoo finance, 2018 retrieved on 19h January from https://in.finance.yahoo.com/

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