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HI5002 Finance For Business For Depicting Core Markets And Activities

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Questions:

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.
 
ii) Name the main people involved in the firm governance:
The Chairman
Board members
CEO.
Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance.
Whether any of shareholders with more than 5% share capital are involved in firm governance.

3. Calculate the following key ratios for your selected company for the past 4 years. Annual reports are accessible via company websites (show all working out):
i) Return on Assets (ROA) = (NPAT / Total Assets)
Return on Equity (ROE) = (Net Profit After Tax / Ordinary Equity)
Debt Ratio = Total Liabilities / Total Assets
EBIT x NPAT x TA = NPAT
TA EBIT OE OE
Be sure that you have “proven” the above equation.

ii) Explain what phenomenon is being “captured” by the variable TA/OE, and how it is impacting on the relationship between Return on Assets and Return on Owners Equity.

iii) Explain why the ROE (EBIT) is significantly greater than or less than the ROA (EBIT)
 
 

Answer:

Portraying company’s information, while depicting core markets, activities, and factors:

The company is relatively focused in mining and exploring gold, copper, and uranium in Australia. Marmota Limited is mainly situated in south of Australia, where relevant fields are controlled by the company for its mining needs. The company operations in Australia and is linked with the Australian consumer demand, which could help in generating higher rate of return. The company has many projects in Australia, where it could acquire the required level of copper, gold, and uranium products to support its rising demand (Marmota.com 2018).

Mentioning the substantial shareholders:

Main substantial shareholders

Number of Share held

% of issued share

Colin Rose

65,873,242

12.74%

Southern Cross Capital Pty Ltd

46,000,000

8.89%

Mentioning the people involved in firm governance:

Position

Name of the Persons

The Chairman

Dr Colin Rose

Executive Director

Dr Kevin John Anson Wills

Director

Mr Peter R Thompson

Managing Director

Mr L D Williams

Managing Director

Mr I Warland

Company Secretary

Ms V Allinson

Mentioning the return on equity, debt ratio, and return on assets of the company:

Particulars

2017

2016

2015

2014

Net Profit After Tax

 (389,655)

 (445,750)

 (1,081,872)

 (18,625,655)

Total Assets

 6,001,626

 4,438,827

 3,434,694

 4,315,834

Ordinary Equity

 34,909,527

 33,064,883

 31,577,896

 31,239,006

Total Liabilities

 206,167

 117,125

 197,132

 345,450

Return on Assets

-6.49%

-10.04%

-31.50%

-431.57%

Return on Equity

-1.12%

-1.35%

-3.43%

-59.62%

Debt Ratio

3.44%

2.64%

5.74%

8.00%

 

Particulars

2017

EBIT

 (368,545)

TA

 6,001,626

NPAT

 (389,655)

EBIT

 (368,545)

TA

 6,001,626

OE

 34,909,527

NPAT/OE

(EBIT/TA) * (NPAT/EBIT) * (TA/OE)

NPAT/OE

-1.12%

Mentioning the variable of TA/OE and stating its impact on return on assets and return on owner’s equity:

Particulars

2017

2016

2015

2014

TA/OE

17.19%

13.42%

10.88%

13.82%

From the overall evaluation of the above able it could be identified that total assets of the company in comparison to its equity has relatively increased from 2014 to 2017. This increment is only possible when the company has acquired more assets to support its overall operations (Vogel 2014). 

 

Mentioning the reason behind ROE being greater or less than ROA:

The overall equity level maintained by the company is relatively lower than its assets level, which is why the ROA is less than ROE. In addition, the equity value listed in financial accounts is higher than assets value, which in turn reduces the return that could be provided from ROA.

Mentioning the return of the company and All Ordinary Index in graph/chart:

Mentioning the correlation of company with All Ordinary Index:

The graph is representing the correlation between return provide by ALL Ordinary Index and shares of MEU. The correlation of 0.054886 is relatively at the lowest indicating a low correlation between both the returns. Therefore, the correlation value cannot be used by investors in formulating its portfolio, as it does not suffice investment criteria (Floyd, Li and Skinner 2015).

Mentioning the impact of announcements on share price of the company:

Date

Announcements

Factors

15-Dec-2017

Cleansing notice and Appendix 3B

Industry wide factors

14-Dec-2017

Change in Directors Interest Notice

Significant management changes

08-Dec-2017

SA Exploration and mining conference presentation

Macroeconomic factors

04-Dec-2017

$1 million placement to sophisticated investors

Changes in management earnings forecast

24-Nov-2017

WPG and Marmota form strategic alliance

Industry wide factors

Mentioning the calculated beta of the company:

Beta of the company as detected from Reuters are at the values of 0.34, where the organisation is not considered to be a risky investment for investors.

Mentioning the rate of return of the company:

Particulars

Values

Beta

0.34

Risk free rate

4%

Market risk premium

6%

CAPM

4.68%

Mentioning whether the company is a conservative investment:

The company mainly falls under conservative investment scope, as the beta is relatively lower than 0.50, while a return of 4.68% can be provided from investment (Au.reuters.com 2018). This relatively indicates that Marmota falls under conservative investment.

Mentioning weighted average cost of capital of the company:

Particulars

Values

Total Equity

 34,909,527.00

Total Debt

0

Total Capital

 34,909,527.00

Cost of debt

0

Cost of equity

4.68%

Tax

30.00%

WACC

4.68%

Mentioning the overall impact of higher WACC has on decisions conducted by management:

The calculation of Weighted Average Cost of Capital (WACC) is conceited to identifying the minimum return that is needed by the company to conduct its operations. Cost of capital is the minimum expenses, which is conducted by the company to maintain the level of capital to support its activities. In addition, higher WACC would reduce its capability to accommodate high-end projects, as its returns needs to be higher than its cost of capital. Thus, the high WACC would restrict the management in making adequate decisions to support its future investment needs (Krüger, Landier and Thesmar 2015).

Mentioning the optimal capital structure used by the company:

Particulars

2017

2016

Total Assets

 6,001,626

 4,438,827

Total Liabilities

 206,167

 117,125

Debt Ratio

3.44%

2.64%

The debt ratio of the company has mainly increased from 2016 to 2017, which indicates that debt fuels its operations. The company has been acquiring debt to support its activities, which could improve its financial position and allow the management to increase its profitability.

Mentioning the steps taken by the company in adjusting their gearing ratio:

The company has been increasing its Exploration and evaluation assets value, which is relatively increasing the total assets and supporting its gearing ratio.

Mentioning the current dividend policy used the management:

Marmota’s management follows non-paying dividend policies, as the company has not paid any dividends to its investors in recent years. The company mainly follows this dividend policy due to the loss incurred from operations.

Recommending adequate investment opportunities, which could be used by investors:

From the evaluation of share price movement and financial position of Marmota, it is advisable to not invest in the stock. The company has not profited or provided any kind of return to its investor. Therefore, investment in the conman would be a loss for the investors and block its investment capital. 

 

Reference and Bibliography:

Au.finance.yahoo.com. (2018). MEU.AX Historical prices | MARMOTA FPO Stock - Yahoo Finance. [online] Available at: https://au.finance.yahoo.com/quote/MEU.AX/history?period1=1446229800&period2=1515349800&interval=1mo&filter=history&frequency=1mo [Accessed 9 Feb. 2018].

Au.reuters.com. (2018). Company Profile for ${Instrument_CompanyName}. [online] IN. Available at: https://au.reuters.com/finance/stocks/company-profile/MEU.AX [Accessed 9 Feb. 2018].

Floyd, E., Li, N. and Skinner, D.J., 2015. Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends. Journal of Financial Economics, 118(2), pp.299-316.

Krüger, P., Landier, A. and Thesmar, D., 2015. The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.

Marmota.com.au. (2018). Downloads | Annual Reports. [online] Available at: https://www.marmota.com.au/site/investors/corporate-reports/annual-reports/doc_view/600-2017-annual-financial-report.html [Accessed 9 Feb. 2018].

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

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