Reference no: EM132309022 , Length: word count : 2000

Case Study

COMPANY NAME: ACRUX LIMITED

1. Purpose

The purpose of this case study is to allow students to take some of the main concepts introduced throughout the course and provide a framework for applying them to a company of their choosing. One of the best ways of learning corporate finance is to apply the models and theories we encounter to real-world contexts and problems.

However, while much if not all theory can be applied to actual companies and not just abstract examples, we necessarily need to compromise and make assumptions in this process given the available information. For this reason, it may not be possible for you to address all aspects of this case study fully.

2. Context

Select an Australian publicly listed nonfinancial company of your choosing (i.e. an Australian company listed on the Australian Securities Exchange ASX Companies.do but not in a financial-related GICS group, such as banks, insurance and diversified financials) and address the questions using the framework for analysis given under Section 6.

At the outset, you should ensure that you are able to obtain the most-recent annual reports or equivalent (i.e. from an electronic database) as a source of financial statement information and corresponding stock price data over a comparable period. You may include your own calculations and calculations from company information providers (incl. details of source).

Potential publicly available sources of information include the company and its website, financial and other publications (Business Review Weekly, Australian Financial Review, The Australian, etc.)Yahoo Finance (financials, stock prices, profiles, etc.), the Australian Securities and Investments Commission,Google, and the Australian Securities Exchange (ASX).

Useful databases available via the university library include ABI/INFORM Complete (ProQuest), Business Source Complete, Factiva, Informit Search (multiple databases), Annual Reports Collection, Aspect Annual Reports, Aspect Fin Analysis, Company360, Hoover's Company Records (via ProQuest), Morningstar Data Analysis, and OSIRIS.The Department of AFE's trading room has access to Bloomberg and DataStream.

Assistance in answering case studies, writing reports and referencing is available under GBS Resources Bank on the course Learning@Griffith site.

3. Timing

Students should begin the case study as soon as it becomes available. This will avoid the requirement to complete a substantial amount of work immediately before the due date. Formal progress reports are not required, but students are encouraged to discuss any problems or concerns encountered with the case study with the convenorwhen they first arise.

4. Structure

The case comprises objectives that focus on selected topic areas by providing a framework for analysis and key questions to address. You should respond to each objective and the keyquestionsin their own section using the framework for analysis as a guide. Do not merely answer each of the framework questions (this may also not be possible depending on the company you have chosen).

Students are strongly encouraged to use financial ratio analysis and other appropriate analytical techniques to support their arguments throughout. There is a maximum word limit of 2,000 words excluding references, tables, figures, and appendices. Submit reports electronically as a single document through the course website.

Objective

To analyse the corporate governance structure of the firm and assess wherethe power in the firm lies and the potential for conflicts of interest at the firm.

To develop a risk profile for your company, estimate its risk parameters and use these parameters to estimate costs of equity and capital for the firm.

To analyse a firm’s existing investments, and to identify differential advantages that explain excess returns on existing investments.

To examine a firm’s current financing choices and to categorize them into debt (borrowings) and equity and to examine the trade-off between debt and equity for your firm.

To examine how much cash your firm has returned to its stockholders and in what form (dividends or stock buybacks) and to evaluate whether the trade-off favours returning more or less.

Key Questions

1. Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?

2. Is there a potential conflict between stockholders and lenders to the firm? If so, how is it managed?

3. How does this firm interact with financial markets? How do markets get information about the firm?

1. What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from [market, firm, industry, or currency]? How is the risk profile changing?)

2. What is the performance profile of an investment in this company? What return would you have earned investing in this company’s stock? Would you have under- or outperformed the market? How much of the performance can be attributed to management?

3. How risky is this company’s equity? Why? What is its cost of equity?

4. How risky is this company’s debt? What is its cost of debt?

5. What is the mix of debt and equity used by this firm to fund its investments?

6. What is this company’s current cost of capital?

1. What are the firm’s competitive strengths and differential advantages, if any?

1. Where and how does the firm get its current financing?

2. Would these financing choices be classified as debt or equity?

3. How large, in qualitative or quantitative terms, are the advantages to this company from using debt?

4. How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?

5. From the qualitative trade-off, does this firm look like it has too much or too little debt?

1. Has this firm ever paid out dividends? If so, is there a pattern to the dividends over time?

2. Given this firm’s characteristics today, do you think that this firm should be paying more dividends, less dividends, or no dividends at all?

Framework for analysis

The Chief Executive Officer

• Who is the CEO of the company? How long has he/she been CEO?

• If it is a ‘‘family-run’’ company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? (Did he/she come from within the organization or from outside?)

• How much did the CEO make last year? What form did the compensation take (salary, bonus, and options)?How much equity in the company does the CEO own, and in what form(s)?

The Board of Directors

• Who are on the board of directors of the company? How long have they served as directors? What is their remuneration?

• How many of the directors have other connections to the firm (as suppliers, clients, customers, etc.)?How many of the directors are CEOs of other companies?Do any of the directors have large stockholdings?

Financial Market Considerations

• How widely held and traded is the stock?

• How much trading volume is there in this stock?

• Graph and discuss the recent performance of the firm’s stock.

Estimating Historical Risk Parameters

• Run a regression of returns on your firm’s stock against returns on a market index.

• What is the intercept of the regression? What does it tell you about the performance of this company’s stock during the period of the regression?

• What is the slope of the regression? What does it tell you about the risk of the stock?

• What portion of this firm’s risk can be attributed to market factors? What portion to firm-specific factors? Why is this important?

• Using this beta and other information, estimate the expected return on an equity investment in this company?

• As a manager in this firm, how would you use this expected return?

Estimating Default Risk and Cost of Debt

• If your firm’s debt is rated, what is the most recent rating for the firm?

• Using financial ratio analysis, comment on the changes in the firm’s liquidity, debt servicing and debt levels over time.

• If your company is not rated, does it have any other recent borrowings? If so, what interest rate did the company pay on these borrowings?

Estimating Cost of Capital

• What is the market value of equity?

• Estimate a market value for debt.

• What are the weights of debt and equity in the firm?

• What is the cost of capital for the firm?

Analysing Existing Investments

• Using financial ratio analysis, comment on the various dimensions of the firm’s performance.

Assessing Competitive Strengths

• Who are the primary competitors for this firm, and how does the firm compare with them in terms of both quantitative (size, profitability, risk) and qualitative measures (quality of management, service)?

• Does the firm have any special strength that no other firm in the sector possesses? Does the firm lag other firms in the sector on any of the measures?

Assessing Current Financing

• How does the firm currently raise equity?

• How (if at all) does the firm borrow money? Does it use bank loans or corporate bonds? What is the maturity structure for the debt? What type of debt does the firm have (currency mix, fixed versus floating)?

Costs of Debt

• How high are the current cash flows of the firm (to service the debt), and how stable are these cash flows? (Calculate relevant financial ratios)

Historical Dividend Policy Analysis

• How much has this company paid in dividends over the past few years? What is its payout ratio? What is the dividend yield?

• How have these dividends related to earnings and cash flows in these years?

Firm Characteristics

• Does the firm declare its dividend policy? If so, what is its interpretation?

• How does this firm compare with other firms in its sector in terms of dividend policy?