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CASE STUDIES IN FINANCE

CASE STUDY - COMPANY FINANCIAL POLICY DECISION-MAKING

Your team works for an active fund management firm and is responsible for research coverage and evaluation of firms operating in the construction and building materials segments of the wider Materials GICS sector. The Lead Broker team has indicated that they are considering adding Boral Limited to their list of designated company investment alternatives for future inclusion in one or more of their actively-managed funds. As a result, your team has been charged with ascertaining the nature of Boral Limited's overall financial management policy choice and decision-making, identifying the potential determinants of this financial management policy structure and determining how this policy platform is associated with the historical market and operating performance outcomes for Boral Limited. The focus of this case study will be on using relevant information provided in the 2015 Annual Report document for Boral Limited to identify, illustrate and explain the financial management policies adopted by the company, and to demonstrate the association between the various policies adopted by the company and how they integrate to determine the accounting and share performance outcomes for Boral Limited.

Boral Limited is a leading international building and construction materials company, and is one of the largest 100 companies listed on the Australian Securities Exchange based on market capitalisation figures. Boral Limited, in its current form today following a de-merger transaction in 2000 resulting in the spin-off of their energy generation and distribution assets into the separate listed company Origin Energy Limited, is involved in the manufacture of building and construction materials, and their distribution either vis their own retail outlets or directly to building supplies wholesalers and major building and constructions companies. The company has six main operational divisions comprising:

- Australian Construction Materials (quarry, concrete, asphalt, transport contracting and land development activities)
- Cement (on-site and readymix cement, formwork and scaffolding, and windows)
- Timber (hardwood, softwood and plywood construction and finishing timbers)
- Plasterboard (manufacturing, distribution and installation activities)
- Clay and Concrete Products (clay and concrete bricks, blocks, interior and roof tiles and landscaping products)
- Boral USA (brick and clay tile manufacturing and coal combustion products)

Boral Limited operates primarily in Australia, although they also have business operating segments in a number of Asian countries and in the United States. Approximately 15% of the company's total operating revenue and net profit after tax are derived from these international operations, and approximately 30% of their total assets are located in these markets.

Annual report documents provide a range of information outlining and summarising the recent financial and operating performance of companies, with tables of historical performance (which are normally located towards the end of annual report documents) being very informative in this regard. The table below provides a summary of financial and structural information for Boral Limited for their recent June 30th year-ends (All figures, except for per- share and percentage statistics are expressed in A$Million):

	2012	2013	2014	2015
Issued share capital (no.)	758.572	774.000	782.736	764.241
Market capitalisation	2237.787	3258.540	4109.364	4470.810
Share price ($)	2.95	4.21	5.25	5.85
Price/earnings ratio (times)	20.922	26.987	31.437	18.994
Earnings per share ($)	0.141	0.156	0.167	0.308
Dividends per share ($)	0.110	0.110	0.150	0.180
Dividend payout ratio (%)	78.014	70.513	89.820	58.442
Return on equity (%)	3.160	3.470	3.820	6.690
Total revenue	4923.700	5260.200	4476.500	4463.900
Profit before interest and tax	200.900	236.600	211.800	350.300
Profit before tax	116.000	140.600	146.600	286.6000
Net profit after tax	106.400	121.100	130.900	235.600
Income tax expense	9.600	19.500	15.700	51.000
Current assets	1803.500	1842.700	1664.500	1741.300
Total assets	6499.100	6316.400	5559.100	5865.400
Current liabilities	1142.800	1174.300	1170.200	923.200
Long-term debt	1575.100	1539.600	886.100	1320.800
Total liabilities	3095.700	2922.900	2211.000	2341.300
Shareholders' equity	3403.400	3393.500	3348.100	3524.100
Long-term debt to total assets (%)	24.236	46.275	15.940	22.518
Total         liabilities         to shareholders' equity (%)	90.959	86.132	66.037	66.437

Further detailed overall summary, structural and performance information can be obtained from the 2015 Annual Report document for Boral Limited. This annual report document is available on the subject LMS site, and 2015 and prior year annual report documents can also be obtained from the Boral Limited web-site (www.boral.com.au) or from the DatAnalysis Premium database available through the Electronic Databases link on the University Library web-site. Other relevant financial information relating to Boral Limited or the wider corporate sector is as follows:

- Boral Limited's share price is currently $6.52 per share.
- Boral Limited is a part of the Materials Sector, based on the Global Industry Classification Standards (GICS) Sector Groupings.
- Boral Limited's beta coefficient is currently 1.01, compared to the beta coefficient for the overall Materials industry sector of 1.04.
- The 90-day Australian Dealer Bill interest rate is currently 2.02% per annum, and the ASX All Ordinaries Index has provided an average annual return of 7.85% over the last ten years.

Required:

This case study requires the completion of the following tasks:

The Lead Broker Team has requested you, based on using the information within the annual report documentation and any other documentation or sources of information considered to be relevant, to identify and outline the following aspects of Boral Limited's financial management policies:

- The nature of the firm's working capital management policies. Focus in this determination should be on overall current asset investment and financing policies, rather than the company's adoption of policies relating to specific current asset categories, such as inventories or receivables.

- Determination of the cost of the various sources of costly (or interest-bearing) financing used by the firm and, based on this information, Boral Limited's overall weighted average cost of capital (WACC).

- The nature of the firm's earnings distribution and dividend payout policies. This should include discussion of the type of dividend policy employed, whether the firm has a target dividend policy or payout ratio, changes in dividend payout amounts or patterns, and the consideration of taxation, dividend imputation and franking credit issues and wider elements associated with the firm's overall earnings management and distribution practices.

- The nature of the firm's capital structure determination policy, including identification of specific policy adoption or usage if relevant, whether the firm appears to have target or optimal capital structure ratios, and the determinants of the firm's capital structure choice.

- The nature of any association or relationship between these various financial management policies employed by the firm, and how this may relate to the Boral Limited's share and/or accounting performance outcomes.

The maximum word limit, excluding any figures and calculations is the equivalent of 500 words per team member, so a case study completed by a team of 4 should be a maximum of 2,000 words.

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