Ratio analysis and securities valuation

Reference no: EM132349104

Background

Being able to analyse and articulate company financial statements is an invaluable skill that ensures managers have a strong grasp on all facets of the business. Specifically, financial literacy ensures managers, particularly the Chief Financial Officer (CFO) and Treasurer are equipped with relevant up-to-date knowledge to make crucial decisions in order to maximise the wealth of the organisation-a fundamental principle of financial management. Furthermore, financial managers must have a deep understanding of domestic and international capital markets for issuing capital instruments such as bonds (debt) and/or shares (stocks). This ensures a corporation can effectively raise long-term capital to acquire profitable assets to maximise wealth for its shareholders.

1. Choose two publicly listed non-financial companies from the same industry and obtain their latest financial statements from the IBISWorld or Marketline database (available via the library link in the student portal). Perform a complete ratio analysis on each company. Break your analysis into an evaluation of the firm's liquidity, profitability, capital structure and market ratios.

Select the following ratio from each category for your analysis.

• Liquidity - Current ratio

• Profitability - Return on Equity ratio

• Capital Structure Ratio - Debt (Gearing) ratio

• Market Ratio - Price-Earnings ratio

(Please note that calculations of ratios are not required as calculated ratios are available on IBISWorld and Marketline.)

In addition to this, you are required to analyse and interpret the ratios along with any other relevant data with reference to the theoretical concepts introduced in this subject to evaluate the company's operations and performance. How well does your selected company compare with the industry peer? Which component of your company's ROE is superior, and which are inferior?

2. Suppose your selected company (choose one of the two) just paid a dividend of $2.20 per share. The dividends are expected to grow at a constant rate of 4% per year, indefinitely. You employ the Capital Asset Pricing Model (CAPM) to calculate the share's expected return. You observe that the risk-free rate of return on US treasuries is 2% p.a; the market risk premium is 7% and the company's equity has a current beta of 1.285.What is the market value of the company's shares? Compare the actual closing price of your selected company's share on the balance sheet date. Why might the actual share price differ from the calculated price? Explain.

3. Assume a mining company PHP LTD. is assigned a AA credit rating by Standard and Poors. The company is looking to expand its operations into an already discovered iron ore deposit 600 km's north of Adelaide in outback South Australia. PHP is looking to finance the $20 billion expansion with multiple sources of capital including raising $5 billion in $AUD senior debt into the US private placement bond market (reg 144a). PHP's lead capital funding managers (underwriters) will offer a 10-year; fixed semi-annual coupon of 5.75% p.a. with a face value of AUD $1,000. The all-up market yield will be benchmarked at 230 basis points above the current Australian Government Bond 10-year of 2.35% p.a.. Calculate the price at which the bonds will trade at in the market?

Reference no: EM132349104

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