vital to the survival of any corporation

Part A: Written report

Background

Financial managers are, arguably, vital to the survival of any corporation. They generally have a say on decisions that directly impact the performance and value of businesses. These decisions are, invariably, related to which projects to pursue (capital budgeting), how to raise funds (capital structure), and how to safeguard the business’ daily operations (working capital management).

In this context, knowing how to interpret financial statements has the same importance to a manager as the ability to understand medical results has to a physician. One of the most important tools in this regard is the financial ratio analysis, whereby information is combined in a way that portrays the status of the company in terms of important aspects (e.g., liquidity, profitability, efficiency, etc.).

Assignment question

To get a good grasp of financial ratio analysis, this assignment asks you to identify a company whose capital structure ratios (e.g. debt ratio and interest coverage ratio) and profitability ratios (e.g. return on assets and return on equity) are either readily available (i.e., through IBISWorld or Marketline) or, else, can be calculated through its financial statements. Then, upon collecting observations from the last 5 years and industry aggregates, answer the following:

Based on a trend analysis, elaborate on whether the company you have chosen is improving or deteriorating in terms of its capital structure and profitability ratios, highlighting any areas (and appropriate actions) for improvement.
How does the company compare to its peers, i.e., are its ratios similar to the industry- average financial ratios (or else, to those from its main competitor)? Would there be any issues of concern and, if so, how to address them?
Is it possible to identify any relationship between capital structure and profitability ratios? (Hint: frame your discussion in terms of risk vs return).
The cash conversion cycle (CCC) is the most relied upon measure to determine how effectively a company is converting resources to cash and managing its working capital. Calculate the CCC for your selected company (if possible or choose another suitable company) over the last 5 years. Evaluate whether CCC changed during this period. What drove this change? Whether this change is in favour or against the interest of the chosen company and why?
Assume your selected company is considering raising funds for expansion from the securities market. The company has the following two alternatives:
1. Issuing bonds having 14% annual coupon rate. Interest will be paid semi-annually. The bonds will have a face value of $1,000 and will mature in 10 years from now. Current yield to maturity is 12%. Rumours have started circulating that Moody’s will soon downgrade the credit rating of your selected company’s bonds, which will result in a 3% p.a. increase in the yield to maturity, from 12% to 15% per annum.
2. Issuing additional ordinary shares. Assume they just paid a cash dividend of $1.20 per ordinary share. Security analysts agree with top management in projecting steady growth of 8% in dividends over the foreseeable future. The required rate of return for shares of this type is 15%.

Determine the price of the bond before and after the rumour and explain the expected change in the price of the bonds. Also, calculate the value of the ordinary share. What relationship exists between the coupon interest rate and yield to maturity and the market value of a bond? In your opinion, which security should be issued by your example company on the basis of their current capital structure and why?

assessment requirements

The required word length for this assessment is 1650 words (plus or minus 10%).
Your report will be marked according to the criteria outlined in the assessment grading criteria outlined in the Subject Outline (Appendix 1).
In terms of structure, presentation, and style you are required to use:
1. preferred Microsoft Word settings.
2. author-date style referencing (which includes in-text citations plus a reference list)..
Acknowledge the sources of facts appropriately. Use a minimum of five academic references.
All references must be from credible sources such as books, industry-related journals, magazines, company documents, and recent academic articles.
Your grade will be adversely affected if your report contains no/poor citations and/or reference list and if the word length is beyond the allowed tolerance level

art B: Reflective Practice

Reading

In preparation for Part B, read the following article:

Bartholomeusz, S 2019, ‘APRA rolls up its sleeves on bankers’ pay’, The Sydney Morning Herald, 28 March, pp. 29–30

Background

Whether you are working as a manager in an organisation or running your own business, ethics are important and fundamental. Although managers should act in the best interest of the company’s owners, in practice the separation of ownership (shareholders) and control (CEOs) can lead to conflicts of interest. For instance, managers might be led to pursue personal goals that are not conducive to maximising shareholder wealth. Although tying management compensation to business’s performance seems like an effective way to fix this problem, compensation plans that embed financial as well as non-financial metrics have, yet, not found their way, as Bartholomeusz (2019) suggests – to the point that the regulator in Australia (APRA) is considering intervening on the matter.

Question

Read the above article and relate it back to the knowledge gained from topic 1, particularly so regarding the goal of financial management and related ethical considerations. Reflect on the goals (both financial and non-financial) that motivate your actions as the manager/employee of the company, and of instances where a decision had to be made where those goals were in contradiction. Please provide specific scenarios to illustrate your answer, and elaborate on the challenges you faced in dealing with the situation. What have you learnt from this experience, and how the material discussed in Topic 1 would have changed/explains the decision made?

The required word length for this assessment is 550 words (plus or minus 10%).
Your report will be marked according to the criteria outlined in the assessment grading criteria outlined in the Subject Outline (Appendix 2).
Given the length of this assessment, you are not required to follow the standard report format, however, you must follow the AIB preferred Microsoft Word settings.
Acknowledge the sources of facts appropriately. Use a minimum of two academic references.

All references must be from credible sources such as books, industry-related journals, magazines, company documents, and recent academic articles.

Your grade will be adversely affected if your report contains no/poor citations and/or reference list and if the word length is beyond the allowed tolerance level

Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles andapplications, 7th edn, Pearson Australia, Vic; (ISBN 9781486019649 or 9781488609275).

References

Chapters 3 and 4 of the textbook: Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.

Trifan, A & Anton, C 2011, ‘Using cost – volume – profit analysis by management’, Bulletin of the Transilvania University of Brasov, Series V: Economic Sciences, vol. 4, no. 2, pp. 207–212.

Irons, R 2014, ‘Enhancing the dividend discount model to account for accelerated share price growth’, Journal of Accounting and Finance, vol. 14, no. 4, pp. 153–159.

Irena, M 2017, ‘The time value of money in financial management’, Ovidius University Annals, vol. 17, no. 2, pp. 593–597.

Irons, R 2014, ‘Enhancing the dividend discount model to account for accelerated share price growth’, Journal of Accounting and Finance, vol. 14, no. 4, pp. 153–159.

Martinez, V 2013, ‘Time value of money made simple: a graphic teaching method‘, Journal of Financial Education, vol. 39, no. 1/2, pp. 96–117.

Chapters 5, 6, 9 (part) and 10 (part) of the textbook: Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.

Bornholt, G 2013, ‘The failure of the capital asset pricing model (CAPM): an update and discussion’, Abacus, vol. 49, pp. 36–43.

Chapters 7 (part) and 8 (part) of the textbook: Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.

Kalyebara, B & Ahmed, A 2011, ‘Determination and use of a hurdle rate in the capital budgeting process: evidence from listed Australian companies’, IUP Journal of Applied Finance, vol. 17, no. 2, pp. 59–76.

Chapter 11 of the textbook: Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.

Roshaiza, T & Azura, S 2014, ‘Overview of capital structure theory’, Studies in Business and Economics, vol. 9, no. 2, pp. 108–116.

Chapters 14 (part) and 15 (part) of the textbook: Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.