BFF5954 Business Finance Assignment Help

BFF5954 Business Finance Assignment Help

Business Finance Assignment Help

This is the solution of Business Finance Assignment help given in the Monash University Australia. Under this assignment, there are some questions based on the specific case study.

Question- 1: General background of the firm

Flight Centre Travel Group Limited is an Australian Company located in Brisbane, which is mainly working on the corporate travel management, whole selling and retailing. It was founded during the period of 1980. It used to provide its flight services in different parts of the world covering U.S., U.K., Singapore, China, and India and in other countries. The company also provides retail services in travelling that includes wholesale, corporate, leisure etc. The other services include Student Flights, Liberty Travel, GOGO Vacations, Stage and Screen, Flight Centre, Campus Travel brands, Infinity Holidays, FCm Travel Solutions etc. It has more than 15,000 employees and has more than 30 brands listed in the Australian Stock Exchange. As of 30/06/2014 total revenue amounted to around AUD 2207 million and net profit of around AUD 207 millions. The Revenue has increased over around 11.97 % from the immediate previous year. The company is maintaining a constant growth in sales from many years. It also raised a dividend of AUD 0.97 per share containing the final dividend and this payment has increased to about 77% after six years. There have also been cost reductions in the recent period and the wages has also increased while keeping the debts in low level. The generation of cash has increased to about 10% while the debt has been rapidly decreased and the company is expecting to invest about AUD 40 million in FLT’s shop network so as to increase the number of stores, fit-outs, IT-systems etc (Murphy, 2014).

Question-2: Capital structure

  1. The company has raised the equity of AUD 391 millions in the recent Financial Year of 2014 which is the largest amount raised than the previous four years ranging AUD 388, 383, 381, and 379 millions in the financial years 2013, 2012, 2011 and 2010 respectively. The Company has also raised the term debt of AUD 85 millions in the financial year of 2010, which is the largest amount raised than the years 2011, 2012, 2013 and 2014 ranging to amounts AUD 69, 62, 3 and 2 million respectively.
  2. The Company issued AUD 391 millions as share capital in the Financial Year 2014, comprising of 100,571,642 ordinary shares authorised. These funds are mainly raised for the growth of the sales and the overall earnings of the company. These investments can be used in purchasing the quality raw materials and using the quality labour in the production process and can also be used to spread the sales in other parts of the segments that the company is operating like in U.K. TTV Sales is only AUD 1,533 millions. So it can be used to facilitate new measures and operations to increase the sales in that country. Profit from Leisure has maintained a constant growth. Now on the part of the Term Debt which is indicating the long term debt i.e. covering more than 12 months, such debt is indicating the amount of AUD 85 millions in 2010 but declined to AUD 2 millions in 2014 because it has paid off a proportionate amount of debt. Now this debt has been raised for further investments and for expanding the business or the network in different parts of the country and also for the repayment of the company’s Business Ownership Scheme (BOS) (Jenster and Hussey, 2001).
  3. The initial announcement date is 30/06/2010, i.e. the Financial Year of 2010. Within this recent five years June 30, 2010 will be the initial debt when these funds have been raised.
  4. The return can be calculated from different ratios like:
  • Operating Margin % which is 11 % as on 2010, where operating margin = Operating Income / Net Sales
  • Earnings Before Tax (EBT) margin which is 11.26 as on 2010 where EBT margin = Earnings Before Interest and Taxes (EBIT) / Net Sales
  • Net Margin % is 7.93 % as on 2010 where Net Margin = Net Profit / Revenue
  • Return on Assets is 7.55 % as on 2010 where Return on Assets = Net Income / Average Total Assets
  • Return on Equity is 21.17 % as on 2010 where Return on Equity = Net Income / Shareholder’s Equity
  • Return on Invested Capital is 19.96 % as on 2010 where Return on Invested Capital = Net Income – Dividends / Total Capital
5. The market return can be calculated from the Earnings per Share (EPS) ratio will be 262.40 % on the basis of Year over Year growth, 7.74 % on three year average basis, 14.06 % on five year average basis, and 10.97 % on the ten year average basis. The EPS is calculated as Net Income – Dividends on preferred Stock / Average Outstanding shares. 6. When all such ratios are compared as calculated in iv. And v. above, we will derive the difference between the one which has been invested on the sales, assets and equity to that with those shares that has been invested in the market. Operating margin, EBT, Net margin, Return on Assets, Return on Equity and Return on invested Capital are all such non-market ratios that depends upon the performance of the company while the EPS is depend on the shares held by the shareholders, though the performance of the company will also affect the EPS as its numerator has net earnings less preferred dividends (Bruce and Epstein, 1994).

7. The market has perceived this issue on different grounds like increase in supply chain, return to shareholders, and assistance to Flight Centre Foundation. There has been also EBIT growth of 45 % in the recent years. The travel sector has earned a handful income of about AUD 45.6 millions. Though there has been inflation from the beginning of 1980 still the air fares hardly increased. The Board is also trying to provide 50-60 % NPAT to the shareholders according to the recent dividend policy.

  • The recent financial crisis has not affected the capital structure while the common stock of the company has increased from AUD 388 million to AUD 391 million in the previous year. The retained earnings have also increased to AUD 734 million from AUD 674 million in the previous year. The company has also retained enough cash to cover three months operating expenses.

The debt to equity ratio which is the division of total debt by total equity has come to Nil in 2014 and 2013, while it was 0.07, 0.09 and 0.12 in the financial years 2012, 2011 and 2010 respectively. Regarding the industry peer, the other consumer service providers are Academies Australasia Group Limited whose debt to equity ratio is 0.09 in 2014, similarly for Ainsworth Game Technology Limited it is nil in 2014, for Ardent Leisure Group it is 0.51 in 2014 and for Aristocrat Leisure Limited it is 0.63 in 2014. Thus a clear line of distinction can be set from the calculation of debt to equity ratio of the different companies in the same industry group.

8. During financial crisis, it is possible that the firm may go through some difficulties regarding the financial structure of the company. The following financial changes may be perceived in the company accounts.

  • There may be a slash in the revenue part; the expenses may be in an upward trend, causing a huge chunk of profit to come down.
  • The debt of the firm is bound to increase; there may be an additional of debt in the balance sheet.
  • High cost of capital will also add in the expense head.
  • There will be cumulative debt that will cause in tampering the debt-equity ratio.

During any financial crisis it is visible that the debt of the firm will increase abruptly. There is a possibility of low profit generation in the firm causing the debt remaining intact with its cost of capital. The debt balance will increase exponentially as the company needs to maintain its operational activities, meeting up working capital requirements, employees expenses etc. Thus it is likely to happen the long-term as well as the short-term debt will compile.

The abrupt rise in debt of the company will cause the Debt- Equity ratio in the higher tone. The firm need to follow the others firms in the sector and need to lower its debt balances.

The following capital structural changes may lead to a balancing Debt -equity ratio. It also helps in emerging markets Suppose for example it is seen that the Present Debt –Equity ratio is 1:1. That is equity share capital values $200000 and its debt also values $200000. After the financial crisis it has seen that the debt amount exceeds to another $200000. Thus causing the Debt balance equals to $400000. Therefore it may cause the Debt-Equity ratio to be 2:1.

Thus, for the sake of competition it has been seen that the firm needs to have a lower debt-equity ratio. Thus the firm needs to apply some strategic changes to console the debt-equity ratio to lower down.

The firm may issue fresh equity share to the existing equity share holders of the company with the ratio of 1:1. Thus, the firm Equity share holder’s capital will increase to $300000 and the inflow of cash will results towards the resolve of debt balance. So, if we do a cross-sectional analysis then we will find the following balance sheet data after re-structuring (Businessweek, 2014).

Early Capital =Debt + Capital =$(200000+200000) =$ 400000

Capital during the financial crisis = Debt + Capital = $(400000+200000) =$ 600000

Capital after issuance of fresh bonus share

= Debt + Capital =$(300000+300000) =$ 600000

Though there may be a possibility if emerging of other expenses in the income statement like cost of issuance of equity share, cumulative cost of capital, increase in other operational expenses etc. However this will impact a bit but the aim of original re-structuring of the capital will be resolve. The above re-structuring of the debt-equity ratio to 1:1 will impact in the confidence of the investors. The confidence will boost up and it will result towards the prosperity of the company as well.

Learn about Corporate Finance Assignment.

Question- 3: Valuations

(i) Calculation

An organization can use numerous ways for the purpose of valuing its stock. In other words it can be said that the value of the stock can be derived through the addition of the present value of the cash flows predicted to be derived in the future. The organization over the past has established a good track record when it comes to paying dividends to its shareholders. The dividend discount model cannot be employed in the cases of organization where the organization is in its initial phase as during this phase the organization does not pay dividends. However this method can be used in cases where the organization has been regularly paying dividends for the purpose of valuation of the stock of the organization (Businessweek, 2014).

The particular method under question employs various methods for the purpose of valuation of the stock of the organization. The major components of the model have been discussed below:

Growth: This element takes into account the growth rate of the dividends. For the purpose of calculation the dividend data for the past 11 years has been taken into account. The average rate with which the dividend of the organization grows is 2.24%. The same can be considered for the purpose of valuation of the stock of the organization.

YearDividend% Change
2004

0.41

20050.28-31.71%
20060.3214.29%
20070.4643.75%
20080.496.52%
20090.01-97.96.00%
20100.444300.00%
20110.489.09%
20120.7147.92%
20130.9128.17%
20140.976.59%
4326.66%
Average Growth336%

Considering the dividend payment history it would be safe to take into account an estimation of the dividends for the next year which is assumed to be 11.98%

The below mentioned formula will be used to derive the valuation:

R is the rate of return expected by the shareholders of the organization after considering the risk of the organization and returns etc. For the purpose of valuation the Beta of the organization, Risk free rate and the market return has to be considered. The other components of the formula have been discussed below:

Beta: Beta of the organization is a measure of the sensitivity of the organization. It measures the change in the value of the stock in respect to the entire market. It can also be termed as the barometer of the risk of the organization. The beta of the organization is 1.80 (refer appendices)

Risk free rate: The rate of return of the long term government securities have been considered has been considered as the risk free rate of return. 3.31% is the average rate of return of the government bond (Refer appendices).

Market Return: The return on the Australian stock market has been considered as the market return. Considering the recent financial turmoil the data of 20 years has been taken into account for the purpose of calculating the average return on the stock. The average return of the stocks is 13.3%.

Hence from the above the required rate of return can be estimated as:

Required rate of return = Rf + Beta * (Rm – Rf) (Sanghera, 2011).

R=3.31 +1.8(13.3%-3.31%)

R=21.29%

The final element or the component of the model is the D0 which is the dividend last paid by the organization which is 0.91. Hence the value of stock will be:

P0=0.91(1+11.98%)/21.29%-11.98%

P0=$10.94

(ii) Comparison with actual

Currently the stock trades at $40.00 (Approximately) this implies that the stock is overvalued by a great margin. However since it is a theoretical model it does not take into account a lot of factors operational in the real life scenario (Markets.ft, 2014). The price of the share is a function of the demand and supply. The demand of the share increases because of a lot of things such as future prospect of the organization, dividends declared etc.

References

  • Bruce, B. and Epstein, C. (1994). The handbook of corporate earnings analysis. 1st ed. Chicago, Ill.: Probus Pub. Co.
  • Businessweek, (2014). FLIGHT CENTRE TRAVEL GROUP L (FLT:Australian Stock Exchange Ltd): Stock Quote & Company Profile - Businessweek. [online] Businessweek.com. Available at: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=FLT:AU [Accessed 17 Oct. 2014].
  • Jenster, P. and Hussey, D. (2001). Company analysis. 1st ed. Chichester: Wiley.
  • Markets.ft, (2014). Flight Centre Travel Group Ltd, FLT:ASX forecasts - FT.com. [online] Markets.ft.com. Available at: http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=FLT:ASX [Accessed 17 Oct. 2014].
  • Murphy, B. (2014). Should you buy Flight Centre Travel Group Ltd?. [online] finance. Available at: http://finance.ninemsn.com.au/newsbusiness/motley/8828464/should-you-buy-flight-centre-travel-group-ltd [Accessed 17 Oct. 2014].
  • Sanghera, P. (2011). CAPM in depth. 1st ed. Boston: Course Technology PTR/Cengage Learning.