Financial Management Assignment 1 (FIN5FMA) – SEMESTER 1, 2018
Your cu
ent role is the Manager of the Finance Division of Fortescue Metals Group Limited,
and you report directly to the Chief Financial Officer (CFO) of the company. The CFO has
equested you to attend a strategic retreat being held by the company to present to the Senior
Leadership Group, including the Chief Executive Officer (CEO) and the Board of Directors,
on the cu
ent financial policy platform of the company, the nature of the linkage or association
etween these policies adopted by the company, and how they integrate to influence the
operating and share performance outcomes for Fortescue Metals Group Limited.
Fortescue Metals Group Limited (FMG) is a leading iron ore production and exploration
company which operates in the Pilbara region of northern Western Australia. The company is
the fourth-largest listed resources company in Australia, behind BHP Billiton Limited, Rio
Tinto Limited and Woodside Petroleum Limited, and the largest pure-play iron ore mining
company listed in Australia. The company cu
ently has two primary production sites in
operation, namely the Chichester Hub located in the Chichester Ranges in the Pilbara region
comprising the Cloud
eak and Christmas Creek mining projects, and the Solomon Hub, which
is located 120 kilometres west of the Chichester Hub and comprises the Firetail and Kings
Valley mines. The company’s cu
ent operational objective is to achieve iron ore production
of at least 155 million tonnes per annum (Mtpa), and it has undertaken an aggressive expansion
program in the last decade in pursuit of this objective. The iron ore produced by the company’s
mining operations is transported to their port facilities at Port Hedland and is shipped for spot
market or futures contract trading in a number of overseas locations, but predominantly China.
Further detailed overall summary, structure, financing and performance information can be
obtained from the 2017 Annual Report document for Fortescue Metals Group Limited, which
is available from the subject LMS site. Prior year annual report documents and other filings
and announcement information relating to the company can be obtained from the Fortescue
Metals Group Limited web-site (www.fmgl.com.au) or from the DatAnalysis Premium
database available through the Databases link on the University Li
ary web-site.
The follow table provides a summary of financial and structural information for Fortescue Metals Group Limited for their recent June 30th year
ends:
06/13 06/14 06/15 06/16 06/17
Key indicators
No. of issued shares 3,113,798,151 3,113,798,151 3,113,798,151 3,113,435,477 3,111,339,230
Share price ($ XXXXXXXXXX50 5.22
Market capitalisation 9,465,946,379 13,545,021,956 5,947,354,468 10,897,024,169 16,241,190,780
Earnings per share ($ XXXXXXXXXX XXXXXXXXXX
Price/Earnings ratio (times XXXXXXXXXX22 5.99
Dividends per share ($ XXXXXXXXXX XXXXXXXXXX
Dividend payout ratio (% XXXXXXXXXX XXXXXXXXXX
Trading Information
Iron ore processed (wet metric
tonnes)
XXXXXXXXXX 172.20
Iron ore shipped (wet metric
tonnes)
XXXXXXXXXX XXXXXXXXXX
Iron ore price (US$ per Mt XXXXXXXXXX XXXXXXXXXX
Total revenue 8,754,716,981 12,476,645,435 11,164,062,499 9,538,109,345 10,981,539,261
Operating expenses -5,536,388,140 -6,667,728,237 -8,069,010,416 -5,428,225,154 -4,898,595,943
Earnings before interest and
taxes (EBIT)
3,032,884,097 4,918,259,023 1,365,885,416 2,702,666,307 4,485,179,407
Profit before tax 1,660,377,358 2,908,704,883 411,458,333 1,326,420,684 2,721,008,840
Net profit after tax before
abnormals
1,882,479,784 2,908,704,883 411,458,333 1,326,420,684 2,721,008,840
Net interest expense -631,805, XXXXXXXXXX,624, XXXXXXXXXX,541, XXXXXXXXXX,968, XXXXXXXXXX,626,105
Income tax expense -776,280,323 -1,245,222, XXXXXXXXXX,416, XXXXXXXXXX,902,774 -1,136,245,449
Net operating cash flows 3,238,814,016 6,632,696,390 2,652,343,750 4,070,832,211 5,533,021,320
Return on total assets (% XXXXXXXXXX XXXXXXXXXX
Return on equity (% XXXXXXXXXX XXXXXXXXXX
Structural information
Cash and cash equivalents 2,326,684,636 2,545,647,558 3,100,260,416 2,131,699,434 2,389,495,579
Cu
ent assets 3,948,247,978 4,752,653,927 4,595,052,083 3,262,860,220 3,386,635,465
Property,plant&equipment 18,215,633,423 18,747,346,072 22,084,635,416 21,673,848,639 20,384,815,392
Total assets 22,498,113,207 24,091,295,116 27,812,500,000 26,039,590,627 24,850,494,019
Cu
ent liabilities 1,524,528,301 3,471,337,579 2,197,916,666 2,200,377,053 2,862,714,508
Long-term debt 13,461,994,609 9,981,953,290 12,257,812,500 8,992,728,252 5,655,226,209
Total liabilities 16,795,687,331 16,041,401,273 17,998,697,916 14,719,903,043 12,195,787,831
Share capital 1,391,913,746 1,368,365,180 1,684,895,833 1,751,952,598 1,675,767,030
Retained earnings 4,359,029,649 6,593,418,259 8,052,083,333 9,504,443,845 10,910,036,401
Total shareholders’ equity 5,702,425,876 8,049,893,842 9,813,802,083 11,319,687,584 12,654,706,188
Long-term debt to Total assets
(%)
59.8% 41.4% 44.1% 34.5% 22.8%
Total liabilities to shareholders’
equity (%)
294.5% 199.3% 183.4% 130.0% 96.4%
On Feb 22, 2018, Fortescue Metals (FMG) has seen its interim net profit slump by almost half
ecause of weaker prices and less demand from China for its lower-quality iron ore. Is share
price fell significantly on the day after investors saw their interim dividend payout cut by $0.09
to $0.11 a share fully franked, which was lower than expected by analysts. News story in detail
can be found at:
http:
www.abc.net.au/news/ XXXXXXXXXX/fortescue-metals-profit-plummets/9470556
Relevant information relating to Fortescue Metals Group Limited or the wider corporate sector
is as follows:
Assume this analysis is being undertaken as at Monday 26th Feb 2018.
Fortescue Metals Group Limited’s share price on Monday 10th July 2017 is $5.21 per share,
and there are 3, XXXXXXXXXXmillion issued ordinary shares on this date.
Fortescue Metals Group Limited is part of the Materials Sector based on the Global
Industry Classification Standards (GICS), and its GICS Industry is Metals and Mining.
Fortescue Metals Group Limited’s beta coefficient on is 0.90, compared to the beta
coefficient for the overall industry of 0.98.
The 5-year and 10-year Australian Government Bond yields are 2.39% and 2.75%,
espectively, on Feb 26th 2018.
The S&P/ASX 200 Accumulation Index, including dividend and franking credit
components, has provided an average annual return of 10.160% over the most-recent five-
year calendar period to Feb 26th 2018.
The Australian dollar to US dollar (AUD/USD) exchange rates on Feb 26th 2018 were
0.7823, respectively.
Fortescue Metals Group Limited is subject to a corporate tax rate of 30%.
Required:
The CFO has requested you to submit a Background Analytical Report providing
supporting calculation and analysis information. The presentation, prepared employing
information from the annual report documentation and any other documentation or
sources of information considered relevant, is required to identify and outline the
http:
www.abc.net.au/news/ XXXXXXXXXX/fortescue-metals-profit-plummets/9470556
following aspects of Fortescue Metals Group Limited’s cu
ent policy platform and
operational activities and performance:
The determination of the costs of the various sources of costly or interest-bearing
financing employed by the firm and, from this, the firm’s overall weighted average
cost of capital (WACC).
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 the firm’s earnings distribution policy, including the type of dividend
policy employed if relevant, whether the firm has a target dividend policy or payout
atio, and the influence of taxation or other relevant elements associated with the
firm’s overall earnings management and distribution practices.
Link to the recent dividend announcement and market share price response to the
dividend, discuss the association or relationship between dividend and other various
corporate financing policies employed by the firm, and how this may relate to
Fortescue Metals Group Limited’s share and/or accounting performance outcomes,
and any other key drivers of the firm’s performance outcomes.
The CFO has requested you to submit two documents in preparation for the strategic
etreat –
1) a PowerPoint presentation that will be presented at the retreat
2) a Background Analytical Report providing supporting calculation and analysis
information.
The hard copies of both the PowerPoint presentation and the Background Analytical
Report should be submitted to the CFO (your lecturer) in the class by 9 pm on Thursday
May 24th 2018 (Week 11). Note you also need to submit the two documents online via the
FIN5FMA subject LMS site by 6 pm May 24th 2018. This case study will represent 15%
of the final assessment for this subject. This case study can be submitted in a group with
three or four members. 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. The PowerPoint presentation and background
documents should be prepared in a professional manner, be informative and
interpretable by an audience with reasonable general finance knowledge, and reflect
creativity and thought about the most appropriate way to present the information. The
PowerPoint presentation should be clear and concise with a maximum of 15 slides. The
Background Report should provide