HI5002: Finance for Business, Assignment, 2018 XXXXXXXXXX1 HI5002: Finance for Business Group Assignment (Case Study) Trimester 2018 Unit Code: HI5002 Unit Name: Finance for Business XXXXXXXXXXDue...

Table of Contents
Introduction    1
Ratio analysis    1
Liquidity    1
Profitability ratios    2
Solvency ratios    4
Inventory turnover ratios    5
Ratio analysis table    6
Two factors that may influence the share price of the company    9
Calculation of Beta values and expected rate of return using Capital Asset pricing model    10
Regression Summary    13
CAPM returns    14
Calculation of weighted average cost of capital    14
Book value weights    15
Cost of debt and equity    15
Weighted average cost of capital    16
Maintenance of a prefe
ed optimal capital structure.    16
Dividend payments    17
Recommendation    17
References    17
Introduction
Rio Tinto is Anglo Australian multinational company which is involved in the business of mining and Metal Corporation. The company was formed way back in 1873 when several investors hold their money to purchase a mining complex on Rio Tinto in Spain, mergers, and acquisitions and today it is the world leader in the production of several commodities like coal Diamond, uranium, copper iron ore, and Aluminum. Penman, S. H., & Penman, S. H. (2001). 
The primary business of Rio Tinto is focused on the extraction of minerals but the company has significant operations in the refining of Bauxite along with iron ore. Rio Tinto has its operation in 6 continents but its major business is concentrated in Canada and Australia the company owns the entire mining operation by a complex web of several partially and wholly owned subsidiaries. Rio Tinto has two headquarters one is based in the Melbourne Australia and another is based out of London UK.
Rio Tinto is a dually listed company and the company is listed on both London stock exchange and Australian Stock Exchange. The company is headed by the Simon Thompson who is the chairman of the company and he is assisted by Jean Sebastian who is the CEO of the company.
The net revenue of the company was $ 40.03 billion in 2017 with the operating income of $ 14.47 billion US dollars in 2017. The net income of the company was $ 8.85 billion in 2017 and its total assets were $ 95.72 billion in 2017.
Ratio analysis
Ratio analysis is one of the most important aspects of the fundamental analysis for any given company, we have analyzed the ratio of the company on 5 different parameters.
The first parameter of the ratio analysis is liquidity ratios liquidity ratio measures the short-term sustainability of the business operation of the given organization. Liquidity ratios give us the information about the availability of liquid assets in the company which are required to run the short-term operations of the company. Penman, S. H., & Penman, S. H. (2001). 
 Liquidity
Liquidity in the company is measured by two major ratios the first ratio is the cu
ent ratio and the second one is the quick ratio.  The cu
ent ratio is the ratio between the cu
ent assets and cu
ent liabilities whereas the quick ratio gives more Emphasis to the liquid Assets and is calculated as cu
ent assets minus inventories divided by the cu
ent liabilities. Penman, S. H., & Penman, S. H. (2001). 
Cu
ent ratio = cu
ent assets/cu
ent liabilities
In the case of Rio Tinto, we can observe that cu
ent ratio of the company has increased from 1.6 in 2016 to 1.69 in 2017. Generally, as a Thumb Rule, it is considered that if the cu
ent ratio of the company is greater than 1.2 then the company has enough liquidity to sustain its short-term operations. Since in the case of Rio Tinto the cu
ent ratio of the company is greater than 1.2 then it has sufficient liquidity to manage its short-term operations.
Quick ratio = (cu
ent assets-inventories)/cu
ent liabilities
We can observe that in the case of Rio Tinto the quick ratio of the company has also increased, it has increased from 1.29 in 2016 to 1.38 in 2017.
General, it is considered that if the quick ratio of the company is greater than 1 then the company has enough liquidity to sustain its operations. Penman, S. H., & Penman, S. H. (2001). 
Profitability ratios
Profitability ratios are one of the most important ratios from the point of the investors in the company.  Profitability ratio defines the profitability at the several levels of the organization.  it helps in identifying the inefficiencies in the business operation so that company can take initiatives to eliminate those inefficiencies and improve its performance.
Profitability of the company is measured by several profitability ratios like gross profit ratio, operating profit ratio, and the net profit ratio.
The gross profit ratio is defined as the ratio between the gross profit of the company and the net revenue of the organization.  Gross profit is used to measure the efficiency of the cost of goods sold.  There is no standard benchmark for the gross profit ratio but it varies between 20% to the 60% depending on the industry of the organization.
Gross profit ratio = gross profit/total revenue
Gross profit ratio is also known as gross margin, in case of Rio Tinto, the gross margin of the company has increased from 60.41% in 2016 to 63.15% in 2017.
The second major profitability ratio is the operating margin operating margin is defined as a ratio between the operating profit and the total revenue. The operating profit measures the efficiency of selling, admin, and other expenses.
Operating profit margin in case of Rio Tinto has increased from 22.0 percent to 34.13% from 2016 to 2017.  This shows that the Rio Tinto has significantly reduced its operating expenses which have led to the higher profit by the organization.
The third and the most important profitability ratio is the net margin ratio which measures the ratio between the net profit of the organization and total revenue of the company.
The net margin of the company measures the overall profitability of the organization which is generated by detecting all the expenses.
Net margin = net income/total revenue
We can observe that the net margin of the company has increased from 13.67% to 21.89% from 2016 to 2017.  This indicates that the company has achieved a significant cost efficiency which has led to increases in the net margin of the company.
Solvency ratios
Solvency ratios are used to measure the long-term sustainability of the organization. As we know that there is a risk of financial distress associated with every organization, therefore, it is generally considered that if there is a very high debt associated with the organization then there are higher chances of that organization becoming insolvent.
Solvency ratios measure the unsystematic risk associated with the company which is the list which is specifically associated with the company's business.
The first solvency ratio witches used to measure the solvency of the company is the debt to equity ratio, the debt to equity ratio measures the proportion of debt and equity in the capital structure of the organization and it is generally considered that higher debt to equity ratio implies that hi list of financial distress is associated with the company.
Debt to equity ratio = total debt in the capital structure/total equity in the capital structure
The debt to equity ratio of the Rio Tinto has reduced from 23.88% in 2016 to 10.23% in 2017 since the amount of debt in the capital structure of Rio Tinto has decreased this implies that the unsystematic risk associated with the Rio Tinto has also decreased.
The second solvency ratio which is used to measure the solvency of the company is EBIT/Interest, this ratio measures the ability of the firm to pay the interest payments on its outstanding debt.  Generally, as a Thumb Rule, it is considered that if EBIT/ Interest ratio is greater than free then it is considered that organization has enough solvency to sustain its operations.
Growth ratios
The growth ratio is used to measure the growth rate associated with the company, major growth rate ratios we have analyzed our revenue growth asset growth and the growth in capital expenditure which is incu
ed by the company.
In the case of Rio Tinto, we can observe that the revenue of the company has increased very significantly by 18.5% from 2017 to 2016. Similarly the asset of the Rio Tinto has grown by 7%.
The capital expenditure of the company has increased by a very huge amount of 48.8%
Inventory turnover ratios
Another parameter for the ratio analysis is the efficiency ratios efficiency ratios measures the operational efficiency of the organization.  The efficiency ratios of the organization are also known as the turnover ratios and are usually measured by two major ratios the first is inventory turnover ratio and the second one is receivables turnover ratio.
Which the receivables turnover ratio and inventory turnover ratio we can calculate the inventory days and receivable days. Froot, K. A., & Stein, J. C. (1998)
Inventory days gives us the number of days on an average when firm converts it inventory into the sellable product where is receivable turnover gives us the number of days usually required by the company in order to collect its credit sales. Froot, K. A., & Stein, J. C. (1998)
In the case of Rio Tinto, we can observe that inventory turnover days of the organization has increased to 84.7 from 79.05.  On the contrast, the receivable turnover ratio of the Rio Tinto has decreased from 35.08 to 29.61. This indicates that the Rio Tinto has reduced its receivable time this implies that the company is now receiving the money within a short span of time from its customers.
Ratio analysis table
     
     
    2016
    2017
    Liquidity ratios
     
     
     
    Cu
ent ratio
     
    1.60
    1.69
    Quick Ratio
     
    1.29
    1.38
     
     
     
     
    Solvency Ratios / Coverage
     
     
     
    Debt to...