You are required to present a consultant’s report containing your responses to the questions listed...

Question

You are required to present a consultant’s report containing your responses to the questions listed below in reference to the same Australian listed public company you have chosen in Part A of Assessment 2, focusing on the company’s financial strategies that create shareholder value. Use the general purpose financial statements in the annual report you submitted in PART A for your analysis. It is necessary you carry out additional secondary research to collect data (or proxy data) from different sources to help you answer the questions.
The purpose of these questions is to require you to demonstrate your ability to conduct research into real companies, their operations and events affecting those companies. You should demonstrate your ability to interpret data, summarise your findings and to communicate your views in a report. The emphasis is on explaining the financial management of the company, as revealed in the accounting reports, and also to place those reports within the wider economic context.

Debt Valuation (20%)

What are the short-term and long-term debts used by your firm?
Is your company’s debt structure consistent with the industry?

How does the industry your company operates in influence the proportion of short-term to long-term debts of your company?
What is your company’s the cost of debt?

Share Valuation (30%)

What is your company’s cost of equity?

Evaluate and discuss your company’s revenue, earnings, EPS, dividends and growth expectations. Use the most recent reported earnings results from the annual report you submitted in PART A for your analysis.

Value your company’s stock using comparables approach (ie. P/E) and constant dividend growth rate model. What are the factors that influence your company’s stock price and how are they captured in these models?

Which of the values in question 3 appear most reasonable compared to the market price of your company’s stock?

What additional data and information would you prefer for valuing your company’s stocks? Explain your reason(s).

Cost of Capital (30%)

Calculate the weighted average cost of capital (WACC) of your company?
Explain the company’s tax rate in the calculation of WACC?
Why is there a difference in the cost of debt and the cost of equity?

Should current liabilities be included in the cost of capital calculation? What are the pros and cons?

What is the major value of the WACC calculation for your company and how is it applied in investment decision-making?

Provide examples of how your company might have recently used WACC in its investment decision-making with reference to two projects recently undertaken by your company. You may need to synthesize information from your readings (ie. Annual reports, GPFS etc.) to identify the projects.

Define and explain capital structure of your company. Discuss whether it is consistent with the industry and why or why not.

What is the optimal capital structure and what economic circumstances will likely cause a change in it?

(IV) Market Analysis (20%)

Comment on your chosen company’s financial performance relative to its industry. You will have to investigate your company’s industry using sources such as Bureau of Statistics, industry journals/publications, analysis in financial press, IBISWorld etc.

Conduct a literature search on your company. Summarise and explain how your company is being viewed by financial analysts and others in the press (or has been viewed over recent years, as appropriate to your company). Do you agree with the comments? Why/why not? Explain.

Comment on any other item that is important or different about your company (that is relevant to the topics in this course).

Resources:
The data sources for your companies include historic published information, contemporary market data and prospective data as follows (but not limited to):
Financial newspapers
Company websites
Company annual reports and prospectus
www.afr.com.au
www.asx.com.au
www.bloomberg.com.au
http://www.google.com/finance
https://au.finance.yahoo.com/

Additional Guidelines for Assignments
Assignments should be seen as learning exercises and not just as pieces of work for assessment purposes, and should follow the following guidelines:

All assignments must be of a professional and ‘post-graduate’ standard, ie, they should provide a critical analysis, incorporate theory and any relevant research evidence and they should provide up-to-date information.

It is expected that all students will make good use of the spelling and grammar checking facilities provided by the word processing software.

Whilst the form of this assignment is a consultant’s report, you are expected to use the appropriate concepts and models covered in the unit adapted to your particular context;

All sources of information should be acknowledged within your assignment using the Harvard or author-date referencing system or Academy of Management referencing;

The report should be well structured containing the title page, contents page, executive summary, above headings and supporting calculations (in t

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David · Accepted Answer

Executive Summary 
Ramsay Healthcare Ltd is one of the prestigious healthcare systems based in Australia. Currently 
it has 220 hospitals across Australia, France, United Kingdom, Indonesia and Malaysia. The 
annual reports of company during past five years show the consistence performance and strongly 
project to perform better in future. Current as well as fixed assets have been continuously 
growing. The growth rate of total assets is 1.08% in 2016. In the same fashion, the current and 
long term liabilities have been increasing from 2011 to 2016. The total liability to total assets is 
71.9% while debt to equity is around 26% in 2016. Thus, low financial leverage provides a great 
flexibility to raise the fund and it would protect against any risk of insolvency. The WACC of 
company is 11.21% that is in line of the Industry’s average. The stock valuation under PE 
approach shows the stock is overvalued. Company’s performance is ahead of Industry and its 
‘growth rate of revenue and net income, both surpass the Industry’s average. Analyst’s 
prediction is quite favorable and company’s’ recent expansion and merger plan further stimulate 
the growth. From investors’ point of view, company seems promising in fetching good returns 
over long term investment.
Analysis and Interpretation
The short-term debts used by the company are interest bearing loan and other borrowings. While 
the long term debts used by the company are Non-convertible debenture and Lease obligations. 
The value of short term debt is 86 AUD million while the value of long term debt is 3,327 AUD 
million. The company’s debt structure is consistent with the industry. 
Industry influences the debt structure of the company in which it operates. If industry is highly 
levered, the company’s long term debt would be high while if the industry has potential of 
growth and expansion; the companies operating under it would raise its short term debt to 
finance short requirements and would keep align itself with the industry’s growth. Short term 
debt also helps to garner the opportunity of capturing the large market segment and Industry’s 
growth potential.
Company’s cost of debt and Equity 
The cost of debt and equity of Ramsay healthcare are 2.98% and 13.35% respectively. 
Evaluation of company’s revenue, earnings, EPS, dividends and growth expectations 
At the end of 2016, the revenue is reported at 8,686 AUD million. Revenue has continuously 
been rising over past five years. In year 2015, it is 7,357 AUD million while in 2014 and 2013, it 
is 4,915 AUD million and 4,137 AUD million respectively. 
Earnings are 450 AUD million in 2016. In past, earnings are 386 AUD million, 304 AUD 
million and 266 AUD million in 2015, 2014 and 2013 respectively. Thus, earnings are also rising 
with increase in revenue. 
EPS stands at 2.16 in 2016. Previously it is at 1.84, 1.43 and 1.24 in 2015, 2014 and 2013 
respectively. Thus, it EPS is fine tuned with earnings. 
In 2016, Ramsay pays the dividend of 119 cents per share. In preceding years, it is 101 cents, 85 
cents and 70 cents in 2015, 2014 and 2013. Thus, we observe a continuous rising in dividends 
over past five years. 
In nutshell, we can say that company has significantly improved its earnings potential over past 
five years and the momentum is promised to maintain at the same pace of growth in coming 
future.  
Valuation of company’s stock using comparables approach (ie. P/E) and constant dividend 
growth rate model. 
Under the PE approach, the market price of equity comes to 58 AUD while under Constant 
dividend growth model; the market price of equity comes to 27.88 AUD. 
The P/E approach of equity valuation seems more reasonable as the calculated price is more 
close to actual market price. 
However, there are several methods to calculate the share price of any company and all the 
methods have their own limitations. Overweighing of one method over other is not justifiable. 
Dividend growth model is assumed to be more reliable one as it discounts the all future cash 
flow (in the form of dividend) to calculate the intrinsic share price. Therefore, for more accurate 
result we need the estimated cash flow in the form of dividends and expected stock price at the 
certain period. However, it is difficult to estimate but we can find them by incorporating certain 
assumptions. 
Average cost of Capital (WACC) 
The WACC of any company shows its overall cost of capital that a company is presently bearing 
through the composition of debt, equity and other sources of capital for running of the business. 
To calculate the WACC, the cost of individual capital is weighted by its proportion according to 
its market value and then sums it.  
To find the WACC of Apple, two major capital’s component are needed - equity and debt.  
The WACC is found by using the formula -  
WACC = (E/E+D) rE + D/(E+D) rD (1-TC) 
Where,  E = Market value of equity 
  D = Market value of debt 
  rE = Cost of equity and 
  rD = Cost of debt 
  TC = Tax rate 
Now, the market value of equity and debt can be found from the latest balance sheet of the 
company while the cost of equity and debt would be calculated through certain calculations. 
The WACC comes to 11.21%
Important of tax rate in calculation of WACC 
Tax rate has a major implication in the calculation of WACC.

You are required to present a consultant’s report containing your responses to the questions listed below in reference to the same Australian listed public company you have chosen in Part A of...

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