ACCT7101 - Financial Analysis and Business Decision Making - Financial Assignment

Internal Code:  MAS5335

Financial Assignment:

Scenario 1: Company A has submitted an application to the State Bank for a loan. The amount of the loan is equal to 30% of total shareholders’ equity at the end of the 2016 financial year. The purpose of the loan is to fund expansion of Company A’s operating capacity. The loan term sought is 10 years and the loan would be secured against company property. Assume you are a branch State Bank lending officer who assesses loan applications. The lending officer must make a recommendation to the head office lending manager advising whether the loan application from Company A should be accepted or rejected. Scenario 2:  Both Company A and Company B have offered Clime Capital Limited, a listed investment company (LIC), a private placement of ordinary shares. The amount of share offer is equal to 20% of total shareholders’ equity of each company at the end of the 2016 financial year. Clime Capital can afford either of the two private placements. The purpose of an increase in equity for each company is to raise funds to finance an expansion of operating capacity. Assume you are an investment manager at Clime Capital who evaluates private equity placements. Clime Capital has limited funds available for investing decisions. The manager must make a recommendation to the board of directors advising whether to accept Company A’s offer to sell to Clime Capital a new issue of ordinary shares and reject Company B’s offer, or accept Company B’s offer to sell to Clime Capital a new issue of ordinary shares and reject Company A’s offer or alternatively reject both offers. Questions: Company background research Review Company A’s and Company B’s annual reports, articles in the financial press and other sources of information. Write a short response to each item below to build background knowledge of each company and their industry. a) Describe the operating activities of each company noting similarities and differences between Company A and Company B. b) Identify two economy wide factors, two industry factors, and two specific factors that could impact on the financial performance and position of Company A and two specific factors that could impact on the financial performance and position of Company B. 2. Financial ratio analysis Calculate financial statement ratios for the 2016, 2015 and 2014 years for Company A and Company B. Use the Excel template provided on Blackboard under the Assessment tab to present the analysis in a table. Obtain data for the ratios from the financial statements and notes to the accounts. You may add to this template . See further instruction in the template. 3. Lending decision  Write a business memorandum to the State Bank head office loan manager from the branch bank lending officer in Scenario 1. The memorandum must address the following points below. a) Evaluate and discuss you assessment of the ability of Company A to repay the loan and interest. Make a recommendation to accept or reject the loan application from Company A and justify that recommendation. Use knowledge that you have acquired in your company research from Q1 and refer to relevant ratios calculated in Q2. b) Briefly discuss Company A’s net cash flows from operating, investing and financing activities and the trends evident over the last three years. Explain how this analysis is consistent with your accept or reject recommendation. c) Choose one ratio that relates information from the Statement of Cash Flows with the Balance Sheet or Income Statement. Discuss the conceptual interpretation of this ratio with reference to literature (accounting texts excluding Carlon et al. or journal articles). Describe trends in this ratio for Company A and how this information supports your recommendation to accept or reject the loan application. 4. Investment decision Write a business memorandum to Clime Capital Limited’s board of directors from the investment manager in Scenario 2. The memorandum must address the points below. a) Use the most relevant financial ratios to analyse and compare trends in profitability and risk of Company A and Company B for the 2016, 2015 and 2014 years. Discuss your assessment of relative profitability and risk of both companies. b) Recommend whether Clime Capital should invest in Company A or Company B or alternatively reject both offers. Justify the recommendation based on the evaluation of risk and profitability of each company and other relevant background information obtained from the annual reports and other sources. Use knowledge that you have acquired in your company research from Q1 and refer to the relevant ratios calculated in Q2. c) Explain with reference to literature (accounting texts other than Carlon et al. or journal articles) the meaning of the price earnings (PER) ratio and EPS. Describe three year trends in these ratios for Company A and discuss its relevance to the investment decision.