Understanding financial side of the business will make you more effective on the job

Background: Financial literacy helps you to become a better manager. Understanding the financial side of the business will make you more effective on the job and will make your work life more meaningful. The two core activities of financial management are to manage profitability and manage liquidity in an ethical manner. If either of these two activities is neglected, it can lead to the demise of an organisation. Hence, these two aspects guide the decision making for any manager. Issuing bonds (debt) and/or issuing stocks (shares), enables the corporation to manage the money it needs to finance long-term assets of the business. Therefore, being able to value these financial securities is also an important skill to have. Assignment question: Your assignment calls for you to calculate certain financial ratios and to compare these ratios with the competitor’s ratios or industry average ratios to evaluate the firm’s profitability and liquidity performance. Second part of the assignment requires you to value the bonds that chosen company and the competitor company are planning to issue. Suppose you have been hired by a large financial institution as a financial analyst. One of your first job assignments is to prepare a report and present the analysis of the financial condition of a company. Choose a non-financial company that you would like to analyse, and obtain its financial statements. Now, select another company (preferably a competitor) from the same industry, and obtain its financial statements too. Students can obtain latest financial statements for two years (2015 & 2016) from IBISWorld database (available via the library link in the student portal) or from the internet (http://www.finance.yahoo.com). If you are interested in analysing the company you work for, use this opportunity to complete the exercise. Otherwise, feel free to choose any other company that interests you. However, note that the company you select must have latest two years financial statements available and should be a non-financial company. Required: A. Your task is to analyse the last two years performance of the selected company and present your findings in the form of a report, which will introduce the company to start with and cover financial performance analysis in a logical cohesive format. Your report should include the following analysis using ratios: Comment on the liquidity of the company using Current Ratio and Quick Ratio. What can they say about the liquidity of the company? Calculate the firm’s net profit margin, Return on Assets (ROA) and Return on Equity (ROE) and comment on the profitability. Which components of your company’s ROE are superior, and which are inferior (use DuPont analysis)? In addition, you are told that your selected company has requested a loan. On the basis of the Capital Structure ratios for the chosen company along with the industry averages and company’s recent financial statements, evaluate and recommend appropriate action on the loan request. Comment on any long term and short-term sources of finance that your example company has used in last two years. Was there any change? Calculate, analyse and interpret the ratios and the other data with reference to the theoretical concepts introduced in this subject to evaluate the company’s operations and performance. How well does your selected company compare to its industry peer? Your analysis should highlight the important changes within these ratios over this period and identify the reasons if any for significant changes. Discuss limitations of this analysis. B. Suppose the chosen company and its competitor decided to expand their operations by issuing bonds. You are required to value bonds issued by two companies selected in part A) above. Both bonds mature in five years and both have a face value of $100 and both pay a coupon rate of 8%. Assume your selected company’s bond (rated as A+ by rating agencies) pays annual coupons while its competitor (rated as B+ by rating agencies) pays semi-annual coupons. The yield to maturity (required return) on Australian corporate bonds of different ratings and different maturity periods provided in the following table: Should these two bonds sell at identical prices or would one be worth more than the other? What prices do you obtain for these bonds? Explain the difference in the value of the bonds. What are the three main international bond-rating agencies? Why might companies try to maintain a given target rating on their outstanding debt? Place the ratio calculations in an appropriate appendix so that the body of the report only states the result of the calculation and not the process of calculating it. Please remember to submit a copy of the Annual Reports with your assignment and include a hyperlink to the annual reports within the reference list in your assignment. Important Assignment Instructions The required word length for this assignment is 2500 words (plus or minus 10%). Your assignment will be marked according to the criteria outlined in the assessment grading criteria (see Appendix 1 in your subject outline). In terms of structure, presentation and style you are normally required to use: - AIB standard report format; and - AIB preferred Microsoft Word settings; and - Author-date style referencing (which includes in-text citations plus a reference list). These requirements are detailed in the AIB Style Guide. Reference lists for AIB assignments / projects normally contain the following number of relevant references from different sources: 6-12 (for MBA assignments). All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.