1. Analysing the quality of earnings and sustainability of capital expenditure. Look up the statement of cash...
Question:
1. Analysing the quality of earnings and sustainability of capital expenditure. Look up the statement of cash flows for Woodside Petroleum Ltd (WPL.AX) and Origin Energy (ORG), two of Australia’s largest oil companies, using Yahoo!Finance! OR the Australian Stock Exchange website OR the websites of the companies themselves.
a) Compute the quality of earnings ratio for both firms and all three years of data provided
b) Compare the quality of earnings ratio for the two firms. For which firm do you feel most comfortable about the reported earnings? Explain.
c) Compute the capital acquisitions ratios for the latest three years for both firms.
d) Compare Woodside’s and Origin Energy’s abilities to use operating cash flow to finance their capital expenditure. Which firm has relied more on the capital markets.
2.
CQU Oil Limited is a an oil wholesale company that had:
• sales last year of $2.5 million;
• cost of goods sold of $700,000;
• paid interest of $200,000;
• cash operating expenses of $150,000;
• Depreciation expense amounting to $150,000
• a tax liability equal to 30% of the firm’s taxable income.
a. Construct an Income Statement with the above data.
b. Determine CQU Oil’s taxable income and tax payable for the year.
c. Determine the total amount of:
- fully franked dividends
- imputation credits that the company is able to declare from its past year’s results.
d. Analyse the data and outcome. What information can we derive from CQU Oil’s Income Statement?
3.
Mini-case: Obtain the most recent financial statements for Wesfarmers Ltd (WES) and Woolworths Ltd (WOW) by downloading their most recent annual reports from the following websites www.westfarmers.com.au and www.woolworthslimited.com.au or the ASX website www.asx.com.au. Obtain the current share prices for these companies from Yahoo! Finance! (Don’t forget to put ‘.AX’ after the stock codes shown above) OR the Australian Stock Exchange website OR the websites of the companies themselves. With this information, answer the following questions.
a. Compute the financial ratios for both firms for the most recent year.
b. Evaluate the relative performance of the two firms in the following areas:
- Liquidity
- Asset management efficiency
- Financing practices (capital structure)
- Profitability
c. What is each firm’s current price-earnings ratio and market-to-book ratio? What do these ratios tell you about how investors value these two firms’ future prospects?
4.
Mini-case: Emily Dao, 27, just received a promotion at work that increased her annual salary to $74,000. In addition to standard compulsory employer superannuation, she is eligible to participate in her employer’s retirement savings plan, to which the employer matches, dollar for dollar, worker’s compensation contribution of up to 5% of salary. However, Emily wants to buy a new $50,000 car in three years, and she wants to have enough money to make a $14,000 deposit on the car and finance the balance. Fortunately, she expects a sizeable bonus this year that she hopes will cover that deposit in three years. A wedding is also in her plans. Emily and her boyfriend, Paul, have set a wedding date two years in the future, after he finishes his medical degree. In addition, Emily and Paul want to buy a home of their own as soon as possible This might be possible because at age 30 Emily will be eligible to access $100,000 trust fund left to her as inheritance by her late grandfather. Her trust fund is invested in 7% government bonds.
a. Justify Emily’s participation in her employer’s retirement savings plan using the time-value-of-money concepts by explaining how much an investment of $20,000 will grow to in 40 years if it earns 10% annual interest.
b. Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the deposit on a new car, assuming she can earn 6% annual interest on her savings. What will happen if she could earn 10% annual interest on her savings?
c. What will be the value of Emily’s trust fund at age 60, assuming she takes possession of half of the money ($50,000 of the $100,000) at age 30 for a house deposit, and leaves the other half of the money untouched where it is currently invested?
d. What is the relationship between discounting and compounding?
e. List at least two actions that Emily and Paul could take to accumulate more for their retirement (think about i and n)?
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin