Corporate Finance Issues - Assignment Example

CORPORATE FINANCE: SANTOS CASE STUDY Author’s name Institutional affiliation CORPORATE FINANCE: SANTOS CASE STUDY This assignment consist of the analysis of Santos Company. It focuses on annual report, company perspective and its future plan. Some of questions include: a) working capital efficiency in Santos in 2013 and 2014 According to Sannikov, (2013) most analysts and investors look at the working capital to determine company efficiency; this is essential in knowing the financial health of the company. To effectively evaluate working capital of a company the three areas to focus on is debtors, creditors, and the stock levels. An efficient company has to balance money owned by the customers and the money invested in the inventory against the money owed by the suppliers of the inventory. Santos working capital efficiency has changed from the year 2013 to 2014, from the statement in source one the current ratio of the company increased to 1.06 in year 2014 from 0.86 in 2013. Current ratio assists in understanding the liquidity of the company, with increase, clearly indicate that Santos can easily meet its current obligations. This is evident in its asset statement, unless other failing companies who sell fixed assets to finance the current assets, Santos is buying more assets as compared to the year 2013. The company working ratio is 0.83 in 2014 from an increase of 0.74 in 2013; this is not only progress on efficiency but also the ability of the company to use its capital to make more income by buying stock. The favorable working capital ratio is 1 and with it less than one the company is assumed risky to invest in. With the use of the net operating cash flow decreased from 900 in 2013 to 600 billion in 2014, the reason according to the directors report Is payment of the currents debts of 2013 this was evidenced in the change of the inventory ratio from 0.98 to 1.06 in 2014. b) Santos use of the long term or short-term debt, direct or indirect debt financing, and currency Long Term debts are long-term liabilities that extend for more than the financial period that is 12 months. They include bonds, lease obligations, and contingency obligations. Current liabilities are financial obligations that are due within the financial year i.e. 12 months. Examples include short term bank loans and creditors. From the Santos financial statements the company mostly uses the Long-term debts. In 2014, the long-term debt to equity was 78.59 in which the composed of more than 200 million dollar finance lease commitments that were more than two years. A company can lend money either through direct lending that is getting money directly from the financial market or indirect lending in which company uses the third party. The company uses direct lending as from the statements there is no bank loan balance. In 2014 the company to have more capital it sold its shares hence a direct financing. Santos uses pounds in borrowing in; Banks have a great role for a company to overcome the informational problems in the financial market. Santos records a high creditworthiness and with the use of foreign currency bonds and Eurobonds that are issued offshore and taking advantage of the price differential in underwriting and the cost incurred on the bond the company has made a lot of profit. This however has stimulated the supply of corporate debt in Europe (Roberts, 2012). c) Yield to maturity I would sell it because according because in 2008 the Yields were 4% but when the price of the bond is low yield is high and increase of the bond to 5% percentage is an indication the price is reducing so increase in YTM would result to low decrease in bond price hence the same amount of interest is paid but for the less money which would be favorable to those buying and not those selling hence it advisable to sell and buy another bond. Capital budgeting 1. free cash flow (FCF) FCF is the money the company can generate after putting its money to maintain and expand the asset base aside. In the case, it involves the money the company will be left with after investing on the project. Santos with assumptions that they will increase for more than 20 years with a 2% increment and 3% cost reduction, The Company holds no barred strategic review according to the chairman statement on the restoration of the shareholders' value and maintaining of an 88 dollar million debt. This gives the company a weaker negotiation position as it will sell an average of 2.5 billion dollar assets which would bring down the gearing ratio to less than 30% by 2018. It can also sell the pipeline in Queensland in parts of 18.5 billion US dollars, but this move would be faced with problems by the fact the company is a joint venture. This financing will have an effect on the debt equity ratio hence when getting FCF a good consideration should be done on effect on business operations (Park, 2013). 2. NPV From the calculation in the excel file in the assumption the earnings of the company to be 16 billion, investment 14 billion and the borrowed amount as 15 billion, it would be viable to invest in the project as the NPV of projects is more than one which makes it viable. 3. Discounted payback period and IRR From the calculation, the IRR is more than one and more than the cost of capital. With the two breaks, even costs of the capital the project have a 24% which is also positive hence a good project 4. sensitivity analysis for Variable with biggest impact on NPV and disadvantages to analysis Sensitivity analysis is a process that is used to analyze how changes in key inputs have an effect the value of the project. In decision-making, NPV is affected by many variables that are determined as part of the project analysis, and after the values were varied at a time, it can be concluded that regardless all the variables affect the NPV growth in revenue affect the NPV most (Leeflang, 2012). References Sannikov, Y. (2013). Dynamic security design and corporate financing. Handbook of the Economics of Finance, 2, 71-122. Park, K., & Jang, S. S. (2013). Capital structure, free cash flow, diversification and firm performance: A holistic analysis. international Journal of hospitality Management, 33, 51-63. Leeflang, M. M., Deeks, J. J., Rutjes, A. W., Reitsma, J. B., & Bossuyt, P. M. (2012). Bivariate meta-analysis of predictive values of diagnostic tests can be an alternative to bivariate meta-analysis of sensitivity and specificity. Journal of clinical epidemiology, 65(10), 1088-1097. Roberts, M. R., & Whited, T. M. (2012). Endogeneity in empirical corporate finance. Read More