Problem Solving in Webster Limited - Case Study Example

Running header: accounting Student’s name: Instructor’s name: Subject code: Date of submission: Webster Limited 1. The company’s main business Webster limited is mainly involved in the production of diversified foods as well as agree business and is widely known for its production of high quality food products. The food products are produced by its two operating divisions which include i) Field Fresh Tasmania which is known for its production of high quality red and brown onions ii) Walnuts Australia which is the country’s largest grower of walnut. 2 a) The chairman of Webster Limited is Mr. Rod Roberts. His education background includes BEc, MBA and is also a fellow of the Australian Institute of Company Directors (FAICD). He has held similar positions in the company from 1996-2001, 2001-2007 and 2008 to date. Other previous roles held by the chairman include Head of corporate finance at Bain&co, Director at county NatWest Australia limited, Tassal group limited director, Deputy Chancellor at University of Tasmania and is the elected national director at Australia institute of company directors and president of its Tasmania branch. b) Thee chief executive officer of Webster Company limited is Leigh Titmus. He is experienced in forest and agriculture industry for over forty years and has helped the company establish more than 2200 hectares of walnut orchards. c) Webster limited has 134,127,365 shares 3. a) Market capitalization = number of shares × market price = 134,127,365× $1.24 =$166,317,933 b) PE Multiple = market price per share /earnings per share = 1.24/0.0562 =22.06 times c) Dividend yield= Annual dividends per share/Price per share = 0.025/1.24 = 0.02 d) Enterprise value –EV = Market capitalization+ debt+ minority interest +preference shares- cash and cash equivalents =$166,317,933+19,527,000-15,269,000 =$170,575,933 e) EV/EBIT ratio = $170,575,933/ (9,922,000+253,000) =16.76 f) EV/EBITDA =$170,575,933/ (9,922,000+253,000 +3,079,000) =12.87 g) P/NTA =1.24/ (102,971,000-4,578,000)/ 134,127,365 =1.69 4a) Days inventory =365×Avg inventory/cost of goods sold 2013 = 365× (12,034,000+8,030,000)/2/ (26,453,000) = 138.42 days 2012 =365× (8,030,000+4,033,000)/2/ (21,418,000) =102.79 days 2011 =365× (4,033,000+3,675,000)/2/(19,685,000) =71.46 days Below is a graphical representation of the company’s Days in inventory for three years from 2011 to 2013. As shown in the graph, the company’s days in inventory have been on an upward trend since 2011. This trend may not be desirable hence the need for the company to come up with strategies to revert the trend. Inventory need to be freed in a bid to generate revenue. This is especially so because the company deals with perishable products which may go bad if held for too long. b) Days accounts receivable = 365× average accounts receivables/credit sales 2013 =365× (14,378,000+23,763,000)/2/52,867,000 =131.67 days 2012 =365× (23,763,000+21,164,000)/2/44,751,000 =183.21 days 2011 =365(21,164,000+10,245,000)/2/47,131,000 =121.62 days The graph below compares the company’s day’s accounts receivables over three years period from 2011-2013 The company had less day’s accounts receivable in 2013 compared to 2012. This is an improvement. However, this could be improved further as seen in 2011. Accouts receivables need to be corrected on time so as to provide the much needed cash for meeting the company’s financial obligations. c) Days accounts payable=accounts payable/(cost of sales/360) 2013 = (9,929,000+9,696,000)/2/(26,453,000)*365 = 135.39 days 2012 = (9,696,000+11,712,000)/2/(21,418,000)*365 =182.41 days 2011 = (11,712,000+7,234,000)/2/ (19,685,000)*365 =175.65 days The graph below compares the company’s day’s accounts payable over three years period from 2011-2013 The company had the least days accounts payable in2013. This is a desirable trend since it reduces the pressure on the company to meet its short-term financial obligation hence reducing associated risks. d) Operating cycle = days sales of inventory+ days sales outstanding 2013 =138.42+131.67 =270.09 days 2012 =102.79+183.21 =286 days 2011 =71.46+121.62 =193.08 days The graph below compares the company’s operating cycle over three years period from 2011-2013 The company has such a long operating cycle in 2013 and 2012. This needs to be improved on as can be seen in 2011. A smaller operating cycle means that the company holds fewer inventories and that accounts receivables are collected on time. This means the company will be able to use these resources in generation of revenues and hence profits which is healthy for the company. d) Cash cycle = Operating cycle-Days payables outstanding 2013 = 270.09-135.39 =134.7 days 2012 =286-182.41 =103.59 days 2011 =193.08-175.65 =17.43 days The graph below compares the company’s cash cycle over three years period from 2011-2013 The company’s cash cycle is longest in 2013 and shortest in 2011. This shows the need for improvement of the company’s operations so as to bring the cash cycle to an optimum level (Johansen, 2011). This way, the company will be able to generate maximum revenues while being able to meet its financial obligations on time and hence eliminating the associated risks. 5. Weighted average cost of capital WACC = 10 YEAR GOVERNMENT BOND RATE IS THE RISK FREE RATE MARKET RISK PREMIUM /R FREE =6% BETA =1.1 PRETAX COST OF DEBT =7.0% Capital composition = equity + debt Equity =$102,971,000 Debt =$5,049,000 Market value of equity = 134,127,365 shares×$ 1.24 =$166,317,933 Book value of debt = $5,049,000 Total value of debt and equity =$171366933 Weight of Equity =$166,317,933/$171366933 = 97.05% Weight of debt = $5,049,000/$171366933 =2.95% Cost of equity = Risk free rate + beta* market risk premium =4+ (1.1*6) =10.6% After tax cost of debt = 7(1-30%) = 4.9% WACC = (10.6%×97.05%) + (4.9%*2.95%) = 10.28% +0.14% = 10.42% 6. The Gordon Dividend Growth Model. The required rate of return for the company’s stock = Risk free rate+ beta (Market ate risk –Risk free rate) Required rate of return = 4% +1.1(6%-4%) = 4% +2.2% =6.2% Constant growth rate = (Current price*required rate)-current annual dividends Current price + current annual dividend = (1.24*6.2%) - 0.025 1.24+0.025 = 4.1% Value of stock = D1/ (k-g) Where: D1 = next year’s expected annual dividend per share K =required rate of return g = expected dividend growth rate D1 = 0.025(1+0.04) = 0.026/ 2.6 cents Value of stock = 0.026 / (6.2%-4.1%) = $1.238/Share The value of the share is $1.238 which is very close to the market share price of 1.24 although it is slightly lower. However, investing in the share would men that I will lose slightly on the value of my investments. As such, I would not invest in the share based on its current value. However, I would change my decision not to invest if the company is to undertake activities that will significantly raise its share value. 7. The total amount of dividend that I will receive when the company pays its interim dividend in April 2014 is = number of share* dividend declared =10,000× 1.5 cents = 150 dollars b) The ex-dividend date was 31st March 2014. c) The date of record was 14th March 2014. d) The dividend was paid on 28th March 2014. e) I received 60 franking credits. f) The company has a dividend reinvestment plan in operation. References: Johansen, B2011, Introduction to business finance, London, Rutledge. Read More