Financial Management for Decision Makers - Assignment Example

Financial Analysis Instructor’s Name: Course Code: Student’s name: Institution’s Name Submission Date Introduction Financial analysis of M2 Telecommunication Company involves the valuation of its shares using returns on their investment and the rate of return which is determined by all the investors. In this analysis the market earnings of shares is compared with the company returns so that the company can know its future potential (Atrill, 2012). It is also important to determine financial crisis which caused the change in the capital structure to ensure that the management can formulate a strategy to mitigate the problem. General background of the Firm This company started in 1999 and is involve in telecommunication business operations. This company has been there but it used to be part of M2 telecommunication pty LTD. It forced this company to restructure itself in 2000 and there was a resolution that the two companies be merged so that there can do business together under one management and ownership. M2 was at the beginning involved in the distribution of different digital messages globally for small business organizations (Baines and Langfield, 2003). It had a name message mate which it used to acquire international authority to do business. This company was managed and controlled by Vaughan Bowen and the director ensures that the company built an international distribution channel. The management team also helps the company to obtain registration certificate from a leading telecommunication industry. The company has a significant growth and ensure that all its products are sold in most countries in Australia (Dyson, 2007). In 2001, there has been reduction in profitability because there was no consistent flow of income that resulted from fluctuation of products sales (Mick and John, 2003). Once this company created domestic sales channel that contains telephone facilities and other similar service providers, the company realized that larger part of this channel was disillusioned with absence of marketing creativity support from large telecommunication companies. The company managed to get a fixed line voice business in 2001which it received from Select Tel LTD. The contract which this company entered with Select-Tel Limited enables it to have a billing intellectual property, a modest customer base, wholesale carrier contracts and a small number of experienced personnel. Currently this company provides telecommunication services to different states and it is seen to grow in profitability (Baines and Langfield, 2003). It is also able to employ more than 50 personnel and not less than 45 sales agents across the globe. This company has been able to get high profit margin where it is recognized to experience perpetual revenues and earnings growth. It received an increase on revenues of 50% in 2014 and earning before tax and interest increased by 48%. There was also an increase in net profit after tax by 53% which attributed to an increase in earning per share by 36%. Capital Structure of the Firm Capital structure is a proportion of debt and equity which the company has used to finance its long and short term business obligations (Baines and Langfield, 2003). This structure is in relation to debt to equity ratio which it used to finance its projects. This information about capital structure generates an insight on how the risky the business organization could be. The largest funds raised by this company over the last 5 years This company raised equity capital than debt capital within the last five years. This source of capital was used by this company because it provides a permanent source of finance which does not require the company to pay when the company is bankrupt (Atrill and McLaney, 2013). Total equity which is used in 2014 and 2013 are 332,686 and 2 9718 9 respectively. The equity which is used by this company is composed of retainer earnings and contributing equity. The purpose of funds This company raised equity capital to finance its expansion projects and to strengthen some of the telecommunication services which has been performing poorly (Mick and John, 2003). It is also used to increase the number of services which the company offer to small communication companies (Watson and Head, 2012). This source of finance is very important since it provide permanent source of capital which has no payback period and also provide sufficient source of finance for the company growth. The initial announcement date of this issue The initial announcement date of the issue of the shares of this company was 03/12/2010 and at this time the price of ordinary shares was issued at $0.70 per share and was to expire on May 2012. The return earned by your company Return is the earnings that the company get annually. The returns of this company can be in the form of dividend per share or earnings per share. 2014 (million) 2013 (million) 2012 (million) 2011 (million) 2010 (million) Revenues $1,024.4 $681.0 $393.5 $426.8 $406.11 EBITDA $160.1 $108.1 $60.1 $48.3 $31.41 NPAT $67.1 $43.8 $33.0 $27.6 $16.6 NPAT Growth 53% 33% 20% 72% 119% Share price $5.78 $6.02 $3.36 $3.28 $1.69 EPS 37. 4 c en t s 2 7. 4 c e n t s 25.9 cents 22.6 cents 14.57 cents EPS Growth 36% 6% 15% 56% 66% Final dividend 14.5 cents 10 cents 9 cents 9 cents 5 cents The market return for the corresponding period The value of market returns can be determined by the use of CAMP or dividend discount approach (Atrill and McLaney, 2013). This is used when the current share price is known, the dividend payment is also there and estimated growth rate. In its determination the formula below is used. k=(D/S)+g Where k = required rate of return D = dividend payment (expected to be paid next year) S = current stock value (if using the cost of newly issued common stock you will need to minus the flotation costs) g = growth rate of the dividend Growth rate = 37. 4/14.57 = 2.57⅟3, = 5.9% Current stock Value = $3.14 Dividend expected to be paid next year = 15 Required rate of return = 12% Market return = (15/$3.14) + 5.9% = 10.68% Compare (iv) and (v) and comment on how the market perceived this issue The market perceives the shares of this company to be of high value (Atrill, 2012). This is because the company is able to produce high investment returns that can satisfy the investor’s goal of profit and wealth maximization. This led to the increase of the number of investors who are willing to buy the shares of the company (Dyson, 2007). In comparison of the market returns and actual returns it is important to note that the value of the company returns is higher than that of the market and this is a strong sign that the company has high potential of generating high investment returns to the investors. The recent financial crisis that affect the capital structure of your company The recent financial crises which affect this company are change in interest rates, inflation and reduction in the value of money. These crises make this company to lose the value of its share capital annually (Atrill and McLaney, 2013). This causes fluctuation in the company earnings and the capital structure leading to reduction to debt to equity ratio. Valuations Valuation is the process of determining the net present value of a share. It is determined by the use of several methods namely super normal profit method when the company has a super normal growth rate. The value of share for the last three years Year Expected Dividend PVIF 12% PV 2014 14.5(1+36%) = 19.72 0.8989 17.73 2013 10(1+6%) =10.6 0.7972 8.45 2012 9(1+15%) =10.35 0.7118 7.37 The value of shares 33.55 Assumptions The dividend payable must be known by the investor and must be constant overtime and the investor can determine the required rate of return in certainty so that it can be accepted by all the investors (Dyson, 2007). It is also assumed that all the investors have the same rate of return and there are no transaction costs. Comparison these valuation results with the actual currently given by market prices The market returns is less than the company returns. This indicates that the company is more profitable than expected by the stakeholders (Atrill, 2012). The company result has higher growth rate than the market growth rate. This results from good management practices which the executives employ in the company. The current market result has a constant growth rate but the valuation result has a constant growth rate in the initial year and then grows in perpetuity (Dyson, 2007). This makes the valuated shares to have higher value than the market price value. Conclusion The company investment must be done after a proper investment evaluation to assess its ability to perform well in the industry. The assessment is done using ratio analysis, project appraisal techniques and cash flow budgets to ensure that the company manages its cash effectively. This makes the company to have good liquidity, profitability and efficiency position References Atrill P. 2012. Financial Management for Decision Makers. 6th Edition, Harlow: Pearson Financial Times/Prentice Hall. ISBN: 9780273756934 Atrill, P. and McLaney, E. 2013. Accounting and finance for non-specialists. 8th ed. Harlow: Financial Times/Prentice Hall. ISBN: 9780273778035 Baines, A and Langfield-Smith, K. 2003. Antecedents to Management Accounting Change: A Structural Equation Approach, in: Accounting,Organizations and Society, Volume 28, pp. 675-698 Dyson J R. 2007. Accounting for Non-Accounting Students. Financial Times/Prentice Hall. ISBN: 9780273709220 Mick, B. and John, C. 2003. Managing Financial Resources .A Butterworth-Heinemann; 2003, 3rd edition ISBN: 0750657553 Watson, D. and Head, A. 2012. Corporate Finance Principles and Practice. 6th edition, Harlow: Pearson ISBN: 9780273762874 Read More