Share Price Performance of the Companies - Assignment Example

Running header: Case studies Student’s name: Instructor’s name: Subject code: Date of submission Case study 1 1a) Domino Pizza closing adjusted price as at 30th June are as follows; 2015- $35.35, 2014- $20.83, 2013-$10.27, 2012-$8.86, 2011-$5.08, 2010-$4.15 The dividends paid by Domino Pizza are; 6/30/2015-$0.31 3/30/2015-0.31 12/30/2014-$0.25 9/30/2014-$0.25 6/30/2014-$0.25 3/28/2014-$0.25 12/30/2013-$0.2 9/30/2013-$0.2 6/28/2013-$0.2 3/29/2013-$0.2 3/16/2012-$3 RFG adjusted price as at 30th June are as follows; 2015- $5.22, 2014-$4.13, 2013-$3.36, 2012-$2.08, 2011-$1.73, 2010-$1.76 Dividends paid by RFG are as follows; 08/09/2010-$0.092857, 17/03/2011-$0.10, 07/09/2011-$0.107143 15/03/2012-$0.121429 07/09/2012-$0.12857 15/03/2013-$0.135714 09/09/2013-$0.146429 17/03/2014-$0.153571 11/09/2014-$0.160714 18/03/2015-$0.164286 Holding period returns HPR= Pt-1-Pt+ Income pt Domino Pizza June 30 2010-June 30 2011 HPR = ($5.08-$4.15+0)/$4.15 =22.41% June 30 2011- June 30 2012 HPR = ($8.86-$5.08+3)/$5.08 =133.46% June 30 2012-June 30 2013 HPR = ($10.27-$8.86 +$0.4)/$8.86= 20.43% June 30 2013 –June 30 2014 HPR = ($20.83-$10.27 +0.9)/$10.27 =111.59% June 30 2014-June 30 2015 HPR = ($35.35-$20.83 +1.12)/$20.83 =75.08% RFG.AU June 30 2010-June 30-2011 HPR= ($1.73-$1.76+0.192857)/$1.76= 9.25% June 30 2011- June 30 2012 HPR= ($2.08-$1.73+0.228572)/$1.73 =33.44% June 30 2012- June 30 2013 HPR = ($3.36-$2.08+0.264284)/$2.08 =74.24% June 30 2013- June 30 2014 HPR = ($4.13- $3.36+ 0.3)/$3.36 =31.85% June 30 2014- June 30 2015 HPR = ($5.22-$4.13+0.325)/$4.13 =34.26% Expected returns Date Domino pizza Retail Food Group Limited June 30 2010-June 30-2011 HPR 22.41% 9.25% June 30 2011- June 30 2012 HPR 133.46% 33.44% June 30 2012- June 30 2013 HPR 20.43% 74.24% June 30 2013- June 30 2014 HPR 111.59% 31.85% June 30 2014- June 30 2015 HPR 75.08% 33.26% Expected return 72.59% 36.41% Estimating risk Date Domino pizza (Rt – E(R))2 Retail Food Group Limited (Rt – E(R))2 June 30 2010-June 30-2011 HPR 22.41% (22.41-72.59)2 9.25% (9.25-36.41)2 June 30 2011- June 30 2012 HPR 133.46% (133.46-72.59)2 33.44% (33.44-36.41)2 June 30 2012- June 30 2013 HPR 20.43% (20.43-72.59)2 74.24% (74.24-36.41)2 June 30 2013- June 30 2014 HPR 111.59% (111.59-72.59)2 31.85% (31.85-36.41)2 June 30 2014- June 30 2015 HPR 75.08% (75.08-72.59)2 33.26% (33.26-36.41)2 Expected return 72.59% 26.18% 36.41% 5.52% =0.25180324+0.37051569+0.27206656+0.1521+0.00062001 =1.0471055/4= 0.2618 =0.07376656+0.00088209+.14311089+0.00207936+0.00099225= 0.05520 Thus, the expected risk for Domino pizza is 26.18% while that of RFG is 5.52% Return to the shareholders Total return to the shareholders over the five years period is given by the formula below; Domino ($35.35+ 5.42/$4.15)1/5-1 =57.93% RFG ($5.22+1.310713)/1.76)1/5-1 =29.98% Comparison of the share price performance of the two companies Both the companies have witnessed considerable growth in their share prices with Domino pizza’s share growing from $4.15 in June 2010 to $35.35 in June 2015. This is over 800% growth during the five years period. On the other hand, the RFG.AU share has grown from $1.76 in June 2010 to $5.22 in June 2015. This is around 290% growth over the five years period. Thus, it can be concluded that the Domino Pizza share had the largest growth during the five years period and owing to its continued good returns as calculated above, the share is expected to perform even better and improve by 73% which is far much better than the 36.41% share price growth expected of the RFG share. Case study 2. Contribution margin Contribution margin = (Revenue-variable costs)/Revenue Revenue = $3 Variable costs include: -8% royalty = .08*$3= $0.24 -5% marketing cost = 0.05*$3 =$0.15 -Direct materials = 0.38 Total variable costs = 0.77 Contribution margin = ($3-$0.77)/$3 = 74.33% Break-even point Break-even point in sales = Fixed cost/ (Price per unit- Variable cost per unit) Fixed cost includes: Weekly rental = $350* 36 = $12,600 NB// Since the business is expected to operate for 252 days during the year, we assume that the rentals will be paid for the 252 days or 36 weeks as opposed to a full year of 52 weeks or 365 days. Annual outgoings of $3,500 Wages: Shop assistant = $16*8*252 =$32,256, Baker $17*8*252 =$34,272 NB//It is assumed that the wages are fixed expenses since they are paid irrespective of the number of cakes made or sold. Total wages = $66,528 Superannuation = 9.5% of wages = $66,528 *9.5% =$6,320.16 Total fixed costs = $6,320.16+ 66,528 +3,500+ 12,600 =$88,948.16 BE P= FC/ (P-V) = $88,948.16/ ($3-0.77) = 39,887.067 = 39,887 Cakes Pretax profit Total revenue =p *total units sold Units sold = 144*252 =36,288 units Price per unit = $3 Total revenue = $36,288*3 = $108,864 Total expenses = fixed cost + Variable cost Variable cost = 0.77*36,288 units = 27,941.76 Total cost = $27,941.76 +88,948.16 = $116,889.92 Profit/loss= revenue –cost =$108,864-$116,889.92 = ($8025.92) She would make a $8,025.92 loss Pretax profit/Loss on making changes If the price is increased to $3.70, sales will be $3.70*134*252 = $124,941.60 NB// Variable expenses = (0.08 *3.70) + (0.05 * 3.70) + 0.38 =0.296+0.185+0.38 = 0.861 But 134 cakes are produced per day, thus, new variable cost = $29,074.25 Total expenses = $29,074.25 +88,948.16 = 118,022.41 Profit /loss = total revenue –total expenses = $124,941.60- $118,022.41 =$ 6,919.19 She would make a $6,919.19 profit. Units to sell to make $10,000 profit On making the changes, the new fixed costs will be up by the cost of hiring the extra baker for the year. This will be; $17*252*8 = $34,272 The superannuation cost will increase by $34,272*0.095 = $3,255.84 Thus, new fixed costs = $116,889.92+ $34,272+ 3,255.84 = $154,417.76 New variable cost = $(2.70*.08+ $2.70*.05 +0.38) = 0.216+0.135+0.38 =0.731 Number of units to be produced to get the target profit is given by; No of units = (Total fixed expenses+ Target profit)/Contribution margin per unit The new contribution margin would be = (Revenue-variable costs)/ = ($2.70-0.731) = 1.969 No of units = ($154,417.76+10,000)/1.969 = 83,503 units Case study 3. Years to payback The annual total expenses will be unchanged. Thus, they will be; Variable costs = Materials = 0.38 Royalty = 0.08*$2.70 = 0.216 Commission = 0.05 *2.70= 0.135 0.731 *70,000 = $51,170 Fixed costs = $154,417.76 Total costs for year 1= $205,587.76 Total revenue = $2.70 *70,000= $189,000.00 Loss in year 1 $16,587.76 2nd year revenue = 2.70*80,000 = $216,000.00 Variable cost for 2nd year = 0.731*80,000= $ 54,840.00 Fixed costs for 2nd year $154,417.76 $212,897.76 Profit for 2nd year $3,102.24*(1-30%) = 2,171.568 3rd and subsequent years revenue =2.7*90,000 = $243,000.00 Variable cost =0.731*90,000 =$ 65,790.00 Fixed costs =$154,417.76 =$220207.76 Profit for 3rd and subsequent years = $22,792.24 *(1-30%) = 15,954.57 The initial capital outlay = $200,000 The discounted payback period Discounted cash inflow/outflow = Actual cash inflow/(1+i)n Year After tax Cash inflow/outflow Balance to payback (200,000) (200,000) 1 (16,587.76) -216,587.76 2 2,171.568 -214,416.2 3 15,954.57 NB// From year 3, the company expects to generate $15,954.57 per year. The payback period will be given by Outstanding amount/ annual cashflows = $214.416.2/15,954.57 =13 years and 6 months Net present value NPV = ∑ {Net Period Cash Flow/(1+R)^T} - Initial Investment Where R is the rate of return and T is the number of time periods. Year After tax cash inflow Discount factor PV NPV 0 (200,000) 1 (200,000) (200,000) 1 16,587.76 0.862069 (14,299.79) (214,299.79) 2 2,171.568 0.743163 1,613.829 (212,685.96) 3 15,954.57 0.640658 10,221.42 (202,464.54) Terminal cashflow 150,000 0.640658 128,131.50 (74,333.04) The net present value if the business is sold on the third year at $150,000 will be -$74,333.04 Profitability index Profitability index = present value of future cash flows / initial investment The present value at the end of the three years when the machine is sold at $150,000 is as calculated as follows; Year 1 -$14,299.79 Year 2 $1,613.829 Year 3 $10,221.42 Terminal $128,131.50 Total present value $125,666.96 Profitability index = $125,666.96/200,000 =0.63 Advice Based on the above NPV calculation, the business if sold at the end of the 3rd year at $150,000, the NPV will be -$74,333.04. The negative NPV means that the investment will have resulted in a loss. As such, I would not recommend to Jane that the investment is financially viable on the basis of NPV. Advice to Jane There are numerous risks associated with establishing a cupcake business. Such risks include the low cost of entry into the cup cake business. This Implies that anyone and everyone even with a little amount of capital is able to venture into the business. It should also be noted that making cupcakes is relatively simple for almost everyone. This leads to quick market saturation quickly rendering one out of the market. The fact that cakes are not patented exposes one to the risk of having their brand copied by others which may push one out of business. It is also not easy to offer the cakes at high prices implying that it is not easy to get a lot of revenue if the business is solely dealing with cupcakes especially bearing in mind the market saturation. People are also increasingly becoming aware of god health practices and owing to the high calorie levels in cupcakes, people are bound to avoid them. Based on the above challenges of running a cup cake shop, I would advise Jane to change her business plan to ensure market survival. She should try to introduce new varieties some of which will be sold at premium cakes. To deal with the issue of calories, she should come up with a variety that does not have a lot of calories to ensure that people readily accept her cakes. She should also try patenting her cake to ensure that they are not easily copied by others in a way fighting competition. Finally, Jane ought to consider combining the cupcake business with other products. In other words, she should not build her business solely on cupcakes if her business is to succeed. Case study 4. EPS a) Earnings per share 2011 2012 2013 2014 2015 Average growth rate Domino Pizza 31.3 37.2 41.5 54.6 74.2 Annual Growth 18.85% 11.56% 31.57% 35.90% 19.58% Retail Food Group 25.4 26.4 26.0 26.5 22.1 -2.45% Annual growth 3.94% -1.52% 1.92% -16.6% Net profit margin = Net profit/sales Domino pizza =$97,840/ $708,881*100% =13.80% Retail food group limited =48,384/120,768*100% =40.06% Asset turnover ratio =sales/total assets Domino pizza = $708,881/ (630,600+559,008)/2 =1.19 or 119% Retail food group limited = $120,768/(398,104+680,048)/2 =539076=0.224 or 22.4% Leverage ratio =Total debts/total assets Domino Pizza =$325,544/630,600= 0.516 or 51.6% Retail food group limited = $276,266/680,048 =40.62% Return on equity = Net income/Shareholders equity Domino pizza =64,048/305,056 =0.2099 or21% Retail food group limited = $34,219/403,782 =8.47% Quick ratio = (current assets- inventories)/Current liabilities Domino pizza = ($116,547-$12,282)/$131,131= 0.795 Retail food group limited = ($90,182-20,901)/$97,025 =0.714 Net debt to equity ratio = net debt/Equity Domino Pizza = $325,544/305,056=1.067 Retail food group limited = 276,266/403782 =0.684 Comparison of the two companies’ financial performance over the five years Domino Pizza experienced a rapid growth in its earnings per share from 31.3 cents in 2011 to 74.2 cents in 2015 which was a 19.58% average growth over the five years period. This is in contrast to RFG which experienced a decline in its earnings per share over the five years from 25.4 cents in 2011 to 22.1 cents in 2015 which was a -2.45% annual growth over the period. This contradicts the level of profit margins since while Domino Pizza had a profit margin of 13.8%, RFG had profit margin of 40.62% in 2014/15. Domino pizza had a 21% return on equity in 2014/15 in comparison to 8.47% for RFG. This just like for profit margin is associated by the higher amount of equity for RFG. While both the companies have relatively low quick ratios, Domino pizza seams to perform better at 0.795 compared to RFG’s 0.714.However, both the companies have relatively high liquidity risk. Owing to the relatively higher equity for RFG, the company’s debt to equity ratio is lower at 0.684 compared to Domino pizza at 1.067. However, Domino pizza’s overall performance is far much better than RFG on the basis of the above analysis. The difference in the total return to shareholders over the past 5 years As can be seen from the above analysis, Domino Pizza performed far much better than RFG financially. As such, the company was able to pay greater dividends than those that were paid by RFG. Owing to the good returns, Domino Pizza share experienced a lot of demand thus pushing its price up from $4.15 in 2010 to $35.35 in 2015. This is the reason behind its share having 57.93% returns over the five years period. On the other hand, owing to the reduced dividends paid by the RFG and relatively poor financial performance in comparison to Domino pizza, the company’s share experienced less price growth culminating in an overall growth that is almost half that of Domino Pizza over the five years period. Case study 5. Table 1 DMP RFG Date 12/01/2016 12/01/2016 Last Price (AUD) 56.00 $4.36 Shares Outstanding (M) 87m 427,197 Market Cap (B AUD) $4.9b $716.54m Earnings Per Share (AUD) (TTM) $0.74 0.221 Current P/E Ratio (TTM) 75.68 19.73 Dividend (AUD) (TTM) $0.518 0.325 Current Dividend Yield (%) 2% 7.14% Table 2 Definition/Explanation Last Price (AUD) This is the last price that the share was traded at during the last trading day or the most up to date valuation of a security until trading commences again on the net trading day. Shares Outstanding (M) Outstanding shares are the shares that are currently owned by the company’s stockholders, the company officials as well as investors but excluding the shares repurchased by the company. Market Cap (B AUD) This is the total or aggregate value of the company based on the company’s current share prices as well as its total number of outstanding stocks. Earnings Per Share (AUD) (TTM) This is the company’s profit dividend by the company’s total number of common outstanding shares. Current P/E Ratio (TTM) This is the ratio of the company’s share price to the company’s per share earnings Dividend (AUD) (TTM) This s the total money that is regularly paid by the company to its shareholders out of the company’s profits Current Dividend Yield (%) The ratio indicates how much the company pays in dividends annually in comparison to the company’s share price Comparison of the two stocks Domino pizza current price is $56 while Retail food group limited has a current price of $4.36. Domino Pizza has 87million outstanding shares while Retail food group limited has 427,197 outstanding shares. Domino pizza has a high market capitalization at $4.9 billion in comparison to $716.54 million for Retail Food Group Limited. Domino Pizza has $0.74 earnings per share compared to $0.221 for Retail Food Group Limited. This explains the higher price earnings ratio of 75.68 times for Domino Pizza compared to 19.73 for Retail Food Group Limited. However, it is worth noting that based on the share prices, the Retail Food Group Limited has a higher dividend yield at 7% compared to Domino Pizza which has 2%. However, it can be concluded that Domino Pizza is belter valued in comparison to Retail Food Group Limited. References: Nasdaq.com, 2016, NASDAQ, Retrieved on 12th January 2016, from; http://www.nasdaq.com/symbol/rfg/dividend-history Jared, B2011, Advanced financial accounting, London, Rutledge. Read More