FINM4000

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School

South Eastern University of Sri Lanka *

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4341

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Finance

Date

Nov 24, 2024

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docx

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Subject code : FINM4000 Subject Name : Finance Assessment Title : Individual Assignment Student Name: Student ID:

Table of Contents 1 Company Perspective – Blackmores Group ....................................................................... 2 a Net working capital and asset management strategy ...................................................... 2 b Systematic and unsystematic risks .................................................................................. 2 c Share prices ..................................................................................................................... 3 d Market capitalization ....................................................................................................... 4 e Long-term financing ........................................................................................................ 4 f Bond calculations ............................................................................................................ 5 2 Capital budgeting – Blackmores Group .............................................................................. 7 a FCFs calculation .............................................................................................................. 7 b NPV ................................................................................................................................. 7 c Changed discount rate ..................................................................................................... 7 d Discounted Payback Period ............................................................................................. 7 e IRR .................................................................................................................................. 8 f Payback period analysis .................................................................................................. 8 3 References ........................................................................................................................... 9 1 | P a g e

1 Company Perspective – Blackmores Group a Net working capital and asset management strategy The net working capital for Blackmores in 2108 and 2019 can be calculated as follows. Net working capital ($ 000) = Current assets - Current liabilities 2019 = 305,526 - 150,509 = 155,017 2018 = 302,507 - 174,467 = 128,040 According to the above calculation, it provides that Blackmores is maintaining more current assets over the current liabilities. Therefore, the current assets management strategy of the company is the conservative approach which is a safety approach to maintain adequate working capital to ensure smooth operations minimizing the solvency risks. The pros and cons of this approach can be provided as follows. Pros Cons  Ensure less distractions and smooth operations  Less insolvency risk  Low returns associated with low risks  Huge investments in current assets might lead to increased interests and the carrying costs creating inefficiencies in managing assets. Source: [ CITATION Raj14 \l 1033 ] b Systematic and unsystematic risks Three major risks of Blackmores can be listed as follows. Risk Implication on the company Systematic or unsystematic Industry risk Associated with the quality and the claims on breaches by the suppliers or the competitors. This can have a negative impact on the credibility of the company. This is an unsystematic risk as the company can avoid it using better quality standards and proper governance. Financial and treasury risk Fluctuations in exchange rates, raw material prices, funding, interest rates etc. can result in financial losses creating negative impacts on the profits, cash flows and the financial position. This is a systematic risk as the company cannot avoid them through different strategies unless limiting them. Regulatory Government policies and regulations can This is a systematic risk as 2 | P a g e

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changes be changed restricting the sale of existing products within the key markets. the company cannot avoid them through different strategies unless limiting them. Source: [CITATION Bla19 \p 34 \l 1033 ] c Share prices The following key information were used for the share price calculation Dividend paid in 2019 = $2.20 Current share price = $88.16 Maturity period (in years) = 5 Dividend growth - year 1 = 30% Dividend growth - year 2 = 25% Dividend growth - year 3 onwards = 6% Australian treasury notes rate = 2.5% Market risk premium = 8% beta of Blackmores = 1.16 The discount rate (expected return) relevant for the share price calculation can be calculated as follows. Expected return = Risk free rate + β × (Market risk premium) = 2.5% + 1.2 × 8% = 11.78% The share price can be calculated as follows. Year 1 2 3 Dividend $ 2.86 $ 3.58 Discount rate 1.1178 1.2495 3 | P a g e

Terminal value $ 65.56 Discount rate 1.3967 2.56 2.86 46.94 Share price = 52.36 The share price of $ 52.36 is less than the current share price in the stock market which is $88.16. This provides that the company shares are overvalued within the market and if they are bought, it would not be possible to sell back and create a gain. This is because the actual value of the share is low than that of the market price. Accordingly, these shares should not be purchased. d Market capitalization The market capitalization is the product of the share price and the total outstanding shares as per the date under consideration. Accordingly, the share price as of 16 th January 2020 was obtained from yahoo finance [CITATION htt20 \l 1033 ] and the market capitalization as of that date is as follows. Total number of share outstanding as at 16 January 2020 = 17,362,000 Share price per share as at 16 January 2020 = $89.49 Market capitalization = $1,553,725,380 e Long-term financing Blackmores uses the following non-current financing sources to finance its long-term operations.  Interest-bearing liabilities  Deferred tax liabilities  Provisions on employee benefits  Other liabilities 4 | P a g e

The financial position of Blackmores can be provided as follows. Year 2019 2018 Interest-bearing liabilities 119,000 86,000 Deferred tax liabilities 11,810 9,341 Provisions on employee benefits 1,137 1,229 Other liabilities 753 483 The interest-bearing liabilities is the main source of financing of the company and the major improvement of the financial position of the company has been occurred due to the new funding arrangements entered by the company on 8 April 2019 with baking institutions. f Bond calculations The following information is used for the bond calculation. Coupon rate = 2% Maturity period (in years) = 10 Frequency of coupon payments = Semi-annual Face value = $ 1,000 Required rate of return = 2.5% The issuing price of the bond can be calculated as follows. Bond price = Present value of coupon payments + Present value of bond face value = $ 529 + $ 779 = $ 1,309 Bank facility = $ 119,000,000 Bond price = $ 1,309 No: of bonds = 90,921 5 | P a g e

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2 Capital budgeting – Blackmores Group a FCFs calculation Free cash flows ($ AUD Million) Year Project A Project B 0 (500) (950) 1 147 233 2 147 233 3 147 233 4 147 323 5 147 323 6 236 323 7 236 323 8 236 323 9 236 323 10 336 473 b NPV Project A – $ AUD 648 Million Project B - $ AUD 866 Million c Changed discount rate The discount rates would be high and the NPV values of the project will get reduced. Since the discount rate represents the risk associated with the project, when the risk of investing in these manufacturing plants is higher than the overall risk of the company, the discount rates would go up to show the increased risk. d Discounted Payback Period Project A – 4.39 years Project B - 4.75 years 6 | P a g e

e IRR Project A – 32.25% Project B – 27.78% f Payback period analysis Even though Blackmores’ management payback rule is 4 years, the discounted payback period calculated for the two projects are more than 4 years. The decision rule of discounted payback period is to select the project with the lowest discounted payback period and in that case, the project A will be suitable as it has the lowest discounted payback period [ CITATION Shy89 \l 1033 ]. However, if the management make the decision of choosing the project based on the discounted payback period considering its payback rule, then no project will be suitable. Apart from the results of the capital budgeting techniques used to evaluate the two projects, financial or nonfinancial factors including the size and the nature of the company, current expenditure, revenues, leverage level, profitability, familiarity with the project, availability of adequate cash, quality of the project etc. 7 | P a g e

3 References au.finance.yahoo.com, 2020. Historical share prices. [Online] Available at: https://au.finance.yahoo.com/quote/BKL.AX/history? period1=1577836800&period2=1579910400&interval=1d&filter=history&frequency=1d&in cludeAdjustedClose=true [Accessed 25 January 2020]. Bhandari, S. B., 1989. Discounted Payback Period — A Viable Complement to Net Present Value for Projects with Conventional Cash Flows. The Journal of Cost Analysis, 7(1), pp. 1 - 10. Blackmore Group, 2019. Annual report, s.l.: s.n. Kishore, R. J. P. a. B., 2014. Impact of Aggressive and Conservative Working Capital Management Policy on Firms Profitability. International Journal of Science and Research, 4(9), pp. 1 - 9. 8 | P a g e

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