The five years development rate within operating revenues of JB Hi-Fi ltd for the previous five years and the same is calculated under:
The anticipated operating revenue for the 2020-21 financial year relied on the growth rate computed above and is mentioned in the table below:
The yearly rate of interest of JB Hi-Fi is calculated under based o the yearly interest expenses along with average long term debt for the year 2015-16:
The monthly payment for addressing the amortised loan for 20 years with interest based on yearly interest rate presented above is calculated under:
The overall interest expenses for the initial year are calculated within the table below:
The fourth year interest expenses for the fourth year are mentioned in the table below:
The needed investment value for initial investment alternative is calculated within the table below:
The needed amount in order to invest within the second investment alternative as under:
Cash funds needed for acquiring bonds based on the third option is computed under:
The initial investment alternative might need lowest cash funds amount amongst the three alternatives. For this reason, it can be gathered that the company must choose the first investment option in order to raise funds of $2,000,000 in the three years. Based on the calculation indicated above, the company might need $1,765,532 in order to invest within the first alternative.
The yield on the bonds of the company based on the stated scenario is calculated below:
There are generally two types of bond yield rates. Current yield rate can be understood as invest percentage gained from certain bond over its recent market price. The yield-to-maturity is the anticipated interest rate that an investor might attain for holding bond until its date of maturity. Current yield rate is not impacted through holding period (Bhimani et al. 2013). Moreover, yield-to-maturity is greatly focused on the holding period. The investor might attain high interest for bonds for extended period and for such reasons, these bonds might have more yield-to-maturity. Additionally, of the bonds of the company had been for short term than the overall interest amount might be lowered and in such scenario, the yield-to-maturity might be decreased in alignment to short period of maturity (Li and Qin 2014).
The Australian economy might deal with depression in the upcoming year. In this condition, the government has to take certain initiatives in order to offer support to the economy. For this reason, it will not be able to offer increased returns on government bonds along with considering that yield to government bond will drop drastically. However, the company bond’s coupon rate might remain unchanged (R?dulescu, R?dulescu and Zb?ganu 2014). For this reason, because of the fixed interest payments and fall within yield on the government bonds and spread to the company bond might turn out to be increased.
For the reason that the organization will offer fixed coupon rates devoid of economic depression, the investor might attain increased return from bonds in contrast to certain risk-free investments such as government bonds and might deal with decreased risk than the risky investments such as shares (Mangram 2013). In addition, the demand for the organizations bonds might increase and considerably it might result in the increase in the bond’s market price.
Within the CAPM technique, the needed return rate of JB Hi-Fi Ltd on 30 June 2015 might be mentioned as under:
The required return rate of the company on 30 June 2016 is mentioned under:
From both the tables above it is gathered that the company has required return rate has dropped over the financial year 2015-16 and 2014-15. This has resulted from the decreased risk-free rate or the yield rate of 10-year “Australian Treasury Bond” over 30 June 2016 in contrast to yield rate on 30 June 2015 (Jbhifi.com.au. 2017).
In addition, if it is gathered that all other factors might be unchanged. In such scenario, the company might experience decreased cost in order to sustain capital funds long with identical revenue growth (Dhrymes 2017). In such condition, it might develop increased funds from the operational conducts in comparison to previous year that can increase the company’s net asset along with the shareholder value. Increased shareholder value might in turn affect the market value of shares along with affecting considerable increase.
Share market is extremely volatile in contrast to certain investment alternatives. For this reason, the investors might need increased returns from the share investment in order to bear increased investment risk. It is also gathered that the shares with increase risk in consideration to fluctuation in price offering higher return. The higher return can be explained as the premium to deal with increased risk (Bodie, Kane and Marcus 2014). Within CAPM, the risk level is measured in alignment with the market risk premium. Additionally, if the average risk aversion might fall, the market risk level can be increased. Moreover, the company might require paying increased risk premium to the investors in order to attract them. This might result in increased share prices because of increased high rate.
The free cash flows for the company JB Hi-Fi Ltd over years 2016 and 2015 are calculated within the table below:
The rate of return within the invested capital over years 2015 and 2016 based on the calculated free cash flows are calculated under:
The company is ROIC for the two years are more than 13%. On the other hand, the cost of capital of the two years is more than 7.15% and 5.92%. For this reason, it can be gathered that JB Hi-Fi Ltd has offered increased returns to all its investors in contrast to the required rate of return in the years 2015 and 2016.
References
Beyhaghi, M. and Hawley, J.P., 2013. Modern portfolio theory and risk management: assumptions and unintended consequences. Journal of Sustainable Finance & Investment, 3(1), pp.17-37.
Bhimani, A., Horngren, C.T., Sundem, G.L., Stratton, W.O. and Schatzberg, J., 2013. Introduction to Management Accounting. Pearson Higher Ed
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education
Dhrymes, P.J., 2017. Portfolio Theory: Origins, Markowitz and CAPM Based Selection. In Portfolio Construction, Measurement, and Efficiency (pp. 39-48). Springer International Publishing
Francis, J.C. and Kim, D., 2013. Modern Portfolio Theory: foundations, analysis, and new developments (Vol. 795). John Wiley & Sons.
Jbhifi.com.au., 2017. JB Hi-Fi | JB Hi-Fi Corporate. [online] Available at: https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/ [Accessed 17 Mar. 2017].
Li, X. and Qin, Z., 2014. Interval portfolio selection models within the framework of uncertainty theory. Economic Modelling, 41, pp.338-344.
Mangram, M.E., 2013. A simplified perspective of the Markowitz portfolio theory.
Qin, Z., 2015. Mean-variance model for portfolio optimization problem in the simultaneous presence of random and uncertain returns. European Journal of Operational Research, 245(2), pp.480-488.
R?dulescu, M., R?dulescu, C.Z. and Zb?ganu, G., 2014. A portfolio theory approach to crop planning under environmental constraints. Annals of Operations Research, 219(1), pp.243-264.
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