Financial management is a crucial activity in an organization which contains a process of planning, organizing, controlling and monitoring the financial resources and activities of an organization with an intention to meet the strategic goals and objectives of the business. This is a crucial practice in an organization in order to control over the business activities and the financial activities of the business such as procurement of funds, utilization of funds, payment, accounting, risk assessment and various other financial activities related to the money (Gibson, 2011).
In this report, the study has been done on two Australian companies in order to identify the financial methods to recognize the performance of the company and make decision about the investment in the company. The main objective of the report is to make it easier for the investors to recognize the performance of the business and make decisions about the investment. This report focuses on the capital structure, WACC, valuation analysis, risk position etc of the companies to evaluate the better option in order to make the investment.
Boral limited:
Boral limited is a building and construction material company which is mainly based in the Australian market. The company has diversified its market at global level in order to grab the market share and meet the common goal of the business. It manufactures and supplies the building and construction material. Boral has around 16000 employees across their 700 operating sites in order to manage the activities of the business (Home, 2018 b). The financial position and performance of the company depict about better position of the company.
AMP limited:
AMP limited is a financial company which is mainly based at Sydney in Australia. The company has diversified its market at New Zealand market as well in order to grab the market share and meet the common goal of the business. It offers the investment services, insurance, superannuation, banking products financial advice home loans etc to its clients. AMP limited has around 5500 employees in order to manage the activities of the business. It is operating its business from 1849 in the Australian market (Home, 2018 a). The financial position and performance of the company depict about better position of the company.
Capital structure:
Capital structure is a systematic approach which defines the financial business activities of the business through a combination of liabilities and the equity of the business. Capital structure theories of a business explore about the relationship of equity financing, debt financing and market value of the firm. The capital structure position of AMP limited and Boral limited have been evaluated in order to measure the relationship of debt and equity.
The capital structure level of AMP limited explains that the debt and equity relation of the business has faced various changes in last 5 years. In terms of the debt and equity relation, it has been found that the proportion of debt and equity has been better from 2013 in the year of 2017. Earlier, company used to rely more on equity but now company has also raised the funds through debt funds in order to manage the risk and return level of the business (Annual report, 2017 a). The study defines that the company’s capital structure has been changed according to the industry factors and the demand of the market. The main factors which have influences the capital structure of the business are economical position and the financial demand of the business. Further, it has been evaluated that the static theory has been adopted by the company where company relies more on debt and equity to manage the internal and external operations of the business (Huang & Ritter, 2009).
|
Capital structure of AMP limited |
||||||||||
|
2017 |
2016 |
2015 |
2014 |
2013 |
||||||
|
Debt |
9915 |
57.92% |
7242 |
49.25% |
13027 |
60.46% |
8157 |
49.91% |
3584 |
30.70% |
|
Equity |
7,202 |
42.08% |
7,462 |
50.75% |
8,519 |
39.54% |
8186 |
50.09% |
8090 |
69.30% |
|
17,117 |
100.00% |
14,704 |
100.00% |
21,546 |
100.00% |
16,343 |
100.00% |
11,674 |
100.00% |
(Annual report, 2017 a)
The capital structure level of Boral limited explains that the debt and equity relation of the business has faced various changes in last 5 years. In terms of the debt and equity relation, it has been found that the proportion of debt and equity has been better from 2014 in the year of 2018 but still various changes are required in the business to make the capital structure, an optimal capital structure. The risk level if the business is quite lower in current scenario but it also affects the liquidity level of the business (Annual report, 2018 b). Earlier, company used to rely more on equity but now company has reduced the equity funds and focused on the debt fund to manage the performance of the company.
The study defines that the company’s capital structure is quite different from the industrial capital structure. The main factors which have influences the capital structure of the business are economical position and the financial demand of the business. Further, it has been evaluated that the static theory has been adopted by the company where company relies more on debt and equity to manage the internal and external operations of the business (Frank & Goyal, 2009).
|
Capital structure of Boral limited |
||||||||||
|
2018 |
2017 |
2016 |
2015 |
2014 |
||||||
|
Debt |
2784 |
32.70% |
2405 |
30.66% |
1112 |
24.08% |
1418 |
28.69% |
1041 |
23.72% |
|
Equity |
5731 |
67.30% |
5440 |
69.34% |
3506 |
75.92% |
3524 |
71.31% |
3348 |
76.28% |
|
8,515 |
100.00% |
7,845 |
100.00% |
4,618 |
100.00% |
4,942 |
100.00% |
4,389 |
100.00% |
(Annual report, 2018 b)
Weighted average cost of capital:
After the evaluation on the capital structure and the leverage position of the business, the study has been conducted on the WACC of the company so that the total cost of the company could be calculated. The study represents that the WACC of both the companies depend on the debt and equity level and the cost of debt and cost of equity of the company.
In case of AMP limited, it has been measured that the cost of equity and cost of debt of AMP limited is 2.39% and 4.13% respectively. Further, it defines that the debt and equity proportion in the year of 2018 is 58:42. It explains that the total cost of capital of the business is 3.40% (Morningstar, 2018 a). The AMP limited has to pay 3.40% in order to manage the equity and debt funds. The total cost of capital of the business is quite in control.
In case of Boral limited, it has been measured that the cost of equity and cost of debt of AMP limited is 5.66% and 2.65% respectively. Further, it defines that the debt and equity proportion in the year of 2018 is 32:68. It explains that the total cost of capital of the business is 4.68% (Morningstar, 2018 b). Boral limited has to pay 4.68% in order to manage the equity and debt funds. The total cost of capital of the business is bit higher than the cost of capital of AMP limited.
Tax is one of the crucial factors in an organization which is used to measure the net profit, tax obligation, total cost of the business etc. In order to measure the WACC position of the business, tax rate is considered by the financial management so that the true value of the cost could be measured. In terms of the debt interest payment, preference dividend payment etc. the tax is got back by the company and thus, it is required to reduce the tax rate from the total debt interest rate and preference dividend rate (Haney, 2009). If this rate is not eliminated from the debt interest rate and preference dividend rate than the WACC of the company would be higher and it would impact on the profitability level of the business. Thus, it is recommended to the financial analyst and the financial manager to always consider the taxation rate while measuring the total cost of capital of the business (Higgins, 2012).
Valuation analysis:
As $ 5 million has been granted from the grandfather so, the investment of this money is better option in terms of getting higher return. In order to identify the better company for the purpose of investment, the valuation approaches have been applied on both the companies. Dividend growth model and PE valuation model have been applied on both the companies.
In case of AMP limited, it has been identified that the market price of the stock of the company is $ 5.51 on 30h June 2018 whereas the valuation model, dividend growth model and PE valuation model depict the different stock price. Dividend growth model study explains that the intrinsic value of the company is $ 13.65 which is quite higher than the market value of the company (Yahoo Finance, 2018 a). Further, the P/E valuation model depicts that the stock price of the company is $ 1.6 which is quite lower than the market value of the company.
Further, through the evaluation on Boral limited, it has been identified that the market price of the stock of the company is $ 7.51 on 31st Dec 2017 whereas the valuation model, dividend growth model and PE valuation model depict the different stock price. Dividend growth model study explains that the intrinsic value of the company is $ 14.33 which is quite higher than the market value of the company (Yahoo Finance, 2018 b). Further, the P/E valuation model depicts that the stock price of the company is $ 2.85 which is quite lower than the market value of the company
Investment decision:
On the basis of the valuation model approaches and the study over the market stock price of the companies, it has been measured that the actual worth of stock of the company is quite different from the actual market price of the company. On the basis of study, it has been found that from dividend growth model and PE valuation model, P/E valuation model is more reliable approach as it focuses on the recent performance and the earnings of the business (Gibson, 2011).
Through the calculations and the study, it has been represented that the stock price of both the companies are overvalued in the market which represents that the performance of the companies are not well. Still, if the comparison among both the stock is done then it has been found that the Boral limited is better option in terms of investment.
Other factors to affect investment decision:
There are various factors which must also be taken into concern while making a decision about the investment by the investors and the financial analyst such as the economical position, industry position, internal factors, projected performance of the company etc (Haney, 2009). On the basis of evaluation on all of these factors of both the companies, it has been concluded that the Material company is performing better in the industry and thus the Boral limited is better choice for the purpose of investment.
Standard risk:
Standards risk of an organization could be calculated through various methods such as coefficient covariance, standard deviation and probability distribution. But among all of them, standard deviation is reliable one because it measures the stock price of the company with index price. the risk of both the companies have been calculated through regression model and it has been measured that the beta of AMP limited and Boral limited is -0.5 and 0.51 which depicts that the stock of Amp limited is inversely correlated with the market index and stock of Boral limited is positively correlated and the volatility of the stock is higher than the market index (Higgins, 2012). On the basis of both the company’s evaluation, it has been measured that the portfolio of both the stock would reduce the risk.
Conclusion:
through the overall study on AMP limited and Boral limited, it is recommend to the investors to invest in the stock of Boral limited as it would offer higher return to the investors and the risk level of the business is also not much higher. The Other factors are also in the favour of the company and reprints that the company is better option for the purpose of investment.
References:
Annual report. (2017 a). AMP limited. (online). Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/OTC_AMLTY_2017.pdf
Annual report. (2017 b). Boral limited. (online). Retrieved from: https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-2017.pdf
Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: which factors are reliably important?. Financial management, 38(1), 1-37.
Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.
Haney, L. H. (2009). Business Organization and Combination. BiblioBazaar, LLC.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Home. (2018 a). AMP limited. (online). Retrieved from: https://www.amp.com.au/
Home. (2018 b). Boral limited. (online). Retrieved from: https://www.boral.com.au/
Huang, R., & Ritter, J. R. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative analysis, 44(2), 237-271.
Morningstar. (2018 a). AMP limited. (online). Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=AMP®ion=aus&culture=en-US
Morningstar. (2018 b). Boral limited. (online). Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=BLD®ion=aus&culture=en-US
Yahoo finance. (2018 a) . AMP limited. (online). Retrieved from: https://finance.yahoo.com/quote/AMP.AX/history?period1=1388428200&period2=1514658600&interval=div%7Csplit&filter=div&frequency=1mo
Yahoo Finance. (2018 b). Boral limited. (online). Retrieved from: https://finance.yahoo.com/quote/BLD.AX/history?period1=1388428200&period2=1514658600&interval=div%7Csplit&filter=div&frequency=1mo
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