Question:
Discuss about the Business Finance for Stock Prices and Exchange Rates.
This paper aims at giving a complete overview of how to choose the best investment from more than one company. In this paper, the focus is on Woodside Petroleum Limited and Wesfarmers Limited. These two companies listed in the Australian Forex have been studied using ratios and past information documented on them.
‘Description, Core Activities, and Markets.’
Woodside Petroleum is an oil and gas company based in Australia. Woodside is Australia’s largest independent oil and gas company. It operates five floating oil production, storage, and offloading (FPSO) vessels, the largest owner-operated fleet in Australia. The company has more than 60 years of experience and its partners have great confidence in them (Hoque, Islam, & Azam, 2013).
Wesfarmers is a company in Australia that deals with several business operations with a wide range of operations from home improvement to supermarkets, convenience stores, hotels, and liquor. The company headquarters is situated in Western Australia. Originally, back in 1914 it was branded as Western Australia Farmer’s co-operative. As mentioned earlier their areas of operations are broad and wide.
‘People Involved in Firm’s Governance.’
Woodside Petroleum
Chairperson Michael A Chaney
Board Members- Melinda A Cilento
Frank C Cooper
Christopher M Haynes
David I McEvoy
Ann Pickard
Sarah Ryan
CEO-Peter J Coleman
Woodside is a non-family company (TUZCU, 2004). This is because people involved in the governance (Directors, Chairman and CEO) have less than 20% shareholding. Royal Dutch shell plc. Is the biggest shareholder and owns 13.3% of the company. It is also the only shareholder with ownership of more than 5% shares (Calder, 2008).
Wesfarmers
Chairperson Michael Chaney AO
Finance Director Terry Bowen
Board Members – Paul Bassat
Tony Howarth
James Graham AM
Wayne Osborn
Jeniffer Westacott
Venessa Wallace
CEO- Richard Goyder AO
Wesfarmers is non-family business. There no individual neither organization with more than 5% shareholding. The organization with the highest shares is Vanguard with 0.19% in the stock exchange ratings. None of the governors with more than 1% shareholdings in the company (Calder, 2008).
‘Key Ratios both companies’
Woodside Petroleum
Return on Assets = NPAT/Total Assets
sum present asset plus Net PPE plus Intangibles plus Other Long- term asset (Alexander & Nogueira, 2007).
= 1070.1942029 + 21661.766667 + 0 + 882.73768
=$23,615million in US currency
NPAT =$ 26million US currency
Answer = 26/23.6 = 1.101695
Return on Owner’s Equity = NPAT/OWNER’S EQUITY
14.1099036232 = Owner’s Equity
26 = NPAT
Answer 26/14.1099 = 1.842678
Gearing Ratios = Total Liabilities/ Total Assets
T.A = 23.615
T.L = 9.53455
Answer = 9.54555/23.615 = 0.4042
Wesfarmers
Return on Assets = NPAT/Total Assets
sum present asset plus Net PPE plus Intangibles plus Other Long- term asset Coakley & Fuertes, 2006).
= 9090 + 4083+ 1931 + 1471 + 181 + 181 +460
=$ 41160 million in US currency
NPAT =$ 2440million US currency
Answer = 2440/41160 = 0.05928
Return on Owner’s Equity = NPAT/OWNER’S EQUITY
Owner’s Equity equals sum asset less sum liability
28965.7971016 = 41160 – 12194.2028986
NPAT = 2440
Answer 2440/28965.7971016 = 0.8423728
Gearing Ratios = Total Liabilities/ Total Assets
T.A = 41160
T.L = 12194.2028986
Answer = 12194/41160 = 0.296263
For woodside the ROA is greater than the ROE meaning that the company generate more income from borrowed investement or rented assets therefore they are unable to generate from their own assets solely.
For Wesfarmers the ROA is less than the ROE meaning that the company has the ability to generate revenue from their own assets and the investors are getting a value for their money since the business has little or no borrowed funds or rented assets.
Wesfarmers graph
Woodside petroleum limited
The red line shows the market security in a given time period while the blue line shows the actual plot that we derived for the graph on ordinary shares (Groenewold & Paterson, 2013). These two lines vary from time to time and initially when the blue line was below the red line, the company is more volatile since the shares are on demand and easily bought by investors (Bugeja & Sinelnikov, 2012).
‘Research via internet’
This study features both of the corporations.
Financial variables
Fiscal concepts for instance GDP development , the cost of living , joblessness degrees as well as Australia’s trades with the other parts worldwide almost all help to the ordinary industry setting that ASX-listed organizations function in.
Changes on these kind of guidelines will most likely impact the course of the share current market since they provide signals with regards to the amount of consumers as well as organizations will tend to be prepared to invest , that might bears ramifications for organization gain(Groenewold & Paterson, 2013) .
Rates of interest
Rates are crucial given that they get the possibility to consequence the two models in a company’s income computation: earnings as well as expenses. The effect on income originates from the point that in occasions of reduced rates while borrowing cash is relatively low-priced, individuals are typically prepared to invest additional on products or services.
The effect on price is simply because that organizations count on lent cash for items like acquisitions.
Forex rate
The Australian dollar has devoted the vast majority of the previous 2 years floating near to its own all-time top against the US monetary of US$1 .10 , attained in 2011 . One latest instance demonstrating just how the trade off price can affect a company’s view was Woodside Petroleum, which provides oil as well as fuel to Asian countries. In its concluding calendar year earnings outcome for 2013 , Woodside declared that a $0 .01 decline in the worth of the Aussie dollar against the US dollar would likely raise a number of net gain US$4m (Bugeja & Sinelnikov, 2012) .
‘Code of the Company –beta’
Wesfarmer’s Beta – 0.82
Woodside petroleum’s Beta – 1.20
Capital Asset Pricing Model = risk free rate + beta (expected market return – risk free rate)
Wesfarmer’s returns
= 0.04 + 0.82 (0.06 – 0.04)
= 0.04 + 0.0164
= 0.0564
Woodside Petroleum Returns
= 0.04 + 1.20 (0.06 – 0.04)
= 0.024
Yes. Both of the companies are a conservative investment due to their low risk portfolio below one (Alexander & Nogueira, 2007).
‘WACC’
Weighted Average Capital
WCC = RE + D/V * RD * ( 1- TC)
WHERE:
RE = COST ON EQUITY
D = MARKET DEBT VALUATION
E = MARKET EQUITY VALUATION
V = E+ D
TC = TAX % ON CORPORATION
Wesfarmer’s WACC
=0.8741 * 6.865 + 0.1259 * 4.9707 * ( 1 – 33.03)
= 6.428
Woodside Petroleum
= 0.9943 * 13.7834 + 4.7892 * 7.3852 * ( 1 – 14.64)
= 8.06
Wesfarmers costs to raise capital is lower than returns on capital, 6.95% therefore what it gets is more in returns
Woodside petroleum costs to raise capital is higher than the returns on capital, 0.098%, therefore what it gets is less in returns (Jooste, 2006).
A high WACC has a negative effect on the management. This because the company is generating less on their returns and it means that something is wrong. The management needs an overall spin or identification of the key departments lagging the company behind.
‘Gearing ratios’
Gearing ratios = Total Liabilities / Total Assets
Wesfarmers
YEAR 2015 = 0.296263
YEAR 2014 = 13740/39727 = 3.366476
Wesfarmers in 2014 had a high gearing ratio it was very risky for investors to invests due to the possibility of downturns while it was able to change its fortunes in 2014 becoming a good prospect for investment initially in 2014 it was unstable however, in 2015 it is stable (Trotman, 2009).
Woodside Petroleum
YEAR 2015 = 0.4042
YEAR 2014 = 7.42/24.08 = 0.3081
Woodside gearing ratios relatively changed by approximately 0.1 this is a low ratio and it is good to invest in both years however year, 2015 is risky by 0.1 than 2014. Therefore, it is stable (Trotman, 2009).
For Woodside from the gearing ratio of 2014 to 2015 the ratio shows that the risk to invest is higher and this is second by the director’s report that indicated significant increase in their borrowing to fund their on going projects.
For Wesfarmers the gearing ratio in 2014 was significantly higher than 2015 meaning the risk for investors to invest decrease. This is backed by the director’s report following payment on cash creditors and major loans in the financial institutions cleared.
Dividend Policy
The company may choose to pay dividend after a given period or currently pay the cash dividend. It all depends on the existence of excess cash by the company (Sáez & Gutiérrez, 2015). On the other hand where the cash is just enough for the company or inadequate they payback the cash dividend in the future but with an interest (Qiu & La, n.d.).
‘Letter’
Name,
Investor Adviser,
Postal Address,
Client name,
Title client,
Postal Address,
Date
Dear sir/madam,
Re: Investment Choice
I hereby wish to advice on the best portfolio to choose for investment following my evaluation of the two companies.
The gearing ratios on both of the companies in 2015 are relatively low however; Woodside has a higher ratio of 0.4042 compared to 0.296263 of Wesfarmers and therefore riskier to invest in Woodside.
While WACC of Wesfarmers is superior to Woodside. Reason is that Wesfarmers are able to generate earnings from its assets since the cost of capital is lower than the return on capital by 0.53%. While Woodside has 7.95% which makes it even riskier to invest here (Jooste, 2006).
Wesfarmers has a low beta of 0.82 while Woodside has a high of 1.20. In case you have cash and unwilling to hold it just buy the Wesfarmers low beta stock that will be more profitable to you in the future than the high beta stock of Woodside.
Therefore, I advise you to choose Wesfarmers ltd as your choice of investment.
Thank you in advance.
Regards,
In conclusion, the tasks done have given conclusive information of the companies based on predominantly the ratios. The Wesfarmer Company though had the last say on the best portfolio for investment Woodside Petroleum was a worthy and able competitor in the two companies tug of war on investment (Alexander & Nogueira, 2007). There mere access on ratio cannot be relied upon due to the unpredictability of markets and the consumer’s preference may as well have drastic changes that affect shares stock.
References
Alexander, C. and Nogueira, L. (2007). Model-free hedge ratios and scale-invariant models. Journal of Banking & Finance, 31(6), pp.1839-1861.
Alexander, C. and Nogueira, L. (2007). Model-free hedge ratios and scale-invariant models. Journal of Banking & Finance, 31(6), pp.1839-1861.
Bugeja, M. and Sinelnikov, K. (2012). Public versus private takeovers of Australian stock exchange listed targets. Australian Journal of Management, 37(3), pp.391-414.
Calder, A. (2008). Corporate governance. London: Kogan Page.
Coakley, J. and Fuertes, A. (2006). Valuation ratios and price deviations from fundamentals. Journal of Banking & Finance, 30(8), pp.2325-2346.
Groenewold, N. and Paterson, J. (2013). Stock Prices and Exchange Rates in Australia: Are Commodity Prices the Missing Link?. Australian Economic Papers, 52(3-4), pp.159-170.
Hoque, M., Islam, M. and Azam, M. (2013). Board Committee Meetings and Firm Financial Performance: An Investigation of Australian Companies. International Review of Finance, 13(4), pp.503-528.
Jooste, L. (2006). Cash flow ratios as a yardstick for evaluating financial performance in African businesses. Managerial Finance, 32(7), pp.569-576.
Qiu, M. and La, B. (n.d.). The Capital Structure Difference Across Australian Companies. SSRN Electronic Journal.
Sáez, M. and Gutiérrez, M. (2015). Dividend Policy with Controlling Shareholders. Theoretical Inquiries in Law, 16(1).
Trotman, K. (2009). TAKEOVER DEFENCES BY AUSTRALIAN COMPANIES. Accounting & Finance, 21(2), pp.63-85.
TUZCU, A. (2004). Corporate governance approach of Istanbul stock exchange companies. Milletleraras, pp.145-167.
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