Case studies Essay Example

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

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%

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

Domino pizza

Retail Food Group Limited

June 30 2010-June 30-2011 HPR

June 30 2011- June 30 2012 HPR

June 30 2012- June 30 2013 HPR

June 30 2013- June 30 2014 HPR

June 30 2014- June 30 2015 HPR

Expected return

Estimating risk

Domino pizza

(Rt – E(R))2

Retail Food Group Limited

(Rt – E(R))2

June 30 2010-June 30-2011 HPR

(22.41-72.59)2

(9.25-36.41)2

June 30 2011- June 30 2012 HPR

(133.46-72.59)2

(33.44-36.41)2

June 30 2012- June 30 2013 HPR

(20.43-72.59)2

(74.24-36.41)2

June 30 2013- June 30 2014 HPR

(111.59-72.59)2

(31.85-36.41)2

June 30 2014- June 30 2015 HPR

(75.08-72.59)2

(33.26-36.41)2

Expected return

=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;

Case studies

($35.35+ 5.42/$4.15)1/5-1 =57.93%

($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)

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

After tax Cash inflow/outflow

Balance to payback

(200,000)

(200,000)

(16,587.76)

-216,587.76

2,171.568

-214,416.2

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.

After tax cash inflow

Discount factor

0

(200,000)

(200,000)

(200,000)

16,587.76

0.862069

(14,299.79)

(214,299.79)

2,171.568

0.743163

1,613.829

(212,685.96)

15,954.57

0.640658

10,221.42

(202,464.54)

Terminal cashflow

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

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.

a) Earnings per share

Average growth rate

Domino Pizza

Annual Growth

Retail Food Group

Annual growth

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.

12/01/2016

12/01/2016

Last Price (AUD)

Shares Outstanding (M)

Market Cap (B AUD)

$716.54m

Earnings Per Share (AUD) (TTM)

Current P/E Ratio (TTM)

Dividend (AUD) (TTM)

Current Dividend Yield (%)

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.