CORPORATE FINANCE Essay Example

6CORPORATE FINANCE

Corporate Finance

Company (Santos) Perspective

  1. Working capital efficiency portrays effectiveness of money balances of a company owed by the customers on sales and the invested money on inventoried goods against the money the company owes for acquiring the inventory. Thus, the three main components of a working capital are the payables, accounts receivable, and the inventory levels. However, an effective means of determining a working capital is by considering the company’s current assets and current liabilities. According to Parrino et al. (2014), Santos’ total current assets as at 31st December 2014 and 31st December 2013 were valued at $2, 065 million and $2,078 million respectively. The current liabilities were valued at $ 1, 946, and $1,726 in 2014 and 2013 respectively.

Working capital: Total current Assets /total current Liabilities

2065/1946 =1.06 in 2014

2078/1726=1.20 in 2013

It is clear that the 2014 working capital efficiency was not satisfactory by being below 1.2. In 2013, the ratio was 1.20 suggesting a satisfactory working capital.

In the same manner, the inventory turnover can be determined by dividing sales by the inventories within a particular period. Santos recorded, in 2014, the inventory turnover of $4,037/443= 9.11 and in 2013, the inventory turnover of $3,602/419=8.59. High turnover reflect either, much intensified sales or an inefficient purchasing that, also reflected in the working capital.

  1. Based on the 10-year summary table of Santos, the company is financed by its assets valued at $22,345 million, debt finance at $7,490 million, and equity of $9,413 million. This implies the company is financed through an indirect predominant short-term debt financing. The possibility of the short-term debt financing occurs in this case through the manipulation of the short-term bank loans indicated in the current liabilities of the company’s balance sheet as at 31st December 2014. The currency in this perspective is the dollar currency.

  2. The face value of the bond=$1000

Yield to maturity=4% , making the total value at the end of 6 years be

0.04*1000*6 *0.045=10.8

Totaling to $1010.8

In 2015, the yield to maturity is 5%, thus, the value becomes 1010.8*0.05*1*0.045=2.27

Totaling to $1013.07

1013.07/1000=1.013

To determine the holding period return for the investment would be,

1.013-1= 0.013*100

4. Investor Perspective

Dividend paid in March 2014 by Rio Tinto= Do (yearly)

Assume the dividends grow at a constant rate of k % between 2013 and 2014

From 2014, dividends grow at a rate of 12% forever.

The risk free rate is 3% today

The expected return rate to the market is 15%

Stock Price = Sum of Dividends (Div) in each Time (T) / (1 + R)T

Expected Return = (Dividends Paid + Capital Gain) / Price of Stock

Capital gain today= (Do + 0.24Do)

15% =[Do+ (Do + 0.24Do)] / Price of the Stock

Price of the Stock Today= [Do+ (Do + 0.24Do)]/15%

=3.24D/15%

=3.24Do/0.15

Based on the price, per stock, I would purchase the shares

5. Analysis of findings

The type of analysis conducted in Question 4 above is the Discounted Cash Flows and Stock pricing.

Based on this analysis type, Stock Price = Sum of Dividends (Div) in each Time (T) / (1 + R)T, suggesting that when taken to the extreme (an infinite timeline), the price of stock today has no relationship to a future capital gain.  It is a function of the dividend stream, divided by the rate of return that can be derived from stocks of similar risk. In this way, this analysis be used to make abnormal (excess) returns. In order to assume market efficiency, a constant growth model to the company’s dividends, is added to be able to make abnormal returns on share purchases. This makes the market inefficient and unrealistic.

References

North, C., & Caes, C. J. (2012). The stock market. New York, NY: Rosen Pub.

Parrino, R. et al. (2014). Fundamentals of Corporate Finance. John Wiley & Sons Australia, Ltd.

Sagner, J. (2013). Essentials of working capital management. Hoboken, N.J: Wiley.