Finance & Accounting of Saturn Pet Care

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
Name of the Student:
Name of the University:
Author’s Note:

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ACCOUNTING AND FINANCE
Executive Summary
The assignment has two part which are Part A and Part B. The first part of the assignment deals
with the business of Saturn Pet care which is engaged in producing products for pets. As per the
plan of the business, the company wants to introduce a new product in the market for which the
management plans to apply capital budgeting techniques. Part A of the assignment focuses on
analysis of the options which are available for the selection of the production site which are
Bathurst site and Wodonga Site. Part B of the assignment deals with the analysis of the capital
structure of ARB ltd. The assignment will also be comparing the capital structure of ARB ltd
with another company belonging to the same industry. The assignment will also suggest
recommendations so as to improve the capital structure of the company.

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Table of Contents
Part A...............................................................................................................................................3
Capital Budgeting of Bathurst Site..............................................................................................3
Product Cannibalization...............................................................................................................5
Marketing Sales Trend.................................................................................................................5
Original Cost of Factory Inclusion in NPV Analysis..................................................................6
Part B...............................................................................................................................................6
Introduction..................................................................................................................................6
Discussions..................................................................................................................................6
Capital Structure and Cost of Capital..........................................................................................6
Weighted Average Cost of Capital..............................................................................................7
Cost of Equity Under CAPM Approach......................................................................................8
Comparison between ARB Ltd and Modine Ltd.........................................................................9
Financial Ratio Analysis of ARB Ltd........................................................................................10
Change in Capital Structure.......................................................................................................12
Wealth Maximization Principle.................................................................................................13
Recommendations..........................................................................................................................13
Conclusion.....................................................................................................................................14
Reference.......................................................................................................................................15

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Part A
Capital Budgeting of Bathurst Site
Particulars 0 1 2 3 4 5 6 7 8 9 10
Initial Investment:
Construction on Manufacturing Unit -$275,00,000
Factory Building -$80,00,000
Infrastructure Grant $25,00,000
Total Initial Investment -$330,00,000
Operational Cash Flow:
Sales Growth Rate 10% 10% 10% 10% 10% 10% 10% 10% 10%
MAC 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
Annual Sales $300,00,000 $330,00,000 $363,00,000 $399,30,000 $439,23,000 $483,15,300 $531,46,830 $584,61,513 $643,07,664 $707,38,431
Conversion Cost -$210,00,000 -$231,00,000 -$254,10,000 -$279,51,000 -$307,46,100 -$338,20,710 -$372,02,781 -$409,23,059 -$450,15,365 -$495,16,902
Rebate on Municipal Rate $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000 $5,00,000
Depreciation on Plant & Equipment -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000
Depreciation on Building -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000 -$3,20,000
Net Profit before Tax $64,30,000 $73,30,000 $83,20,000 $94,09,000 $106,06,900 $119,24,590 $133,74,049 $149,68,454 $167,22,299 $186,51,529
Less: Income Tax @ 30% -$19,29,000 -$21,99,000 -$24,96,000 -$28,22,700 -$31,82,070 -$35,77,377 -$40,12,215 -$44,90,536 -$50,16,690 -$55,95,459
Net Profit after Tax $45,01,000 $51,31,000 $58,24,000 $65,86,300 $74,24,830 $83,47,213 $93,61,834 $104,77,918 $117,05,610 $130,56,070
Add: Depreciation on Plant $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000
Add: Depreciation on Building $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000 $3,20,000
After-Tax Cash Flows $75,71,000 $82,01,000 $88,94,000 $96,56,300 $104,94,830 $114,17,213 $124,31,834 $135,47,918 $147,75,610 $161,26,070
Net Cash Flow -$330,00,000 $75,71,000 $82,01,000 $88,94,000 $96,56,300 $104,94,830 $114,17,213 $124,31,834 $135,47,918 $147,75,610 $161,26,070
Cumulative Cash Flow -$330,00,000 -$254,29,000 -$172,28,000 -$83,34,000 $13,22,300 $118,17,130 $232,34,343 $356,66,177 $492,14,095 $639,89,705 $801,15,775
Discount Rate 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%
Discounted Cash Flow -$330,00,000 $62,05,738 $55,09,944 $48,97,987 $43,58,845 $38,83,079 $34,62,590 $30,90,412 $27,60,539 $24,67,783 $22,07,650
Payback Period (in years) 3.863
Net Present Value $58,44,567
Profitability Index 1.177
Years
Capital Budgeting Analysis for Bathurst Site:
Figure 1: (Image Showing Capital Budgeting Techniques for Bathurst Site)
Source: (Created by Author)

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Particulars 0 1 2 3 4 5 6 7 8 9 10
Initial Investment:
Construction on Manufacturing Unit -$275,00,000
Value of Wodonga Site
Total Initial Investment -$275,00,000
Operational Cash Flow:
Sales Growth Rate 10% 10% 10% 10% 10% 10% 10% 10% 10%
MAC 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
Annual Sales $300,00,000 $330,00,000 $363,00,000 $399,30,000 $439,23,000 $483,15,300 $531,46,830 $584,61,513 $643,07,664 $707,38,431
Conversion Cost -$210,00,000 -$231,00,000 -$254,10,000 -$279,51,000 -$307,46,100 -$338,20,710 -$372,02,781 -$409,23,059 -$450,15,365 -$495,16,902
Depreciation on Plant & Equipment -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000 -$27,50,000
Depreciation on Building $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net Profit before Tax $62,50,000 $71,50,000 $81,40,000 $92,29,000 $104,26,900 $117,44,590 $131,94,049 $147,88,454 $165,42,299 $184,71,529
Less: Income Tax @ 30% -$18,75,000 -$21,45,000 -$24,42,000 -$27,68,700 -$31,28,070 -$35,23,377 -$39,58,215 -$44,36,536 -$49,62,690 -$55,41,459
Net Profit after Tax $43,75,000 $50,05,000 $56,98,000 $64,60,300 $72,98,830 $82,21,213 $92,35,834 $103,51,918 $115,79,610 $129,30,070
Add: Depreciation on Plant $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000 $27,50,000
Add: Depreciation on Building $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
After-Tax Cash Flows $71,25,000 $77,55,000 $84,48,000 $92,10,300 $100,48,830 $109,71,213 $119,85,834 $131,01,918 $143,29,610 $156,80,070
Net Cash Flow -$275,00,000 $71,25,000 $77,55,000 $84,48,000 $92,10,300 $100,48,830 $109,71,213 $119,85,834 $131,01,918 $143,29,610 $156,80,070
Cumulative Cash Flow -$275,00,000 -$203,75,000 -$126,20,000 -$41,72,000 $50,38,300 $150,87,130 $260,58,343 $380,44,177 $511,46,095 $654,75,705 $811,55,775
Discount Rate 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%
Discounted Cash Flow -$275,00,000 $58,40,164 $52,10,293 $46,52,372 $41,57,521 $37,18,060 $33,27,328 $29,79,542 $26,69,662 $23,93,293 $21,46,593
Payback Period (in years) 3.453
Net Present Value $95,94,827
Profitability Index 1.349
Capital Budgeting Analysis for Wodonga Site:
Years
Figure 2: (Image Showing Capital Budgeting Techniques for Wodonga Site)
Source: (Created by Author)
The first part of the assignment will be focusing on the business of Saturn Pet care which
is planning to launch a new product in the market. The business is planning to set a production
process for the new product for which the business has two possible production option which are
Bathurst site and Wodonga site. The first part will be applying capital budgeting techniques
which applies techniques like NPV analysis, Payback period and Profitability Index (Burns &
Walker, 2015).
From the analysis of the capital budgeting results of both the sites, it is clear that the best
option for the business to undertake the production of the new product is Wodonga site. The Net
Present Value (NPV) of Wodonga site is shown at $ 95,94,827 which is much more than the
NPV results of Bathurst site which is shown as $ 58,44,567. The results signify that the
profitability of Wodonga site is much more than Bathurst site. In addition to this, the expected

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cash inflow from Wodonga site is much more than the expected cash inflow from Bathurst site.
The profitability index of Wodonga site also proves that the profitability of the same is more than
the Bathurst site. The profitability index of Wodonga site is 1.349 and the profitability index of
Bathurst site is shown as 1.177. The payback period of Wodonga site is lesser than payback
period of Bathurst site. This suggests that Wodonga site is able to recover the initial investment
on the project much quicker than Bathurst site. Thus, from the discussion, it is clear that
Wodonga site is the clear choice for the Saturn Pet care.
Product Cannibalization
Product Cannibalization refers to the strategy which is adopted by companies in which a
sales price and sales volume of a product is reduced so as to facilitate a business to introduce a
new product in the market (Barroso & Giarratana, 2013). This strategy is followed by businesses
when the business is trying to promote a new product in the market. In the case of Saturn Pet
care, there is a possibility the management is following this strategy in order to promote the new
product in the market. The purpose of using Product Cannibalization is to establish a product in
the market for the purpose of sales maximization.
Marketing Sales Trend
One of the directors of the company Nathan is of the opinion that the company is of the
opinion the sales which is estimated by the marketing department is in excess and therefore the
director is of the view that this might affect the capital budgeting analysis. The management
needs to rectify such an error in estimation as this will affect the planning process and also this is
unrealistic. The management can use NPV method in which the cash outflows can be increased
so as to neutralize the error in estimation of sales.

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Original Cost of Factory Inclusion in NPV Analysis
Nathan is also of the opinion that the original cost of the factory site which is already
established of Wodonga should be included in the NPV analysis. The estimation is not correct as
the new investments which are made for the project. If the management includes the old factory
site in the cost of initial investment then NPV analysis of the same will not be showing accurate
results which will affect the planning and decision-making process of company.
Part B
Introduction
This part of the assignment will be analyzing the capital structure of ARB ltd. ARB ltd is
engaged in manufacturing activities related to road motor vehicles accessories. The assignment
will be analyzing the current capital structure of the company with previous year’s capital
structure (Robb & Robinson, 2014). The assignment will be conducting a comparison between
ARB ltd and another company belonging to the same industry.
Discussions
Capital Structure and Cost of Capital
Particulars Amount Weightage
(in '000s)
Total Equity $2,72,341 100%
Secured Borrowings $0 0%
TOTAL CAPITAL $2,72,341 100%
CURRENT CAPITAL STRUCTURE:
Figure 3: (Image Showing Current Capital Structure of ARB ltd)
Source: (Created by Author)

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The current capital structure which is used by ARB ltd comprises of only equity share
capital and there is no presence of debt capital in the capital mix of the company (Hasan et al.,
2014). This shows that the company is solely dependent on the equity-based capital and does not
rely on any leverage. The capital structure of the company is shown in figure 3 which is around $
2,72,341. The company finances all the operations of the business using this capital.
Weighted Average Cost of Capital
WACC:
Particulars 2017 2016 2015 2014
(in '000s) (in '000s) (in '000s) (in '000s)
Net profit after Tax $49,152 $47,439 $44,093 $42,570
Total Equity $2,72,341 $2,49,608 $2,26,348 $1,97,814
Cost of Equity 18.05% 19.01% 19.48% 21.52%
Weightage of Equity 100.00% 100.00% 99.12% 100.00%
Interest Expenses for
secured borrowings 0 0 220 0
Secured Borrowings $0 $0 $2,000 $0
Cost of Debt 0% 0% 11.00% 0%
Weightage of Debt 0% 0% 1% 0%
Tax Rate 30% 30% 30% 30%
WACC 18.05% 19.01% 19.39% 21.52%
Figure 4: (Image Showing Weighted Average Cost of Capital of ARB ltd)
Source: (Created by Author)
The Weighted Average Cost of Capital (WACC) as shown in figure 4 comes to 18.05%
which has decreased from previous year’s estimate. This is a favorable sign as the overall cost of
capital reflects risks of the business and as the cost of capital has reduced from previous year, the
risk of the company has also reduced (Hann, Ogneva & Ozbas, 2013). As shown in the table
above, for the purpose of computing WACC of the company cost of equity and cost of debt is to

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be considered as well as the tax rate which is applicable on the company is also to be considered.
In this case as the company does not have any debt capital in the capital structure of the business
therefore the cost of debt will be zero (Cheynel, 2013). The cost of equity of ARB Ltd which is
computed following the general method comes to about 18.05%. as the equity capital forms
100% of the capital structure of ARB Ltd, hence the cost of equity will be the overall cost of
capital of the business which is 18.05%.
Cost of Equity Under CAPM Approach
Cost of Equity under CAPM:
Particulars Amount
Beta 0.89
Market Return 8.54%
Risk Free Rate 2.78%
Expected Cost of Equity 7.906%
Figure 5: (Image Showing Cost of Equity under CAPM Approach)
Source: (Created by Author)
In figure 4, it is clearly shown that the cost of equity when following the general method
comes to about 18.05%. The cost of equity for 2017 following the Capital Asset Pricing Model
will be different as it takes into consideration numerous variables. The variables which are taken
into consideration while following the CAPM approach are risk free rate of return, market rate of
return, beta factor which is denoted by B (Barberis et al., 2015). As per computation, under
CAPM approach the cost of equity comes to 7.906% which is favorable. The market rate of
return as shown in figure 5 is 8.54% which is more than the cost of equity. This signifies that the
expectation of the shareholders is meet as the market return is more than the cost of equity of the
business (Ahmed, 2013). CAPM approach is followed by maximum number of company and it is

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considered to be the most accurate method of computing cost of equity for a company (McKay &
Haque, 2016).
Comparison between ARB Ltd and Modine Ltd
The company which is selected for the purpose of comparison with ARB is Modine Ltd.
Modine ltd is a company which is engaged in manufacturing activities of products which are
similar to ARB ltd and also belongs to the same industry as ARB ltd. The capital structure of
Modine ltd comprises of equity share capital of $ 421.20 million and the company also has debt
capital which is shown in figure 6 as $ 519.90 million. The capital structure of the business
shows that the business has more amount of debt capital in comparison to equity capital. This
shows that the business relies on debt capital more than equity capital. On the other hand, the
capital structure of ARB ltd is made up of only equity share capital and there is no presence of
debt capital in the capital structure of the company. Thus, it can be said that the capital structure
of the Modine ltd is much better in comparison with ARB ltd as it has the advantage of debt
capital. In addition to this, the company using the debt capital is also able to take advantage of
tax reductions.
Particulars Amount Weightage Amount Weightage
(in '000s) (in million)
Total Equity $2,72,341 100% $421.20 45%
Secured Borrowings:
Short Term Debt $73.4
Current Portion of Long
Term Debt $31.8
Long Term Debt $405.7
Total Secured Borrowings $0 0% $510.90 55%
TOTAL CAPITAL $2,72,341 100% $932 100%
ARB MODINE
COMPARISON with MODINE MANUFACTURING COMPANY
Figure 6: (Image Showing Comparison of Capital Structure of two companies)

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Source: (Created by Author)
Financial Ratio Analysis of ARB Ltd
Profitability Ratios
Particulars 2017 2016 2014 2015
Total Revenue 382599 356905 329755 297779
Materials & Consumables Used 173600 161857 149646 131764
Net Profit 49152 47439 44093 42570
Total Assets 323243 291808 269869 241764
Total equity 272341 249608 226348 197814
Gross Profit Margin 0.454 0.454 0.454 0.442
Net Profit Margin 0.128 0.133 0.134 0.143
Return on Assets 0.152 0.163 0.163 0.176
Return on Equity 0.180 0.190 0.195 0.215
Figure 7: (Image Showing Profitability ratios)
Source: (Created by Author)
Particulars 2017 2016 2014 2015
Total Assets 323243 291808 269869 241764
Total equity 272341 249608 226348 197814
Total Liabilities 50902 42200 43521 43950
Current Assets 169177 148466 133820 150620
Current Liabilities 49785 40944 42544 43230
Finance Costs 11 170 220 0
Operating Profit 67512 64549 60236 57291
Current Ratio 3.398 3.626 3.145 3.484
Time Interest Earned Ratio 6137.455 379.700 273.800
Debt-to-Equity Ratio 0.187 0.169 0.192 0.222
Debt Ratio 0.157 0.145 0.161 0.182
Equity Ratio 0.843 0.855 0.839 0.818
Solvency Ratio
Figure 8: (Image Showing Solvency ratios)
Source: (Created by Author)

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Particulars 2017 2016 2014 2015
Inventory 88020 86941 77821 70443
Trade Receivables 50840 44425 42216 39762
Trade Payables 35279 27754 28874 30202
Cost of Goods Sold 173600 161857 149646 131764
Sales Revenue 382599 356905 329755 297779
Inventory Turnover Ratio 1.972 1.862 1.923 1.871
Payables Turnover Ratio 4.921 5.832 5.183 4.363
Receivables Turnover Ratio 7.526 8.034 7.811 7.489
Efficiency Ratio
Figure 9: (Image Showing Efficiency ratios)
Source: (Created by Author)
As per the computation of ratios which are shown in the above table, the ratio which are
used for the analysis of the performance of the company are based on profitability, solvency and
efficiency (Babalola & Abiola, 2013). The profitability ratio shows gross profit margin, net profit
margin, return on equity and return on assets. The net profit margin of the company shows that it
has reduced from the previous year’s estimates which implies that the company needs to improve
the operations of the business and also reduce the costs associated with the business (Xu et al.,
2014). The return on assets also shows that it is 0.152 which is reduced from previous year’s
estimate which signifies that the return from assets has reduced which in turns means that the
profit of the company has fallen. The return on equity also shows similar results which suggests
that the profit which is available to the shareholders of the company has reduced significantly
from previous year. The solvency ratio of the business shows mixed results (Khidmat &
Rehman, 2014). The current ratio of the business shows a favorable change as it has increased
from previous year. This shows that the liquidity position of the company has improved from
previous year’s estimates. The debt equity ratio shows that it has increased from previous year’s

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estimate which signifies that the level of debt which is used by the business has increased from
previous year’s figure. Similarly, the time earned ratio has increased significantly due to the
increase in the level of debts of the company (Rauch & Wende, 2015). The efficiency ratio of the
business considers inventory turnover ratio, debtors turnover ratio and creditors turnover ratio.
The inventory turnover ratio shows that it has increased from previous year’s estimate which is a
favorable sign for the business. The debtor turnover ratio shows that the estimate has reduced
from previous year’s figure. This might mean that there is a problem in the credit collection
policy of the company (Gautam, Petander & Noel, 2013).
Change in Capital Structure
Particulars Amount Weightage Amount Weightage Amount Weightage Amount Weightage
(in '000s) (in '000s) (in '000s) (in '000s)
Total Equity $2,72,341 100% $2,49,608 100% $2,26,348 99% $1,97,814 100%
Secured Borrowings $0 0% $0 0% $2,000 1% $0 0%
TOTAL CAPITAL $2,72,341 100% $2,49,608 100% $2,28,348 100% $1,97,814 100%
Change in Total Capital 9.11% 9.31% 15.44%
2015 2014
CHANGE in CAPITAL STRUCTURE:
2017 2016
Figure 10: (Image Showing Change in Capital Structure of ARB ltd)
Source: (Created by Author)
As shown in figure 10, the total capital which is used by the business for the year 2017
comprises of only equity capital and no portion of debt capital is used in 2017. In 2016, equity
share capital of the business is shown at $ 2,49,608 which is the only capital present in the
capital structure. In 2015, the company had used debt capital in the capital structure of the
company as shown in figure 10 is of $ 2000.

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Wealth Maximization Principle
2017 2016 2015 2014
Particulars Amount Amount Amount Amount
(in '000s) (in '000s) (in '000s) (in '000s)
NOPAT $49,152 $47,439 $44,313 $42,570
Total Capital Employed $2,72,341 $2,49,608 $2,28,348 $1,97,814
WACC 18.05% 19.01% 19.39% 21.52%
Total Capital Cost $49,152 $47,439 $44,269 $42,570
Economic Value Added $0 $0 $44 $0
SHAREHOLDER'S WEALTH:
Figure 11: (Image Showing Shareholders Wealth Statement of ARB ltd)
Source: (Created by Author)
ARB ltd has not been able to achieve the required growth for the business and has been
earning low amount of profits as shown in NOPAT as shown in Figure 11. The only positive
factor is that the cost of capital is reduced. Thus, it can be said that the company has not been
able to generate as much wealth as per the expectation of the shareholders (Jones & Felps, 2013).
Recommendations
The recommendation which can be suggested to ARB ltd are given below:
 The company needs to add debt capital in the capital structure so that the management
can take advantage of the additional capital available and also will be able to take
advantage of tax situations.
 The company also needs to focus on strategies which improves the wealth generation
ability of the company in order to meet the expectation of the shareholders.
 The cost of capital of the business needs to be reduced further as they represent the risk
factor and such can be done with the help of a better capital structure.

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Conclusion
Thus, from the above discussion it is clear that ARB ltd needs to improve the capital
structure of the business and also improve the cost of capital associated with the business. In
addition to this, the company needs to formulate strategies which will result in wealth
maximization for the shareholders of the company. The company needs to include debt capital in
the capital mix of the business.

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