Accounting and Finance - Assignment

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

ACCOUNTING AND FINANCE
Executive summary:
The assignment is about two case studies that is divided into two sections Part A and part B.
Part A is about Saturn Pet Care that is seeking investment into two projects. Such projects are
evaluated by using the techniques of capital budgeting. Part B on other hand is about ARB
limited for which the financial performance is analyzed using tools of ratio and CAPM.
Table of Contents
Executive summary:...................................................................................................................1
Part A:........................................................................................................................................3

ACCOUNTING AND FINANCE
Analysis of capital budgeting for Bathurst project:...................................................................3
Analysis of capital budgeting for Wodonga project:.................................................................3
Importance of product cannibalization in capital budgeting decision:......................................3
Capital budgeting options for sales estimation:.........................................................................3
Evaluation of original value of vacant Wodonga factory :........................................................3
Part B:.........................................................................................................................................3
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................4
Categorizing the capital structure of ARB Corporation Limited:..............................................4
Computation of WACC:............................................................................................................4
Determining appropriate return using CAPM:...........................................................................4
Comparing the capital structure of ARM limited with similar firms of same industry:............4
Analyzing the financial performance of ARB limited using financial ratios:...........................4
Analyzing the change in capital structure for the last three years:............................................4
Evaluating the firm’s success in generating wealth to their shareholders:................................4
Recommendations for adopting alternative capital strcuture:....................................................4
Conclusion:................................................................................................................................4
References list:...........................................................................................................................6

ACCOUNTING AND FINANCE
Part A:
Analysis of capital budgeting for Bathurst project:

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Analysis of capital budgeting for Wodonga project:
Evaluation of both the projects that is Bathurst and Wodonga project is done by the
application of capital budgeting tools such as net profit value, profitability index and payback
period. From the above table, it can be inferred that it would be viable for Saturn Pet Care to
make investment in Wodonga project. This is so because the net present value of Wodonga
project stood at $ 5844567as against Bathurst project at $ 9594827 indicating that net present
value is significantly higher for Wodonga project. In addition to this, the payback period of
Wodonga project stood at 3.453 while that of Bathurst project stood at 3.86 and this is
indicative of the fact that time taken for recovering initial investment made in Wodonga
project is less than that of Bathurst project. Profitability index of Wodonga project is
computed at 1.17 compared to 1.34 of Bathurst project. Therefore, it would be viable to make
investment in Wodonga project.

ACCOUNTING AND FINANCE
Importance of product cannibalization in capital budgeting decision:
Cannibalization of product is a strategy that is implemented by organization when
they intend to increase the sales of newly developed product by reducing the volume of sales,
sales revenue and share of market of the existing products. Under such strategy, there are
negative incremental effects of newly launched product as it reduces the sales of existing
product and any amount of loss generated from such product should be treated as cost. Saturn
Pet Care has adopted this particular strategy as a measure for promoting their new product
that will have the impact in terms of increasing sales revenue. Such affect will have
considerable impact on capital budgeting decision and accordingly investment decision (Chen
and Hong 2017).
Capital budgeting options for sales estimation:
It is perceived by strategy finance director of Saturn Pet Care that the amount of
estimated sales is unreasonably high and any amount of such error would considerably
impact the decision relating to capital budgeting. The estimation of wrong budgeted sales
would have considerable impact on the process of budgeting and thereby on the decision of
making investment in project. Therefore, in order for minimizing the impact of such errors,
appropriate steps must be taken by Saturn Limited. Under such circumstances, it would be
suitable to employ the technique of net present value as using this value will help in
neutralizing the influence of wrong estimation in sales by generating an increased cash
outflow.
Evaluation of original value of vacant Wodonga factory:
Considering the original value of vacant Wodonga factory is the capital budgeting
analysis is another area of concern. It is opined by Natha that original factory cost should be
involved in the present value analysis. However, if the factory cost is considered then there

ACCOUNTING AND FINANCE
would be change in net present value. There might be negative impact of such inclusion and
ultimately influencing the capital budgeting decision.
Part B:
Introduction:
The report is prepared for evaluation the financial performance of ARB limited by
analyzing their capital structure, financial ratios, and wealth of shareholders and cost of
capital. Change in structure of capital has been analyzed over the past three years by
comparing to the other firm operating in the same industry.
Discussion:
Categorizing the capital structure of ARB Corporation Limited:
It can be seen from above table that the capital structure of ARB involves equity with
no dependency on external borrowings. Total amount of equity stood at $ 272341. The firm
does not have any financial leverage.

ACCOUNTING AND FINANCE
Computation of WACC:
The WACC of ARB limited has been changing year on year with fall in the rate since
year 2014. Weighted average cost of capital stood at 21.52% in year 2014 that declined to $
19.01% in year 2016 and further to $ 18.05%. Decline in the cost is considered favorable on
part of investors as lower cost is associated with lower level of risks (Wang and Fargher
2017).
Determining appropriate return using CAPM:

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Value of equity cost is different when it is computed using general method and when
it is computed using CAPM. Cost of equity computed under the CAPM stood at 7.906% as
against 18.05% under the general method.
Comparing the capital structure of ARB limited with similar firms of same industry:
This particular section depicts the comparison of structure of capital of ARB limited
with that of Modine limited operating in the same industry. There is difference between the
capital structures of both the firms with Modine having considerable degree of financial
leverage. ARB limited finances its operations only by way of equity investments. Modine
limited on other hand, has both debt and equity in their capital structure. Secured borrowings
have a higher proportion compared to equity in their capital structure.
Analyzing the financial performance of ARB limited using financial ratios:
The financial performance of ARB limited is evaluated by analyzing its liquidity,
efficiency and solvency position.

ACCOUNTING AND FINANCE
It can be seen from above table, that net profit margin, return on equity and return on
assets have decreased year on year. Gross profit margin on other hand has remained constant
for over three years. Therefore, the overall profitability position have deteriorated by fewer
amount.
Now, looking at the solvency position of company, it can be seen that there has been
increase in value of ratio indicating an increased financial leverage of company. Equity ratio,

ACCOUNTING AND FINANCE
debt ratio, time interest earned ratio and debt to equity ratio have declined in earlier year and
have increased subsequently in later years (Elliot et al. 2016).
Efficiency position of ARB limited has also declined with receivables turnover ratio
and payables turnover ratio falling to 7.526 and 4.921 in year 2017 against 8.034 and 5.832 in
year 2016 respectively.
Analyzing the change in capital structure for the last three years:
Capital structure of ARB Limited has changed considerably with increasing amount
of total capital year on year. In earlier year, the capital structure also involved debt along with
equity. Value of capital has increased to $ 272341 in year 2017 as against $ 249608 in year
2016 respectively.

ACCOUNTING AND FINANCE
Evaluating the firm’s success in generating wealth to their shareholders:
Although, there has been increase in net operating profit after tax to $ 49152 in year
2017 compared to $ 44313 in year 2015. The total cost of capital has also increased with non
economic value being added. This depicts that wealth of shareholder has not increased.
Recommendations for adopting alternative capital structure:
It is required on part of management of ARB limited to lower the cost of capital so as
to lower the risks associated with operation of company.
 The capital structure of company should involve both debt as well as equity for
lowering the total equity costs and taking the advantage of tax deduction.
 ARB limited should have appropriate mixture of debt capital and equity into their
capital structure.
Conclusion:
Analysis of the financial performance of ARB limited using capital budgeting tools
and ratio analysis tool, it can be inferred that capital structure should also include debt along
with equity capital. In addition to this, there should be reduction of cost of capital for
reducing the risk level associated with the operations.

ACCOUNTING AND FINANCE
Reference list:
CHEN, M. and HONG, D.D., 2017. Overinvestment, Investment Effect and Accounting
Conservatism. Accounting and Finance, 5, p.003.
Crawford, I. and Wang, Z., 2014. Why are first‐year accounting studies
inclusive?. Accounting & Finance, 54(2), pp.419-439.
Elliot, B., Docherty, P., Easton, S. and Lee, D., 2016. Profitability and investment‐based
factor pricing models. Accounting & Finance.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Öker, F. and Adıgüzel, H., 2016. Time‐driven activity‐based costing: An implementation in a
manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
Tucker, I., 2017. The blueprint for continuous accounting. Strategic Finance, 98(11), p.40.
Vesty, G., Sridharan, V.G., Northcott, D. and Dellaportas, S., 2018. Burnout among
university accounting educators in Australia and New Zealand: determinants and
implications. Accounting & Finance, 58(1), pp.255-277.
Wang, I.Z. and Fargher, N., 2017. The effects of tone at the top and coordination with
external auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4),
pp.1177-1202.

ACCOUNTING AND FINANCE