Applied Finance: Project Report on Financial Statement and Market Performance of Caltex Australia

This project report analyzes the financial statement and market performance of Caltex Australia to identify investment opportunities. It covers topics such as corporate governance, risk and return, ownership structure, and more.

Running Head: Applied Finance
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Project Report: Applied Finance

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Executive summary:
Identification over the financial statemenent and market performance of an
organization is quite important before making any decision about the investment in the
company. In the report, various financial key indicators of the company has been studied in
order to identify the investment level of Caltex Australia. The study explains that risk and
return position of the company is quite better in the industry. Further, the ownership structure
and rules have been managed by the company according to Australian policies only. The
other factors also define about better position of the company. the report concludes that the
investment into the company would offer higher return to the investors.

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Contents
Corporate governance.......................................................................................................5
Chief executive officer.................................................................................................5
Ownership structure......................................................................................................6
Conflict between bondholders and shareholders..........................................................7
Financial market consideration.....................................................................................8
Social constraints..........................................................................................................9
Recommendation on corporate governance..................................................................9
Risk and return................................................................................................................10
Estimating historical risk parameters..........................................................................10
Estimating default risk and cost of debt.....................................................................12
Estimating cost of capital............................................................................................14
Earnings and cash flow...................................................................................................15
Analyzing existing investment...................................................................................15
Assessing competitive strength...................................................................................18
Sustainability and competitive strength......................................................................20
Financial sources............................................................................................................20
Assessing current financing........................................................................................20
Benefit of debt............................................................................................................21
Cost of debt.................................................................................................................22
Dividend policy..............................................................................................................23
Historical dividend policy analysis.............................................................................23
Firm characteristics.....................................................................................................23
Cash/ trust nexus.........................................................................................................24

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Peer group...................................................................................................................24
Valuation.........................................................................................................................25
FCFF approach...........................................................................................................25
DDM approach...........................................................................................................26
PE approach................................................................................................................26
Conclusion:.....................................................................................................................27
References.......................................................................................................................28
Appendix.........................................................................................................................30

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Corporate governance:
Corporate governance structure of Caltex Australia has been studied in the report. The
study explains that a number of guidelines have been set by the business in order to manage
the corporate governance structure of the company. Company follows a straight style to
manage the corporate governance of the company.
Chief executive officer:
Chief executive officer (CEO) of the company is Julian Segal. He has been the chief
executive officer if Caltex Australia since December, 2016. He is also one of the boards of
director members of the company and commercially driver senior manager whose main focus
is towards the innovation solution and customer centric solution to the customers which
improves the operational efficiency and overall performance of the company (Annual report,
2018).
Julian Segal is not connected as family to the business. He has been appointed as CEO
of the comapny because of his efficiency level and great performance in the organization. He
has worked in the organization from a long time and has experience of nearly 30 years in
various firms which have helped Julian to be at CEO position (Annual report, 2018). CEO is
the only person who also holds a set in non executive officers of the company.
Further, it has been investigated that Julian has earn $ 22,23,500 in the year of 2018
which includes salaries and various other remuneration such as bonus, LT etc. The annual
report (2018) of the company explains that bonus and LTI of the CEP depends on the
performance of the company. Since, last 2 years, this amount has been improved due to the
better performance of the company.
(Annual report, 2018)

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Further, it has been investigated that 325,585 shares are held by Julian in the company
which involves the direct interest and indirect interest f the company. Below image describes
about the classification of shares of Julian in the company.
Ownership structure:
The annual report (2018) of company explains that all the directors have stocks of the
company for direct interest and non direct interest. Below is the report of directors along with
the number of shares held by them in last financial year?
(Annual report, 2018)
Further, it has been recognized that top 20 stockholders of the company are various
financial institution and Bhang Corporation. They held 83.38% of total stock of the company.

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(Annual report, 2018)
Through the study over top 20 stockholders of the company, it has been recognized
that there is no executive and non executive director exist in the top 00 stockholders of the
company. Further, none of their relative held more stock in their kitty. It explains that proper
ownership structure guidelines re followed by the company so that no decision could be made
by the stakeholders for their own benefit rather than the stockholder’s benefit.
Conflict between bondholders and shareholders:
Caltex Australia’s debt structure has been studied further in order to identify the bond
performance of the company. On the basis of bond structure of the company, it has been
found that all the debt of the company is secured. Below is the detail about the bonds of the
company:
Issuer Caltex Australia
Bond type Coupon bonds
Placement method Open subscription
Placement type Public
Par amount, integral multiple 100,000 AUD

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Nominal 100,000 AUD
Outstanding principal amount 100,000 AUD
Amount 150,000,000 AUD
Placement date 17/04/2008
Maturity date 15/4/2027
Floating rate No
Coupon Rate 7.25%
Current coupon rate 7.25%
Day count fraction 2
Coupon frequency 2 time(s) per year
Interest accrual date 30th June
Related issues
Caltex Australia, 4% 17apr2025,
AUD
Caltex Australia, FRN 15sep2037,
AUD
(Bloomberg, 2018)
On the basis of further study, it has been recognized that the debt are convertible and
debt holders are free to convert it into cash and equity at any time. The company has
contacted with various regulatory agencies to run the bonds and manage the financial
performance of organization at better level.
On the basis of S&P ratings, it has been found that the debt type of company is A
which explains that the risk level of debt of the company is quite lower along with that,
timely payment of interest is done by the company in order to manage the performance and
other obligations of the company.
Financial market consideration:
Further, the stock market performance of the company has been studied and it has
been found that stock trading of the company is at higher level.

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Figure 1: Outstsnading share
(Morningstar, 2018)
Above graph indicates that the trading stock of the company has been lesser. On the
basis of invetsing.com (2019), it has been recognized that the investors should buy the stock
of the company in current scenario to improve the overall performance of the company.
Social constraints:
The news and articles related to the company has been studied and it has been found
that company has fulfilled all the social responsibilities at better level. As an investigation, it
has been found that company has invested a great amount in sustainability process of the
company. The annual report (2018) explains that company has taken various initiatives in the
market to help the Australian community to improve their lifestyle.
The environmental, social and corporate study has been done on the company and
found that the company has performed well in the market in terms of previous year and
competitor’s performance in the market. The number of women executive is higher in the
board of directors of the company and various new initiatives for more employment has been
done by the company.
Recommendation on corporate governance:

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On the basis of study over corporate governance of Caltex Australia, it has been found
that few changes in the organization could help the company to improve the management
decision and reduce the agency problem of the company. Further, it is recommended to the
management to improve the stakes in the company to reduce the ownership and governance
issues in the organization.
Risk and return:
Risk and return are the essential factor of an organization. It defines about the total
associated risk with the investment in the company as well as the total return which could be
got by the stakeholders from the company (palicka, 2011). The following analysis has been
done over the stock of Caltex Australia in order to identify the performance of stock of the
company in the market as well as in context with the competitors of the company.
Estimating historical risk parameters:
Historical risk parameters of the company have been studied on the basis of last 5
years stock price. Regression analysis study has been done over the stock of the company to
measure the risk factors of the company. Regression analysis study of the company is as
follows:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.0867
08
R Square 0.0075
18
Adjusted R
Square
-
0.0095
9
Standard
Error
0.0633
64
Observatio
ns
60
ANOVA
df SS MS F Significa
nce F
Regression 1 0.001764 0.001
764
0.439
361
0.51005
7
Residual 58 0.232868 0.004

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015
Total 59 0.234632
Coeffic
ients
Standard
Error
t Stat P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.0069
05
0.008313 0.830
57
0.409
622
-0.00974 0.0235
46
-
0.00974
0.02354
6
X Variable
1
0.1647
06
0.248484 0.662
843
0.510
057
-0.33269 0.6621 -
0.33269
0.6621
(Yahoo finance, 2019)
On the basis of regression analysis study over Caltex Australia, it has been found that
standard risk of the company is 0.16 which is lesser then 1 and indicates that the volatility in
the stock of the company is lesser then the market index stock price. It further defines that the
associated risk with the company is quite lesser (ASX, 2019). In the last 5 years, the stock
performance of the company has been improved along with the less volatility in the stock
price.
The regression analysis scope of the company is as follows:
Figure 2: Regression Analysis
(Source: Author)
The figure explains about the changes in Y factor on the basis of X factor. Here Y
factor indicates about the return from Caltex stock and X depicts the return from AORD
stock. On the basis of the above slope, it has been studied that the changes into X factor could
not impact much over the stock price of Y factor and it also explains that the stock
performance of Caltex Australia is independent and it does not rely over the market (Porcelli
& Delgado, 2009).

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Further, the beta risk of the company is 0.16 which is lesser then 1 and indicates that
the volatility in the stock of the company is lesser then the market index stock price. On the
basis of the study, it has been found that the risk level of company is attributed to the
industrial and economical factors of the country (Madura, 2014). The overall performance of
the comapny depends on the industry and hence, minor changes into the industry directly
impacts over the stock price of the company. It is important for the investors to identify the
type of risk attributed to the stock in order to measure the overall performance of stock and
prepared a better portfolio.
Overall, risk of the company depends upon the business. In terms of financial
leverage, it has been found that the company has managed the performance at great extent
and no financial leverage risk has been attributed in the company.
On the basis of the regression analysis study, it has been studied that the beta of the
company is 0.16. Further, Bloomberg (2019) explains that risk free rate of Australian market
is 2.45%. Along with that, market rate of return is 6%. It explains that the overall cost of
equity of the company would be 3.27%.
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 6%
C. Beta 0.16
D. CAPM 3.27%
(Mandell & Hanson, 2009)
As a manager, it has been found that cost of equity of firm is 3.27% which is quite
higher and hence, it must be determined by the company while making any investment that
the internal rate of return from that project is higher than the cost of equity of the firm. Also,
minor changes such as reduction in equity level could be done to manage the cost level of the
business.
Estimating default risk and cost of debt:
Debt of the company has been rated by various big firms such as S$P. Recently, S&P
has given A rating to the
On the basis of financial ratio analysis over last 5 years of the company, it has been
recognized that various ups and downs have been faced by the company. Initially, the

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liquidity position of the company has been studied and found that current ratio and quick
ratio of the company has varied a lot in last few years. Current liquidity level of the company
explains that quick ratio of the company must be improved to manage the overall
performance of the company.
Liquidity Ratios 2014 2015 2016 2017 2018
Current Ratio
Current Assets /
3,251,72
8
2,099,33
6
2,005,23
9
2,143,65
5
2,727,62
3
Current liabilities
2,072,15
7
1,503,90
0
1,217,74
9
1,502,45
6
2,358,66
9
Answer: 1.57 1.40 1.65 1.43 1.16
Acid test ratio
Current Assets - Inventory
/
1,223,87
1 981,252
1,035,35
4
1,062,73
5
1,032,70
8
Current Liabilities
2,072,15
7
1,503,90
0
1,217,74
9
1,502,45
6
2,358,66
9
Answer: 0.59 0.65 0.85 0.71 0.44
(Morningstar, 2019)
Further, the capital structure of the company has been studied and found that debt to
capital employed ratio of the company has been reduced in current year in comparison with
previous years. Interest level of the company explains that company has earned enough to
manage the expenses of the company in recent year which depicts about better solvency level
of the company.
Capital Structure Ratios 2014 2015 2016 2017 2018
Gearing ratio
Long term liabilities /
1,360,90
4
1,104,00
5
1,111,46
3 1,002,879 902,133
Capital employed
3,948,71
3
3,624,63
4
3,886,99
2 3,800,278
3,996,55
1
Answer: % 0.345 0.305 0.286 0.264 0.226
Interest Coverage Ratio
EBIT / 120,912 -790,959 286,236
-
15,871,37
0 37,110
Net Finance Costs (used net interest
expense) 97,632 119,575 82,093 79,403 70,102
Answer:
1.
24
-
6.61
3.
49
-
199.88
0.
53

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(Morningstar, 2019)
Further, annual report (218) of Caltex Australia explains that tax rate of the company
is 30%. On the basis of study over borrowings of the company, it has been found that interest
expenses of the company is 70,102 and borrowings amount of the company is $ 902,133. It
explains that interest rate of the company after taxation treatment is 5.44%.
Cost of debt:
Net finance cost 70,102.00
Less: Tax @30% 21,030.60
After tax cost of debt 49,071.40
Borrowings amount 902,133.00
After tax cost of debt (%) 5.44%
(Annual report, 2018)
On the basis of interest coverage ratio, it has been recognized that interest coverage
ratio of the company is 0.53 which is leaser then 0.5 and hence the rating of the company
would be C and the spread of the company would be 12.7%. A few relaxations have been
given to the company because of lower capital and better market performance.
Interest Coverage Ratio 2017 2018
EBIT /
-
15,871,370 37,110
Net Finance Costs (used net interest
expense) 79,403 70,102
Answer:
-
199.88
0.
53
(Yahoo finance, 2019)
Estimating cost of capital:
Market value of equity defines about the total market cap of the company. On the
basis of study, it has been recognized that the outstanding shares of the company are 2,61,000
and the market share price of stock of the company is $ 26.07. It explains that market cap of
equity off Caltex is $ 68,04,270.
Further, the market value of debt has been calculated on the basis of interest expenses
and maturity of debt of the company and it has been recognized that the market debt of the
company is $ 32,60,802 (Reuters, 2019).
Further, in order to calculate the WACC of the company, equity and debt share of the
company is calculated which are as follows:

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Markey Value Weights
Debt Equity Total
Equity shares
6,804,270.0
0
Value of debt
3,260,802.0
0
Total
3,260,802.0
0
6,804,270.0
0
10,065,072.0
0
D. Weights 32.40% 67.60%
(Annual report, 2018)
The above study explains that the cost of equity of the company is 3.27% and the cost
of debt of the company is 5.44%. Hence, the cost of capital of the company is 3.97%.
Calculations of WACC of the company are as follows:
Debt Ordinary Shares Total
Cost of Finance 5.44% 3.27%
Market Weights 0.32 0.68
WACC 1.76% 2.21% 3.97%
It explains that the cost of capital of the company is 3.97%.
Earnings and cash flow:
Analyzing existing investment:
The initial investment of the company has been studied and it has been recognized
that company is earning 10.2% ARR from the market. It is quite higher than the cost of
equity and cost of capital of the business which defines that it is better option for the
company to make investment and get higher return from the market.
Further, economic value added of the company has been studied to measure that
whether the company is able to manage the cost of equity of the company or not. In recent
year, EVA of the company is 2.78 which depicts about better performance of the company.
Further, the EVA of the company has been compared with previous numbers to measure the
improvement and changes into the performance of the company. It depicts that the overall
financial performance of the company has been improved (annual report, 2018).
Calculation of EVA

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2014 2015 2016 2017 2018
Net profit 530028 19931 521507 609940 619085
Equity
cost
289326 254010 235911 281223
222,500
EVA
1.83 0.08 2.21 2.17 2.78
(Annual report, 2018)
The study explains that ARR of the company is 10.2% and EVA of the company is
2.78 in the year of 2018. It explains that company is enough capable to manage all the cost
incurred due to raise in equity, debt and total capital of the company. On the basis of study it
has been recognized that the ARR rate if 10.2%, quite higher then cost of capital, 3.97% of
the company. Further, EVA also explains that company is earning 2.8 times more than cost of
equity of the company which is quite better.
Further, financial ratio study has been done over the company to measure the overall
financial performance of the company. On the basis of below given tables, it has been
recognized that the profitability position of the company have faced various issues in last 5
years, however, by the end of 2018, profitability level of the company has been improved at
better level (Koropp, Kellermanns, Grichnik & Stanley, 2014). Moreover, the efficiency
position of the company describes that the efficiency level in current year has improved to
manage the operations and performance of the comapny has been improved.
Along with that, company is managing all the operations in lower cost than earlier.
Addition to it, liquidity performance of the company has been improved at better level. From
previous years, the associated liquidity risk of the company has been lower. It can further be
improved by improving the level of quick assets of the company. Lastly, capital structure
ratio of the company defines that the capital such as debt and equity has been managed by the
company in better proportion (Madura, 2014). Along with that, company is able to manage
the entire cost related to the capital of the company.
Ratio Calculations 2014 2015 2016 2017 2018
Profitability Ratios: 2014 2015 2016 2017 2018
Return on Capital employed
Operating profit / 120912 -790959 286236 -
1587137
37110

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0
Capital employed (total assets -
current liabilities)
3,948,
713
3,624,
634
3,886,
992
3,800,
278
3,996,
551
Answer: % 3.06% -21.82% 7.36%
-
417.64
% 0.93%
Gross Profit Margin
Gross profit /
1,313,3
43
1,148,5
66
1,653,6
99
-
14,261,8
27
1,834,3
15
Sales Revenue (note used operating
revenue)
24,352,
188
23,878,
180
19,692,
110
17,618,6
37
21,072,
140
Answer: 5.4% 4.8% 8.4% -80.9% 8.7%
Operating profit margin
Operating profit / 120,912
-
790,959 286,236
-
15,871,3
70 37,110
Sales Revenue %
24,352,
188
23,878,
180
19,692,
110
17,618,6
37
21,072,
140
Answer: 0.50% -3.31% 1.45% -90.08% 0.18%
Asset Efficiency Ratios 2014 2015 2016 2017 2018
Trade payable payment period
ratio
Accounts payable/
1,195,4
91 610,399 673,072 0 0
Cost of sales
23,038,
845
22,729,
614
18,038,
411
31,880,4
64
19,237,
825
Answer: (note the above needs to
be x 365) 18.94 9.80 13.62 0.00 0.00
Inventory Turnover (days)
Average Inventory /
2,027,8
57
1,118,0
84 969,885
1,080,92
0
1,694,9
15
Cost of Sales
#
days
23,038,
845
22,729,
614
18,038,
411
31,880,4
64
19,237,
825
Answer: (note the above needs to be x
365) 32.13 17.95 19.63 12.38 32.16
Receivables Turnover (days)
Average trade debtors /
901,
494
758,
165
639,
943
659,
115
736,
644
Sales revenue (note used operating
revenue)
#
days
24,352,
188
23,878,
180
19,692,
110
17,618,
637
21,072,
140
Answer: (note the above needs to be x
365) 13.51 11.59 11.86 13.65 12.76

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Liquidity Ratios 2014 2015 2016 2017 2018
Current Ratio
Current Assets /
3,251,7
28
2,099,3
36
2,005,2
39
2,143,65
5
2,727,6
23
Current liabilities
2,072,1
57
1,503,9
00
1,217,7
49
1,502,45
6
2,358,6
69
Answer: 1.57 1.40 1.65 1.43 1.16
Acid test ratio
Current Assets - Inventory /
1,223,8
71 981,252
1,035,3
54
1,062,73
5
1,032,7
08
Current Liabilities
2,072,1
57
1,503,9
00
1,217,7
49
1,502,45
6
2,358,6
69
Answer: 0.59 0.65 0.85 0.71 0.44
Capital Structure Ratios 2014 2015 2016 2017 2018
Gearing ratio
Long term liabilities /
1,360,9
04
1,104,0
05
1,111,4
63
1,002,87
9 902,133
Capital employed
3,948,7
13
3,624,6
34
3,886,9
92
3,800,27
8
3,996,5
51
Answer: % 0.345 0.305 0.286 0.264 0.226
Interest Coverage Ratio
EBIT / 120,912
-
790,959 286,236
-
15,871,3
70 37,110
Net Finance Costs (used net interest
expense) 97,632 119,575 82,093 79,403 70,102
Answer:
1
.24
-
6.61
3
.49
-
199.88
0
.53
Market value Ratios 2014 2015 2016 2017 2018
Earnings per share
Net income 530,028 19,931 521,507 609,940 619,085
Weighted average shares
outstanding 270,000 270,000 270,000 263,000 261,000
Answer: 1.963 0.074 1.932 2.319 2.372
Dividend coverage ratio
Net income / 530,028 19,931 521,507 609,940 619,085

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Dividend paid to shareholders 109,400 99,900 262,700 319,405 293,107
Answer:
4.
845
0.
200
1.
985
1.9
10
2.
112
(Morningstar, 2019)
Assessing competitive strength:
On the basis of study, it has been recognized that the main competitors of the
company are Ergon, Balckrock resources llc etc. The study over porter’s 5 forces model of
the company is as follows:
Thereat of new entrants:
There are huge chances for the firm to enter into energy industry and grab the share
from Caltex Australia. Hence, the company has already lower the pricing strategy and
reduced the cost of the company to lower the threat from new entrants. Also, company is
following the innovation strategy to maintain the performance of the comapny.
Bargaining power of suppliers:
In the energy sector, all the companies buy the raw material from the same suppliers.
Hence, the suppliers are at dominant place and decrease the profitability position of Caltex
Austrasia. the overall impact of higher barraging power is reduction in the prfouts of the
comapny (Mandell & Hanson, 2009).
Threat of substitute:
There are few chances for the company to get a substitute. Hence, the threat from
substitution level is quite higher. Also, company is working hard to bring innovation in the
market.
Bargaining power of buyers:
In the energy sector, customers could buy the products from any of the company
available in the market and hence, buyers are at dominant place and it decreases the
profitability position of Caltex Austrasia. The overall impact of higher barraging power is
reduction in the profits of the comapny (Annual report, 2018).
Industry rivalry:

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Caltex Australia is operating its business in a very competitive environment. It downs
the prices and reduces the profit level of the company. However, in terms long term
profitability, it is good for the comapny.
SWOT analysis:
SWOT analysis of Caltex Australia is as follows:
Strength 1. Strong supply and market
infrastructure
2. Increment in the profitability eve
3. Strategic acquisition
4. Broad product list and better service
portfolio
5. Solid refining output
6. Global presence
Weakness 1. Debt burden
2. Shutdown few refineries in Sydney
Opportunity 1. A great energy demand in the market
2. Growth in Asian pacific
3. Increased focus towards the
renewable energy (Investing.com,
2018)
Threat 1. Geographical concentration
2. Higher capital cost
3. Volatility in the oil and gas price
4. Competition from various other
players in the market (annual report,
2018).

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Sustainability and competitive strength:
The sustainability and competitive strength of the company has been studied further
and it has been found that there is a blurry image of upcoming year’s f the company. There is
a pressure over the company to manage a competitive strength in the market in red to manage
the market share and improve the profitability ratio. In order to do the same, the company has
prepared a portfolio of sustainability activities to improve the performance level of the
company.
Financial sources:
Assessing current financing:
Currently, the capital structure of the company has been studied and found that equity
level of the company is almost similar in last 5 years. Company has risen a bit of equity in
order to improve the funds for new investment. Further, in case of debenture, it has been
found that company raises the debt amount through selling the debenture in the market and
through generating the loan amount from the financial institute.
Company owns the convertible debenture which could be converted into equity and
cash at anytime. Further, the fixed vs. floating debentures have been issued by the company
in the market. Company has not used any hybrid source of capital to raise the investment in
the company.

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Figure 3: Capital structure
(Annual report, 2018)
Benefit of debt:
Annual report (2018) explains that marginal tax rate of the company is 30% which
explains that if the investment would be done into the debt of Caltex Australia then the
investors would be able to get a return of 30%. Further, it has been found that various other
tax deduction factors are involved in the financial measurement of the company such as
depreciation, amortization, valuation of inventory etc.
On the basis of the study, it has been recognized that the free cash flow of the
company has been improved at better level in last 5 years. Company has made a huge growth
in last 5 years to improve the cash level and liquid performance of the company. The
EBITDA/ firm value of the company explains that the company has improved the overall
performance in the year of 2018.
Calculation of free cash flows
2014 2015 2016 2017 2018
EBITDA 120912 -790959 286236 -15871370 37110
Firm value 2587809 2520629 2775529 2797399 3094418
4.67% -31.38% 10.31% -567.36% 1.20%
(Investing.com, 2019)
Cost of debt:

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On the basis of the study, it has been found that a huge amount is paid by the
company to its debt holder by the name of interest. Currently, company has reduced the
amount of interest in order to manage the cash flow and the overall performance of the
company. The annual report (2018) explains that the interest coverage rate of the company
has also been improved. Below is the interest coverage ratio and interest express’s of last 5
years of the company.
Interest
Coverage Ratio
EBIT / 120,912 -790,959 286,236
-
15,871,370 37,110
Net Finance
Costs (used net
interest expense) 97,632 119,575 82,093 79,403 70,102
Answer:
1.2
4
-
6.61
3.4
9
-
199.88
0.5
3
Figure 4: Interest expenses
(annual report, 2018)
On the basis of study and transperant process of the company, it has bene recognized
that it is quite easier for the bondholders of idntify the performance of debt of the company.
the assets of the company are largelt tangible which is used by the company to run the
business and manage the overall operations. further, it has bene found that forecatsing
staregies of the company are quite advanced and hence, it it easier for the company to keep a

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track over the fiture invetsmen opportunities, market demand and the market performance of
the company.
Dividend policy:
Historical dividend policy analysis:
On the basis of annual report (2018), it has been recognized that the dividend policy
pay out of the company is 50% which defines that company pays 505 of net income amount
to its shareholders in the name of dividends. This dividend policy has helped the company to
manage the stock performance and market value as investors get motivated due to the
dividend amount. Dividend payout of the company is 50% and dividend yield is 3.6% (annual
report, 2018). In last few years, along with the improvement in the cash flows of the
company, an increment has been seen in the dividend payout ratio of the company.
Firm characteristics:
The shareholders of the company have invested in the company for long term because
of better dividend from the company and lesser risk involved with the stock of the company.
Marginal stockholders of the company are big institution and corporation. Dividends are not
their preferences, they have invested into the company to run the company according to their
basis and get higher return (Bloomberg, 2018). Company announces about the financial
information in its annual report and through the newsletter and articles. It is quite easier for
the company to send the information to financial market.
Further, there isn’t any limit for the company to manage the payout the dividend.
Company takes payout decision on the basis of market demand and company’s performance.
Dividend policy is used by the company as a signal to tell the investors that company is
performing well and investment into the company would offer great return to the investors.
Cash/ trust nexus:
On the basis of study, dividend is paid in cash by the company. Company has paid
30.23% of dividend from FCFE. Management is quite trusted in terms if managing the cash
of the company. The FCFE is higher than dividend amount of the company which is quite
normal for every company.
Calculation of dividend paid / FCFE
Dividend paid 0.042 0.043 0.039 0.039 0.035

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FCFE 0.045 0.106 0.191 0.217 0.117
93.21% 41.11% 20.67% 18.00% 30.23%
(Morningstar, 2019)
Peer group:
The competitor of the company has been studied and it has been found that dividend
payout, dividend yield, EPS and ROE of the company is highest in the market.
Dividend
yield
Dividend
payout
ratio EPS ROE
Caltex Australia 3.60% 50% 2.37 19.41%
Ergon 2.50% 43% 1.47 13.93%
Blackrock
resources 1.60% 48% 0.89 14.12%
(Morningstar, 2019)
It defines that company has performed very well in the market and the demand of
company’s stock is highest in the market.
Valuation:
FCFF approach:
Intrinsic value of the company through FCFF is as follows:
Estimated Free cash flows for firm
Year FCFF ($M)
2018 1,972,610.58
2019 2,067,295.88
2020 2,166,526.09
2021 2,270,519.34
2022 2,379,504.27
2023 2,493,720.47
2024 2,613,419.05
2025 2,738,863.17

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2026 2,870,328.60
2027 3,008,104.37
Terminal cash
flows 3,108,274.25
Present value of discrete cash flows for next 10 years
Year FCFF ($M)
PVF
@3.97% PV of Cash Flows
1 1,972,610.58 0.962
1,896,795.6
5
2 2,067,295.88 0.925
1,911,441.5
3
3 2,166,526.09 0.889
1,926,200.4
9
4 2,270,519.34 0.855
1,941,073.4
1
5 2,379,504.27 0.822
1,956,061.1
7
6 2,493,720.47 0.790
1,971,164.6
5
7 2,613,419.05 0.760
1,986,384.7
5
8 2,738,863.17 0.731
2,001,722.3
8
9 2,870,328.60 0.703
2,017,178.4
3
10 3,008,104.37 0.676
2,032,753.8
3
Total
19,640,776.2
8
Present value of terminal cash flows
Terminal cash
flows 3,108,274.25 29,049,292.05
Total value of Firm ($'000) 48,690,068.33
Less: Value of Debt 3,260,802.00
Total value of Equity 45,429,266.33
No of Shares Outstanding 261,000.00

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Per share value of value of equity
$
174.06
DDM approach:
Intrinsic value of the company through DDM is as follows:
Dividend Discount Model
Dividend expected 0.06
Growth rate 3%
Discount rate 3.27%
Intrinsic Value 20.98
Market Price 26.07
Overvalued
PE approach:
Intrinsic value of the company through PE approach is as follows:
PE Multiple Model
Industry PE ratio 28.30
EPS of Caltex 2.37
Intrinsic Value 67.07
Market Price 26.07
Undervalued
(yahoo finance, 2019)
On the basis of study, it has been recognized that the stock price of the company was
undervalued in the market.
Conclusion:
To conclude, Caltex Australia’s financial and stock performance is quite better in the
Australian market. The study over Caltex Australia that the ownership structure and rules has
been managed by the company according to Australian policies only. Further, risk and return
position of the company is quite better in the industry. In addition to this, financial sources
have also been managed by the company according to market demand only. Other factors
also define about better position of the company. The report concludes that the investment
into the company would offer higher return to the investors. Apart from it, it is also

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recommended to the investors that the stock price of the company is undervalued in the
market. Hence, this is the right time to buy the stock of the company.

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References:
annual report. (2018). Caltex Australia. [online]. Retrieved from:
https://www.caltex.com.au/annual-report-2018
ASX. (2019). Caltex Australia. [online]. Retrieved from: https://www.caltex.com.au/our-
company/investor-centre/asx-announcements
Bloomberg. (2019). Caltex Australia. [online]. Retrieved from:
https://www.bloomberg.com/quote/CTX:AU
Invetsing.com. (2019). Caltex Australia. [online]. Retrieved from:
https://www.investing.com/equities/caltex-australia-limited
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision
making in family firms: An adaptation of the theory of planned behavior. Family
Business Review, 27(4), 307-327.
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision
making in family firms: An adaptation of the theory of planned behavior. Family
Business Review, 27(4), 307-327.
Madura, J. (2014). Financial Markets & Institutions. US: Cengage Learning.
Madura, J. (2014). Financial Markets & Institutions. US: Cengage Learning.
Mandell, L., & Hanson, K. O. (2009, January). The impact of financial education in high
school and college on financial literacy and subsequent financial decision making.
In American Economic Association Meetings (Vol. 4, p. 2009).
Mandell, L., & Hanson, K. O. (2009, January). The impact of financial education in high
school and college on financial literacy and subsequent financial decision making.
In American Economic Association Meetings (Vol. 4, p. 2009).
Morningstar. (2019). Caltex Australia. [online]. Retrieved from:
https://www.morningstar.com/stocks/XASX/CTX/quote.html
Palicka, V.J. (2011). Fusion Analysis: Merging Fundamental & Technical Analysis for Risk-
Adjusted Excess Returns. McGraw Hill Professional.
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial
decision making. Psychological Science, 20(3), 278-283.

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Reuters. (2019). Caltex Australia. [online]. Retrieved from:
https://www.reuters.com/finance/stocks/financial-highlights/CTX.AX
Yahoo Finance. (2019). Caltex Australia. [online]. Retrieved from:
https://finance.yahoo.com/quote/ctx.ax?ltr=1

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Appendix:

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Check the attached spreadsheet