Applied Finance: Financial Analysis and Investment Recommendation

This report provides a detailed financial analysis of AGL Energy and offers investment recommendations based on its performance. It covers corporate governance, risk and return, cash flow and earnings, financing sources, and dividend policies.

Running Head: APPLIED FINANCE 0
Applied Finance
(Student Name)

APPLIED FINANCE 1
Executive Summary
AGL energy is an Australian based company. The report focuses over the overall financial and
capital market performance of the company in order to offer a recommendation about the
investment level to investors of the company. The report has been conducted on various aspects
of the company and it has been measured that the investment into the company would offer
better return to the investors. The corporate governance policies have been maintained and
followed by the company properly. Along with that, risk and return level of the company is
average. Further, dividend policies, financial performance and other financial aspects are also in
the favor of the company and depicts that investment into the company would offer huge return
to the company.

APPLIED FINANCE 2
Table of Contents
Executive Summary.....................................................................................................................................1
Introduction.................................................................................................................................................4
Scope of Report.......................................................................................................................................4
Background of Company.........................................................................................................................4
Corporate Governance.................................................................................................................................5
Chief Executive Officer...........................................................................................................................5
Board of Directors...................................................................................................................................5
Ownership Structure................................................................................................................................7
Lenders....................................................................................................................................................8
Financial Market Consideration...............................................................................................................8
Social Constraints....................................................................................................................................9
Risk and return:.........................................................................................................................................10
Historical risk parameters:.........................................................................................................................10
Default risk and cost of debt:.................................................................................................................12
Estimating cost of capital:.....................................................................................................................14
Earnings and cash flows:...........................................................................................................................15
Analyzing the Existing Investment.........................................................................................................15
Assessing the Competitive Strength......................................................................................................18
Evaluating Sustainability of Competitive Strengths...............................................................................20
Financing Sources.....................................................................................................................................20
Current financing...................................................................................................................................20
Benefit of debt.......................................................................................................................................21
Costs of debt..........................................................................................................................................21
Dividend policy.........................................................................................................................................22
Dividend policy analysis.......................................................................................................................22
Firm characteristics:..............................................................................................................................23
Cash/ trust nexus:..................................................................................................................................23
Peer group analysis................................................................................................................................23

APPLIED FINANCE 3
Valuation:..................................................................................................................................................24
FCFE approach:.....................................................................................................................................24
DDM approach:.....................................................................................................................................27
PE approach:..........................................................................................................................................28
Conclusion.................................................................................................................................................28
References:................................................................................................................................................29
Appendix...................................................................................................................................................31

APPLIED FINANCE 4
Introduction
Scope of Report
The report contains a detail financial analysis over AGL energy. The report contains corporate
social responsibility, management of ownership structure, environment and government
sustainability of the company. Further it focuses over the risk and return position of the company
in order to measure that how feasible it is for the investors to invest into the company and
improve the return. Efficiency level of the company has studied so that a better conclusion could
be offered to the investors of the company. The historical 5 years financial statement and stock
price of the company has been studied in the report in order to identify the overall market
position and improvement in the company. The report mainly focuses on the below points of
AGL energy:
 Risk and Return profile
 Corporate Governance
 Cash Flow and Earning
 Financing Sources
 Policies related to Dividend
Background of Company
AGL energy is an Australian based company which is dealing is energy sector. The company is
generating as well as retaining the electricity and gas to commercial buildings as well as
residential. Company has been founded in the year of 2006. According to annual report (2018),
company has 3.6 million electricity accounts which include residential as well as commercial
account (Reuters, 2019). The main services of the company include electricity generation,
retaining of electricity, distribution of electricity etc. Headquarter of company is based in New
South Wales, Australia.

APPLIED FINANCE 5
Corporate Governance
Chief Executive Officer
Andy Vesey is the CEO of the company. He has been appointed as CEO in the year of
2017. Study explains that AGL is a public limited company and it is not run by a family. Andy
doesn’t have any connection with the entrepreneurs of the company. Andy holds the degree of
BA (Econ), BSc (Mec. Eng.) and MS Managing Director. Over 30 years experience of different
organizations in energy sector is held by him who helped him to get the position of CEO in AGL
energy. He has come from different organization in AGL to grab the opportunity of top level
management. Andy is also the managing director of the company since 2017.
The remuneration report of company explains that STI, cash, restricted shares, LTI etc.
the below image depicts about the portion of remuneration from each of the head:
(Annual report, 2018)
The study explains that the remuneration also includes some amount from stock of the
company and the bonuses also depend on the performance of the company. Andy Vesey holds
399506 ordinary shares of the company. The stocks are maintained by him according to the
section 250 G of corporation act.
Board of Directors
Board of director’s information of the company is as follows:

APPLIED FINANCE 6
(Annual report, 2018)
the board of members comprises 42% women shares. Total number of executive and non
executive directors is 17 out of which 42% shares are held by women. It explains that the
company would make unbiased decision for the betterment of the stakeholders of the company.
all the executive and non executive directors of the company are performing since July 2017 in
the company or from long period.

APPLIED FINANCE 7
All non-executive directors and executive director’s background have been checked and found
that they don’t have any connection with the client, supplier and customers directly. Further, the
study briefs each department head have substantial qualification and knowledge about that
department such as law committee is handled by a law expert. 3 exceptive and non executive
directors of the company are CEO in other firm. The stocks are maintained by him according to
the section 250 G of corporation act (Annual report, 2018). there is in total 11 meeting of
directors in the year to maintain the performance and make better decisions for the company.
Ownership Structure
Ownership structure of the company is as follows:
(annual report, 2018)
The above table explains that top 20 stockholder of the company are large financial
institution and big corporate bodies. the total stock hold by top 20 stockholders of the company
is 60.72%, Rest, stock is held by the insiders and other individuals of the company.

APPLIED FINANCE 8
On the basis of above table, 11 financial institutions have invested into the company. In
the list of top 20 stockholders, no existence of funders and board of directors are. Ownership
structure has been maintained by the company in accordance with section 250 G of corporate
governance.
Lenders
Major funds have been borrowed by the company from financial institution and
debentures of the company. In case of debentures, it has been found that huge amount has been
raised by the company. It reduces the cost level of the company. Also, it is one of the better
sources to maintain the capital structure and cost of capital of the company.
Annual report (2018) explains that there are no restrictions over the company to issue the
debentures. However, company must offer the debt according to the assets available to the
company in order to maintain the solvency level. Currently, Moody has provided the rating to the
company. the current credit rating of the company is Baa2. Investing. com (2019) and AFR
(2019) explains that company has maintained the overall performance at better level and hence,
this is the right time to make investment into the company in order to get higher return
Financial Market Consideration
The market consideration explains that the stock of the company is traded as wide level
because of higher return involved with the company. In last 5 years, the number of stock has
been reduced in the market because of buy back of stock and reduction in stock level of the
company.

APPLIED FINANCE 9
(Morningstar, 2019)
Through investigation over the market, it has been measured that various analysts are
working on the company and according to their recommendation, currently; it is the right time
for the investors to invest into the stock of the company in order to get higher return from AGL
stock.
Social Constraints
Annual report (2018) indicates that the social responsibilities have been managed by the
company at better level. Company is following all the responsibilities towards the society and
environment. It has improved the competitiveness of the company in the market. Company has
announced a great budget for the social responsibility. However, few issues have been faced by
the company in order to dispatch the waste items of the company.
Particularly, good reputations have been managed by the company in the society. Various
events are organized by the company timely to improve the performance of the company.
Recently, company has changed few policies in order to improve the CSR policies and overall
position of the company. In comparison to the main competitor, ORG energy, AGL energy is
performing better. As, ORG energy has recently been penalized for not meeting the proper
guidelines of corporate social responsibility and harming the society because of electricity
generation process.

APPLIED FINANCE 10
Risk and return:
Historical risk parameters:
The historical data if last 5 years of AGL and S&P has been gathered in order to identify
the risk level involved in the stock of AGL. The regression analysis study explains that the
unsystematic and systematic risk of the company is 0.01 and 0.27.the calculation of regression
analysis is as follows:
Figure 1: AGL risk evaluation
(Yahoo finance, 2019)
Regression analysis calculations:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.2015
69
R Square 0.0406
3
Adjusted R
Square
0.0237
99
Standard
Error
0.0456
87

APPLIED FINANCE 11
Observation
s
59
ANOVA
df SS MS F Significa
nce F
Regression 1 0.005039 0.005
039
2.414
002
0.12579
Residual 57 0.118976 0.002
087
Total 58 0.124014
Coeffic
ients
Standard
Error
t Stat P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.0101
21
0.006051 1.672
755
0.099
856
-0.00199 0.0222
37
-
0.00199
0.02223
7
X Variable
1
0.2787
51
0.179411 1.553
706
0.125
79
-0.08051 0.6380
15
-
0.08051
0.63801
5
(Yahoo finance, 2019)
On the basis of calculated data, it has been found that the beta level of the company is
quite lesser than 1 and hence, indicates that the fluctuations in AGL stock price is quite lesser
then th market index stock price fluctuations which further defines that the stock price is
fluctuated but the involved risk is quite lesser.
On the basis of regression analysis, it has been measured that the overall performance and
risk management capability of the company is quite better. The above figure explains that
regression slope is downward which defines about lesser fluctuations in the stock price of the
company. On the basis of regression analysis, it has been estimated that the stock price of the
company would be better in near future and the risk level of the company would be average
(Investing.com, 2019).
Alpha defines about business related risk of the company i.e. 0.010. It defines that market
risk of the company is quite lower. Further, beta defines that the market risk of the company is
0.27. It explains that the business risk of the company is also lower. In addition to this, it has
been found that financial leverage of the company is quite higher which must be maintained in
order to manage the performance of the company.

APPLIED FINANCE 12
On the basis of the calculated beta, cost of equity of the company has been calculated which are
as follows:
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 6%
C. Beta 0.28
D. CAPM 3.66%
It explains that risk free rate and market rate of return of the company is 2.75% and 6%
(Bloomberg, 2018). It defines that the cost of equity of the company is 3.66%. Company has to
pay 3.66% in total to raise the funds through equity. Being a manager, it defines that cost of
equity of the company is average and it must be compared with the cost of debt of the company
in order to raise the capital so that the risk and return level of the company could be managed.
Default risk and cost of debt:
Annual report (2018) explains that Moody has offered a rating of Baa2 to AGL energy.
The rating has been given to the company on the basis of total earnings and debt coverage ratio
maintained by the company from a long time.
The financial ratio study has been defined on the company to measure the capital
structure level and liquidity level of the company. Capital structure level defines that the debt
servicing and debt coverage ratio of the company has been improved overall. Below is the
calculations of debt management level of the company:
2014 2015 2016 2017 2018
Capital Structure (Debt
Management) Ratios
Net Asset
Financing %
Net Assets x 100 0.77 0.78 0.75 0.75 0.74
Total Assets
Long-
TermDebt to
Capitalizatio
n %
Long-Term Debt x
100 0.69 0.66 0.62 0.60 0.63
Long-term Debt +
Net Assets

APPLIED FINANCE 13
Debt Service
Coverage
Excess of Revenues
over Expenses +
Depreciation +
Interest 3.69 2.39 0.24 4.32 9.62
Principal Payment+
Interest
Cash Flow to
Debt %
Excess of Revenues
over Expenses +
Depreciation x100 0.20 0.13 0.01 0.25 0.54
Current Liabilities +
Long-Term Debt
(Morningstar, 2019)
Further, liquidity ratios of the company have been calculated in order to measure the
changes and short term debt management obligations of the company. Liquidity ratios of the
company defines that company has managed enough current assets to meet the current debt
obligation of the company. Below are the details of liquidity ratios:
Liquidity Ratios
Current Ratio
Total Current Assets
Total Current Liabilities 1.620 1.458 1.405 1.327 1.649
Days in Patient
Accounts
Recievable
Net
Receivables
Net Patient Service
Revenue / 365 66.6731 64.7415 64.6525 57.4124 53.8557
Days Cash on
Hand, Short-term
Sources (Days)
Cash +
Marketable Securities 124.12 47.01 36.60 30.42 79.45
(Total Expenses –
Depreciation Expenses)
/ 365
(Reuters, 2019)
the marginal tax rate managed by the company is 30% (annual report, 2018). the recent
borrowings and the cost of borrowings of the company are $ 6249000 and 2.50% respectively.
calculations of the same are as follows:

APPLIED FINANCE 14
Cost of debt:
Net finance cost 223,000.00
Less: Tax @30% 66,900.00
After tax cost of debt 156,100.00
Borrowings amount 6,249,000.00
After tax cost of debt (%) 2.50%
(Annual report, 2018)
Company has been rated by Moody on the basis of interest coverage ratio and debt
performance of the company.
Estimating cost of capital:
Currently, outstanding shares of AGL limited are 655825. further yahoo finance (2019)
explains $ 20.81 at the end of 30th June 2018. It brief $ 14,742,946 market stock price of AGL
limited. Further, borrowings amount is $ 6,249,000.00. the weight of debt and share of the
company are as follows:
Markey Value Weights
Debt Equity Total
Equity shares
14,742,946.0
0
Value of debt (short term
borrowings+ long term borrowings)
6,249,000.
00
Total
6,249,000.
00
14,742,946.0
0
20,991,946.0
0
D. Weights 29.77% 70.23%
(ASX, 2019)
The above calculations brief that cost of capital of the company is 3.31%. Proper
calculations of cost of capital of the company are as follows:
Debt
Ordinary
Shares Total
Cost of Finance 2.50% 3.66%
Market Weights 0.30 0.70
WACC 0.74% 2.57% 3.31%

APPLIED FINANCE 15
(Business Insiders, 2019)
Earnings and cash flows:
Analyzing the Existing Investment
The study explains that actual accounting rate of return of the company is around 8.5%.
This is the average return earned by the company through investing into various projects.
Further, the cost of equity and cost of capital of AGL energy is 3.66% and 3.31%. It explains that
cost of company is lesser then the return and hence, company is performing good.
Economic value added of the company explains about better improvement of the
company as the net profit level of the company has been improved against the equity cost of the
company in last 5 year. Below is the calculation of EVA:
Calculation of EVA
2014 2015 2016 2017 2018
Net profit 570000 218000
-
408000 539000 1587000
Total outstanding
equity 582017 653726 674712 669300 655825
Market price of equity 11.39 12.39 13.39 14.39 15.39
Equity cost 242359 296119 330292 352112 369000
EVA 2.35 0.74
-
1.24 1.53 4.30
(Morningstar, 2019)
Further, the calculations define that the overall quality in terms of profitability, equity
cost, accounting return etc has been improved. It briefs better investment level of the company.
company is quite able to manage the entire cost against the profits. Further, below are the
financial performance calculations of the company:
Table of Financial Indicators
2014 2015 2016 2017 2018
Profitability Ratios
Total Margin%1 Excess of Revenues
over Expenses x 100 24.26% 26.43% 27.21% 25.63% 29.23%
(Source: Cleverley)
Total Operating
Revenue + Other

APPLIED FINANCE 16
Income
Excess Excess of Revenues
over Expenses x 100 5.97% 2.04% -3.65% 4.36% 12.38%
Margin %1 Total Operating
Revenue
Operating Margin %
Operating Income x
100 24.26% 26.43% 27.21% 25.63% 29.23%
Total Operating
Revenue
Return on Net Assets Excess of Revenues
over Expenses x 100 4.08% 1.38% -2.79% 3.73% 10.84%
(Equity) Net Assets
%
Liquidity Ratios
Current Ratio
Total Current Assets
Total Current
Liabilities 1.620 1.458 1.405 1.327 1.649
Days in Patient
Accounts Recievable
Net
Receivables
Net Patient Service
Revenue / 365 66.6731 64.7415 64.6525 57.4124 53.8557
Days Cash on Hand,
Short-term Sources
(Days)
Cash +
Marketable Securities 124.12 47.01 36.60 30.42 79.45
(Total Expenses –
Depreciation
Expenses) / 365
Days Cash on Hand, All
Sources (Days)
Cash + Marketable
Securities + Unrestricted
LT Investments 598.53 390.77 323.46 414.38 403.95
(Total Expenses –
Depreciation Expenses) /
365
Average Payment
Period
Total
Current Liabilities
(Total Expenses –
Depreciation
Expenses) / 365 546.28 430.70 370.81 539.40 396.06
2014 2015 2016 2017 2018

APPLIED FINANCE 17
Capital Structure (Debt
Management) Ratios
Net Asset
Financing %
Net Assets x 100 0.77 0.78 0.75 0.75 0.74
Total Assets
Long-
TermDebt to
Capitalization
%
Long-Term Debt x
100 0.69 0.66 0.62 0.60 0.63
Long-term Debt + Net
Assets
Debt Service
Coverage
Excess of Revenues over
Expenses + Depreciation
+ Interest 3.69 2.39 0.24 4.32 9.62
Principal Payment+
Interest
Cash Flow to
Debt %
Excess of Revenues
over Expenses +
Depreciation x100 0.20 0.13 0.01 0.25 0.54
Current Liabilities +
Long-Term Debt
Asset Efficiency (Activity) Ratios
Total Asset
Turnover
Total Operating
Revenue + Other
Income
Total Assets 0.070 0.051 0.036 0.091 0.111
Fixed Asset
Turnover
Total Operating
Revenue + Other
Income 0.091 0.066 0.047 0.122 0.149
Net Fixed Assets
Current Asset
Turnover
Total Operating
Revenue + Other
Income 0.30 0.23 0.15 0.36 0.43
Current Assets
Inventory
Turnover
Total Operating
Revenue + Other
Income 5.10 2.05 1.26 3.76 4.38
Inventory

APPLIED FINANCE 18
(Morningstar, 2019)
On the basis of above calculations, it has been found that the financial performance of the
company has been improved at great level from last few years. The profitability, efficiency,
liquidity, capital structure and market position define that company has improved overall
financial position at better level.
Assessing the Competitive Strength
SWOT Analysis
Strengths Weaknesses
 Serves more then 6 million customers
in Australian market
 Generation capability of the company is
quite higher
 Strong presence across Australian
market
 strong market capitalization
 Presence of the company is in
Australian market only
 Government intervention is higher
 Operational efficiency of the company
is quite lower
Opportunities Threats
 company has vast opportunity to enter
into south Asian countries
 There is huge demand of power in
Australian market
 Potential to improve the renewable
portfolio of energy
 reduction in electricity prices could
lead company towards lower profit
 consolidation of Australian power
industry
 presence of various large companies in
the market
 Rise in the raw material prices
(Madura, 2014)

APPLIED FINANCE 19
Porter Five forces
Threat of New Entrants: Threat level from new entrants in AGL limited is quite high due to
government intervention and higher opportunities for the new businesses in the market.
Threat of Substitute: Threat level from substitute in AGL limited is quite lower because such
industries can not be substituted. the demand of power would be same throughout the time.
Bargaining Power of Consumers: consumer’s bargaining power is lower due to the few firms
available in the market and government intervention in selecting the price of electricity.
Bargaining power of suppliers: supplier’s bargaining power is higher due to the few firms
available in the market and less options in front of the company.
Rivalry: there is huge competition in the country because of the big players in the market. The
main competitors of the company are ORG energy (Koropp, Kellermanns, Grichnik & Stanley,
2014).
Evaluating Sustainability of Competitive Strengths
The competitive strength of the company is quite higher because of higher market
capture. However, there are various competitors available in the market and it is important for
the business to launch some innovative changes or lesser price to manage the performance of the
company.
Financing Sources
Current financing
The current raises equity of the company is as follows:

APPLIED FINANCE 20
Figure 2: Equity
(Annual report, 2018)
Further, it has been measured that company borrows the money through bank loan and
long term debentures in the market. Bonds of the company would be matured in the 20 years.
The main debenture of the company is currency mix. Company has enough space to raise the
funds through debt and equity both. However, no hybrid source have been used by the company
to raise the funds.
Benefit of debt
Annual report (2018) explains that debentures of the company includes various benefits
related to the tax benefits, EBITDA management etc. the marginal tax rate of the company is
30%. It helped the denture holders to reduce the tax burden. Further, the EBITDA/ firm value of
the company has been managed at better level. the managers are quite responsive to report and
inform the stockholders in better level. there is no large separation among the management and
stockholders of the company.
Calculation of free cash flows
2014 2015 2016 2017 2018
EBITDA 2315000 2822000 3034000 3167000 3746000
Firm value 7587000 8806000 7915000 7574000 8390000
30.51% 32.05% 38.33% 41.81% 44.65%

APPLIED FINANCE 21
(Morningstar, 2019)
Costs of debt
On the basis of annual report (2018), it has been found that cash flows of the company
are quite improved. It has been found that cash management is not stable. Company is ,making
continuous improvement to manage the cash level of the company. The interest coverage ratio of
the company is as follows:
Debt
Service
Coverage
Excess of Revenues over
Expenses + Depreciation
+ Interest 3.69 2.39 0.24 4.32 9.62
Principal Payment+
Interest
there is no agent involved in raising the debt. Company managed more tangible assets
and explains that better debt level has been managed by the company. On the basis of overall
level, it has been measured that the investment opportunity in the company is better in enar
future because of proper management of financial factors of the company.
Dividend policy
Dividend policy analysis
On the basis of report, it has been found that company is following relevant dividend
through. In which, proper dividend amount is paid to the stockholders of the company to attract
them towards the comapny. The overall dividend policy of the company explains that dividend
payout ratio of the company is higher and hence, investors get attracted towards the company in
order to get higher return for long term.
Calculation of Dividend payout
2014 2015 2016 2017 2018
DPS 0.63 1.63 2.63 3.63 4.63
EPS 0.98 0.33 -0.60 0.81 2.42
64.29% 493.94% -438.33% 448.15% 191.32%

APPLIED FINANCE 22
(Yahoo finance, 2019)
Further, the dividend yield of the company also define about better dividend and
investment performance of the company
Calculation of Dividend yield
2014 2015 2016 2017 2018
DPS 0.63 1.63 2.63 3.63 4.63
Stock price 11.39 12.39 13.39 14.39 15.39
5.53% 13.16% 19.64% 25.23% 30.08%
(Morningstar, 2019)
On the basis of the study, dividend of the company has been affceted through the FCFE
level of the company. It epxlains that the improvment with the FCFE has also improve the
dividend level of the company.
Dividend / FCFE
2014 2015 2016 2017 2018
DPS 0.63 1.63 2.63 3.63 4.63
FCFE 0.37 0.33 0.28 0.28 0.26
168.97% 493.32% 954.03% 1292.32% 1755.18%
Firm characteristics:
Most of the stock of the company are hold by the large financiaal institution and big
corporation. these invetsors have invested into the company to manipualte the decision. marginal
stockhodlers of the company are large financial institution. The company prefers to buyba k the
stock. Company conveys about changes and any alteration in the company to its shareholders
through its newslatter and website. It is quite easier for the company to share the same. Company
don’t have any plicy regarding the dividend payout.
Cash/ trust nexus:
The dividend / FCFE calculations of the company are as follows:

APPLIED FINANCE 23
Dividend / FCFE
2014 2015 2016 2017 2018
DPS 0.63 1.63 2.63 3.63 4.63
FCFE 0.37 0.33 0.28 0.28 0.26
168.97% 493.32% 954.03% 1292.32% 1755.18%
It epxlains that the FCFE level of the company is lower then the dividend of the
company. the company has enough good projects to handle such expenses.
Peer group analysis
Below table defines that the overall performance of the company has been managed at
better level. company is doing good in terms of peers of the company.
Dividend
yield
Dividend
payout
ratio EPS ROE
AGL energy 30.08% 191% 2.42 7.82%
Origin energy 1.58% 53% 0.1 6.50%
Inter RAO 1.34% 75% 0.7 9.80%
(Morningstar, 2019)
On the basis of dividend payout and other dividend analysis, it has been measured that
the overall performance of the company has been improved at great extent.
Valuation:
FCFE approach:
FCFE approach has been applied to evaluate the stock price of the company. On the basis
of calculations, it has been measured that the stock price of the company is $ 20.81 in current
market. However, the intrinsic value of the company is $ 108.93. It explains that the stock price
of the company is undervalued. Below are the calculations of FCFE of the company:
Webjet: Past five Year Free Cash Flows for Firm

APPLIED FINANCE 24
2014
($'000)
2015
($'000)
2016
($'000)
2017
($'000)
2018
($'000)
Earnings before interest and tax 974,000 811,000 521,000
1,319,00
0
1,619,00
0
Less: Tax @30% 292,200 243,300 156,300 395,700 485,700
After tax EBIT 681,800 567,700 364,700 923,300
1,133,30
0
Add: Depreciation and amortisations 326,000 379,000 465,000 484,000 558,000
Add/Less: Decrease (increase) in \
current receivables 422,000
(151,000
) (81,000) 31,000 53,000
Add/Less: Decrease (increase) in
inventories 48,000
(205,000
) (18,000) 63,000 (19,000)
Add/Less: Increase (decrease) in
accounts payable
(140,000
)
(437,000
) 234,000 4,000 35,000
Add/Less: Increase (decrease) in
progress collections
1,942,00
0 368,000 351,000 112,000
(374,000
)
Total
3,279,80
0 521,700
1,315,70
0
1,617,30
0
1,386,30
0
Less: Capital expenditure
(723,000
)
(806,000
)
(545,000
)
(498,000
)
(720,000
)
Free cash flows to the firm
2,556,80
0
(284,300
) 770,700
1,119,30
0 666,300
Avergae 965,760
Estimation of a discrete cash flow growth: ROE*Retention ratio
Year
Net
profit for
equity
($'000)
Equity
($'000) ROE (%)
Retentio
n ratio
Growth
rate
2014 570000 7587000 7.51% 35.71% 2.68%
2015 218000 8806000 -2.48% - 9.75%

APPLIED FINANCE 25
393.94%
2016 -408000 7915000 5.15% 538.33% 27.75%
2017 539000 7574000 -7.12%
-
348.15% 24.78%
2018 1587000 8390000 18.92% -91.32% -17.27%
Average growth of past five years 1.61%
Valuation of equity taking free cash flows of firm
Past
average
FCFF ($M) 965,760.00
Discrete free cash flow growth 1.61%
Applied for next 10
years
Permanent growth rate free cash
flow 3.33% Applied after 10 years
Estimated Free cash flows for firm
Year FCFF ($M)
2017 981,336.08
2018 997,163.37
2019 1,013,245.94
2020 1,029,587.88
2021 1,046,193.40
2022 1,063,066.73
2023 1,080,212.20
2024 1,097,634.20
2025 1,115,337.19
2026 1,133,325.70
Terminal cash
flows 1,171,065.44

APPLIED FINANCE 26
Present value of discrete cash flows for next 10 years
Year FCFF ($M)
PVF
@3.31% PV of Cash Flows
1 981,336.08 0.968
949,894.
57
2 997,163.37 0.937
934,289.
77
3 1,013,245.94 0.907
918,941.
33
4 1,029,587.88 0.878
903,845.
03
5 1,046,193.40 0.850
888,996.
74
6 1,063,066.73 0.823
874,392.
37
7 1,080,212.20 0.796
860,027.
92
8 1,097,634.20 0.771
845,899.
44
9 1,115,337.19 0.746
832,003.
07
10 1,133,325.70 0.722
818,334.
99
Total
8,826,625.
23
Present value of terminal cash flows
Terminal cash
flows 1,171,065.44 69,001,118.45
Total value of Firm ($'000) 77,827,743.68
Less: Value of Debt 6,388,000.00
Total value of Equity 71,439,743.68
No of Shares Outstanding 655,825.00
Per share value of value of equity
$
108.93
Per share value of value of equity (market)
$
20.81
Undervalued
(Morningstar, 2019)

APPLIED FINANCE 27
DDM approach:
DDM approach has been applied to evaluate the stock price of the company. On the basis
of calculations, it has been measured that the stock price of the company is $ 20.81 in current
market. However, the intrinsic value of the company is $ 12.43. It explains that the stock price of
the company is overvalued. Below are the calculations of DDM of the company:
Dividend Discount Model
Dividend
expected 7.62
Growth rate 65%
Discount rate 3.31%
Intrisic Value 12.43
Market Price 20.81
Overvalued
(Yahoo
finance,
2019)
PE approach:
PE approach has been applied to evaluate the stock price of the company. On the basis of
calculations, it has been measured that the stock price of the company is $ 20.81 in current
market. However, the intrinsic value of the company is $ 15.73. It explains that the stock price of
the company is overvalued. Below are the calculations of PE multiple method of the company:
PE Multiple Model
Industry PE ratio 6.50
EPS of AGL 2.42
Intrisic Value 15.73
Market Price 20.81
Overvalued
(Morningstar, 2019)

APPLIED FINANCE 28
Conclusion
On the basis of overall study, AGL energy limited has been measured by the company at
better level. The report concludes that various aspects of the company has been improved. The
investment into the company would offer better return to the investors. The corporate governance
policies have been maintained and followed by the company properly. Along with that, risk and
return level of the company is average. Further, dividend policies, financial performance and
other financial aspects are also in the favor of the company and depicts that investment into the
company would offer huge return to the company. overall, it is a good opportunity for the
investors to invest in,.

APPLIED FINANCE 29
References:
Annual report. (2018). AGL energy. [online]. Retrieved from:
https://www.2018annualreport.agl.com.au/xmlpages/resources/TXP/agl_energy/finrep/
pdf/AGL_Energy_Annual_Report_2018.pdf
ASX. (2019). AGL energy. [online]. Retrieved from: https://www.asx.com.au/asx/share-price-
research/company/AGL/statistics/bonds
Bloomberg. (2019). Australian risk and bonds. [online]. Retrieved from:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
Business Insiders. (2019). AGL energy. [online]. Retrieved from:
https://markets.businessinsider.com/bonds/agl_energyad-medium-term_nts_201414-21-
bond-2021-au3cb0225233
Invetsing.com. (2019). AGL energy. [online]. Retrieved from:
https://www.investing.com/equities/agl-energy
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.
Morningstar. (2019). AGL energy. [online]. Retrieved from:
https://financials.morningstar.com/income-statement/is.html?
t=0P00006XTF&culture=en&ops=clear
Reuters. (2019). AGL energy. [online]. Retrieved from:
https://www.reuters.com/finance/stocks/overview/AGL.AX
Yahoo finance. (2019). AGL energy. [online]. Retrieved from:
https://au.finance.yahoo.com/quote/AGL.AX/history?
period1=1400178600&period2=1557945000&interval=1mo&filter=history&frequency=1
mo

APPLIED FINANCE 30

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Appendix:
Refer to spreadsheet