Corporate Financial Management Analysis 2022

Running Head: CORPORATE FINANCIAL MANAGEMENT
1
CORPORATE FINANCIAL MANAGEMENT

Running Head: CORPORATE FINANCIAL MANAGEMENT
Contents
Part A..........................................................................................................................................................3
Introduction.................................................................................................................................................3
Corporate governance..................................................................................................................................4
Financial performance.................................................................................................................................4
Dividend Policy...........................................................................................................................................7
Risk Profile..................................................................................................................................................8
Optimal Capital Structure of Rio Tinto.......................................................................................................9
DCF Model................................................................................................................................................11
Part B.........................................................................................................................................................13
NPV.......................................................................................................................................................14
IRR........................................................................................................................................................15
Payback Period......................................................................................................................................16
Profitability Index..................................................................................................................................17
Conclusion.................................................................................................................................................18
References.................................................................................................................................................20

Running Head: CORPORATE FINANCIAL MANAGEMENT
Part A
Introduction
Corporate finance is an area of finance that deals with the sources of funding, capital structure,
the action that manager take to increase the value of the organization. It is required to use the
financial tool to allocate the financial resources appropriately (Fracassi, 2016). It is essential to
analyze the financial position of the company to allocate the resources in an appropriate manner.
There are different terms and policy developed in the form of standard just to manage the
financial statements of the company accurately such as income statements, profit and loss and
balance sheet. The items are recorded under the different heads as per the standards and policy so
that the financial performance of the company is easily evaluated (Dang, Li, and Yang, 2018).
However, the analysis or forecasting the financial position of the company it is necessary to
evaluate the financial ratios and the other calculations (Tricker, and Tricker, 2015). In this
report, the discussion is based on the financial analysis of the company. In this paper, Rio Tinto
has been taken into consideration to evaluate the financial performance as per the standards.
Rio Tinto is an Australian multinational company which operates the business in metals and
mining. It was founded in the year 1873 while purchasing the mine complex. The company is
growing with the method of mergers and acquisitions. It operates in six components such as
Australia and Canada (Rio Tinto, 2018a).
The report is classified in two parts such as task 1 and task 2. In task 1, the different terms and
policy of financial statements will be discussed. In task 2, investment appraisal techniques will
be discussed with the evaluation.

Running Head: CORPORATE FINANCIAL MANAGEMENT
Corporate governance
Corporate governance is the grouping of processes, rules or laws by which organization are
functions are operated, controlled and regulated (McCahery, Sautner, and Starks, 2016). In the
case of Rio Tinto, the board of directors develops laws, rules to control or operates the functions
of the business. It has been seen that the directors of the company are collectively responsible for
the long term success of the group. Board of Directors of the company is classified in three
positions such as chairman, executive and non-executive. The chairman of the company is Simon
Thompson, Chief executive is Jean Sesbastien Jacques, Chief Financial Officer is Jackob
Stausholm, and non-executive director is Megan Clark AC.
There are also other committee’s such as Audit committee, chairman committee, sustainability
committee, remuneration committee (Rio Tinto, 2018b). Different committee manages the
different activities of the company such as executive committee responsible for delivering of
strategy, annual plans and commercial objectives. The role of board of directors of the company
is to develop the laws and rules to operate the business effectively. The rules and regulation are
introduced by the directors as per the financial performance of the company just to control the
functions (Tricker, and Tricker, 2015).
Financial performance
Financial Ratio
Analysis
Rio Tinto
2017 2018
Profitability Ratio
Gross Profit Margin Gross Profit 24223 23963
Net Sales 40030 61% 40522 59%

Running Head: CORPORATE FINANCIAL MANAGEMENT
Profit Margin Net Profit 8762 13638
Net Sales 40030 22% 40522 34%
Return on Equity
Net income after
preference dividends 8762 13638
Average common stock
holder's equity 6319 139% 6024 226%
Liquidity Ratio
Current Ratio Current assets 18678 18185
Current liabilities 11349 1.65 10865 1.67
Quick Ratio Quick assets 9365.0 13377
Current liabilities 11349 0.83 10865 1.23
Efficiency Ratio
Average Receivable
days Receivables 3472 3447
sales *365 40030 31.66 40522 31.05
Average Payable Days Payables 3,255 3180
Sales*365 40030 29.68 40522 28.64
Solvency Ratio
Debt to Equity Ratio Total Debt 14,575 12,401
Total Equity 8,666 1.68 8,000 1.55
Debt Ratio Total Debt 14,575 12,401
Total assets 95,726 0.15 90,949 0.14
Market Performance
Ratio
Earnings Per share
Net income after
preference dividends 8762 13638
Total common stock 4360.00 2.01 3688 3.70
(Sources: Rio Tinto, 2018b)
For evaluating the financial position, the ratios of the company has been calculated. The
profitability ratio states the company position in terms of profit. As per the above evaluation, it is

Running Head: CORPORATE FINANCIAL MANAGEMENT
observed that the amount of equity is increasing as compare to previous year. In the year 2017,
the percentage of return on equity is 139% but in the year 2018, it is increasing by 226% which
indicates that the value of equity is increasing which given by the company to its shareholders.
The amount of profit is increasing with the increasing percentage. In the year 2017, the
percentage of profit margin is 22% that is increasing by 34% (Morning Star, 2018). Liquidity
ratio defines the operating position of the company by evaluating the assets.
The liquidity position of the company is improving as the company invests in current assets
rather than the fixed assets. As per the evaluation, it has been seen that the amount of current
asset is increasing by 1.65 times to 1.67 times which indicates that the improving position of
liquidity. Efficiency ratio defines the efficiency to operate the business (Williams, and
Dobelman, 2017). In the year 2017, the days of collection of amount is decreasing with the
minor difference which indicates that the company did not improve its performance in terms of
collection. But while paying the amount, the organization pays the amount in fewer days as
compare to previous year. In the year 2017, the average payable days are 29 but in the year 2018,
it decreasing by 28 days.
Profitability Ratio
2017 2018
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
350.00%
Return on Equity
Profit Margin
Gross Profit Margin

Running Head: CORPORATE FINANCIAL MANAGEMENT
The solvency ratio defines that the stability of the company (Robinson, Henry, Pirie, and
Broihahn, 2015). As per the evaluation of solvency ratio of the company, it is observed that the
amount of debts is decreasing which reflects positive sign to operate smoothly in the market. In
the previous year 2017, the debt ratio is 0.15 which is decreasing with the ratio 0.14 (Rio Tinto,
2018b). The debt ratio of the company indicates that it can survive for long time in the market as
it borrows the fewer amounts on credit which is a positive situation.
Dividend Policy
Dividend Policy is the financial policy which is used to evaluate the amount of dividend by the
company to its shareholders. Under this policy, the frequency is also evaluated with which the
dividend is paid by the company (CFI, 2018). Rio Tinto declared a surprise $1bn special
dividend after writing its best half years profit. The miner declared a half year dividend of 151
cents per share and also a special dividend of 61 cents per share, equivalent to $3.5bn and a
record half year payout. While the company operates Oyu Tologi, it does not have a direct
holding of shares.
The company has 50.8 percent controlling stake and 34 per cent by Mongolian government. The
number of share of the company has been arises with the 27 percent this year but it is also fell
with 2.8 percent to £45.68 (Hume, 2019). It indicates that the paid amount of dividend is also
decreasing due to which the company will face the issues of financial crises. It has been
evaluated that the decreasing dividend paid indicates the less investment just because of low
capital. It requires the large amount of capital that is why; it has to borrow the amount on debt
(Baker, and Weigand, 2015).

Running Head: CORPORATE FINANCIAL MANAGEMENT
Risk Profile
The risk profile of the Rio Tinto is determined with the help of the matrix presented above. The
health of the Rio Tinto is determined in terms of the catastrophic nature where the multiple

Running Head: CORPORATE FINANCIAL MANAGEMENT
fatalities or serious problems are taken into consideration. The safety of the company is also
measured on site which is related to the risk possessed in the environment and the risks which
are possessed outside the environment (Rio Tinto, 2019). The risk management in the year 2018
remained unsettled with the rising tension of increased volatility of the market. The increased
pressure from the market tends to be continuous and the company has focused on delivering the
operational efficiency in the business operations (Ortas, Gallego‐Alvarez and Álvarez Etxeberria,
2015). The continuous macroeconomic and the geopolitical uncertainty is one of the crucial risks
that have been face by Rio Tinto. The short term risks like the increase in the rate of exchange
have created a tension on the trade platform. Climate change represents perhaps the greatest
long-term threat to our business, but also brings opportunities. There are several other risks
which are possessed by the company such as – physical, regulatory and market. A low-carbon
economy may lead to structural shifts such as a step-change in recycling, but it will also fuel
higher demand for commodities like copper and raw materials for the batteries (Rio Tinto, 2019).
Optimal Capital Structure of Rio Tinto
The capital structure of Rio Tinto is an amalgamation of the debt as well as equity. The
amalgamation of the debt and the equity can be understood with the help of the debt and the
equity ratio. The purpose if the capital structure is how a firm finances its operations and the
growth with the help of the different sources of the funds. The debt comes in the form of bonds,
issues, and long term notes payable whereas the equity is in the form of the common stock,
preferred stock, and retained earnings (Cornell and Gokhale, 2016).
Debt is one of the ways to raise the capital of the business and the major reason behind the issue
of the debt is to gain the tax advantage of the business. Since the interest payments are

Running Head: CORPORATE FINANCIAL MANAGEMENT
deductible, debt always allows the company to retain the ownership whereas the Equity on the
other hand is more expensive when the interest rates are so low. However, unlike the debt the
equity is not paid back if the earnings are declined (Reid, 2018).
Optimal capital structure is a metric that the organizations use to determine the best mix of debt
and equity financing for the purpose of the operations of the business. The optimal capital
structure helps in the reduction of the cost of the capital, in order to keep the firm less dependent
on creditors and is able to finance the assets with the help of the equity as well (Burtonshaw-
Gunn, 2017).
Following is the capital structure of the company and the optimal capital structure will be
decided on the basis of the weights.
Optimal capital structure
Particulars 2018 Weights
Debt 8160 40%
Equity 12241 60%
Total 20401 100%
This tends to be the optimal structure for Rio Tinto as it the debt shall be less than the equity.
The reason for such optimal capital structure is due to the excessive financial leverage that
creates the burden on the financial performance of the employees. The correct strategy shall be
followed before in order to keep the balance of the risk and the advantage of the tax benefit
(Kumar and Yerramilli, 2017).

Running Head: CORPORATE FINANCIAL MANAGEMENT
DCF Model
A DCF model is a particular requirement of financial model used in the process of the valuation
of the business. DCF also known as Discounted Cash Flow, and it’s basically the calculation of
the unlevered free cash flow over the period of the cash flows, which is called the NPV (NPV)
(Platonova, Asutay Dixon and Mohammad, 2018). The DCF model of the Rio Tinto has been
presented below in detail so that the potential upside down of the share price or say fair valuation
of the company can be recorded. The DCF model is used for forecasting the revenue as well as
the expenses. Taking into account that elements are required to unveil the reasonable estimation
of their amortized cost resources, using the equivalent CECL DCF models while applying a
market markdown rate rather than the EIR could be an approach to make efficiencies inside an
organization (Hajlaoui, Jabri and Jemaa, 2018).
One bit of leeway of using a limited income (DCF) model is that DCF models utilize a
successful financing cost (EIR), similarly as credits do when they are started. This empowers an
establishment to adjust the ideas of timing of misfortunes with salary acknowledgment. Utilizing
a misfortune technique to extend occasional misfortune rates and a DCF strategy to apply those
rates to the normal money streams is worthwhile in light of the fact that it is predictable with the
pay way to deal with reasonable worth. In this scenario the DCF MODEL is applied on the Rio
Tinto company for the evaluation of the fair valuation share price (Sayed, 2017).
DCF Method
Particulars 1 2 3 4 5
DCF Method FY2015 FY2016 FY2017 FY2018 FY2019
Operating profit Before
Interest and Tax 4093.000 6123.000 11591.000 13407.000 15507.519
growth(%) 50% 89% 16% 16%
Tax rate 1227.90 881.40 272.90 268.10 101.51
Post-tax operating profit 6240.000 4591.000 4842.000 3884.000 4260.000

Running Head: CORPORATE FINANCIAL MANAGEMENT
(NOPAT)
Add: Depreciation &
amortization 2,005 2,086 2,126 2,122 2,136
Less: Change in working
capital
1,9
30.00 502.00 570.00 955.00
1,0
72.00
Less: Capex 4,6
85.00
3,0
12.00
4,4
82.00
5,4
30.00
5,2
60.00
Free Cash Flow to Firm 1
4,860 10,191 12,020 12,391 12,728
FCF growth (0.31) 0.18 0.03 0.03
Discount factor 0.953 0.908 0.865 0.825 0.786
PV of Free Cash Flows 14,16
0.44
9,2
54.24
10,4
02.13
10,2
18.19
10,0
02.07
Sum of present values of
FCFs
54,03
7.06
Free cash flow (t+1) 13109.5
Terminal value 3%
Present value of
terminal value 676538
Enterprise Value 730,57
4.73
Less:
Net debt 124010
Minorities
Equity value 854,58
4.73
Fair value per share
(OMR) 49.71
Upside/Downside 2%
48.63

Running Head: CORPORATE FINANCIAL MANAGEMENT
Part B
Company managers will have a huge impact on the future of the company and the capital
budgeting tends to be one of the most important aspect in deciding the proposal of the business.
The majority of the companies invest in the business to be sustainable and show the potential
growth of the company (Mathuva, 2015). Besides the sustainability, one of the crucial decisions
is to manage the profits along with the sustainability. Research and the development stage have
already been set for the Super Tyre project and test marketing has also been undertaken. In this
section a detailed analysis of the NPV, internal rate of return, payback period and the
profitability index. As per the case study the Super tyre can provide the product through the two
major markets such as OEM market, as well as the replacement market. In the OEM market, it
consists of the large automobiles company that is exclusively made for purchasing of the tyre for
new cars (Cummins and Weiss, 2016).
Tires Inc. is initially investing 200 million initially and the same can be sold for 50 million at the
end of the four years. The working notes have been explained in detail in the current market
scenario and the replacement market scenario as well (Rossi, 2015).
Units
2000000.0
0
2040000.0
0
2080800.0
0
2122416.0
0
Original market
Unit
price
Selling price 30 30 31.20 32.45 33.75
Variable cost 10 10 10.4 10.82 11.25
Sales 60000000 63648000 67517798 71622881
Variable cost 20000000 21216000 22505933 23874294
Units 1000000.0 1020000.0 1040400.0 1061208.0

Running Head: CORPORATE FINANCIAL MANAGEMENT
0 0 0 0
Replacement market
Unit
price
Selling price 40 40.00 41.60 43.26 44.99
Variable cost 10 10.00 10.40 10.82 11.25
Sales 40000000 42432000 45011866 47748587
Variable cost 10000000 10608000 11252966 11937147
NPV
NPV (NPV) is the practice of finding out the profitability of an investment within the company.
It is the difference between the present value of cash outflows and the present value of cash
inflows (Leyman, and Vanhoucke, 2016). The evaluation of NPV is used in capital budgeting
and investment planning in order to evaluate the profitability of the proposal. The company can
evaluate the risk factors while investing in the project by evaluating the NPV. It has been
evaluated that it is a best sources to measure the profitability of the organization. Although, it is
beneficial for the company but it is observed that the estimation is not accurate just because of
difference of size of projects. The biggest disadvantage of the NPV method is that it is
guesswork of cost of capital due to which the organization will face the challenges (Shu,
Zeithammer, and Payne, 2016).
The NPV of the Super Tyre Project is negative in the present scenario is $21494064, this
indicates that the project shall not be accepted as the present value of the project is negative and
cannot generate any future possibility. Hence, the NPV of the project tends to be a negative
source for the company (Andor, Mohanty and Toth, 2015).
PART B

Running Head: CORPORATE FINANCIAL MANAGEMENT
Particulars 0 1 2 3 4
Initial investment
$
(200,000,00
0.00)
Sales
$
100,000,000.
00
$
106,080,000.
00
$
112,529,664
.00
$
119,371,467.
57
Variable cost
$
30,000,000.0
0
$
31,824,000.0
0
$
33,758,899.
20
$
35,811,440.2
7
Gross profit
$
70,000,000.0
0
$
74,256,000.0
0
$
78,770,764.
80
$
83,560,027.3
0
Less: Expenses
Marketing costs
$
30,000,000.0
0
$
30,900,000.0
0
$
31,827,000.
00
$
32,781,810.0
0
Depreciation
$
50,000,000.0
0
$
50,000,000.0
0
$
50,000,000.
00
$
50,000,000.0
0
Profit before tax
$
(10,000,000.
00)
$
(6,644,000.0
0)
$
(3,056,235.2
0)
$
778,217.30
Tax @ 40%
$
(4,000,000.0
0)
$
(2,657,600.0
0)
$
(1,222,494.0
8)
$
311,286.92
Profit after tax
$
(6,000,000.0
0)
$
(3,986,400.0
0)
$
(1,833,741.1
2)
$
466,930.38
Annual Cash
flows
$
(200,000,00
0.00)
$
44,000,000.0
0
$
46,013,600.0
0
$
48,166,258.
88
$
94,127,199.4
9
Discounting
factor @ 10% 1.000 0.909 0.826 0.751 0.683
Present value
$
(200,000,00
0.00)
$
40,000,000.0
0
$
38,027,768.6
0
$
36,188,023.
20
$
64,290,143.7
7
Cumulative cash
flows
$
(200,000,00
0.00)
$
(160,000,000
.00)
$
(121,972,231
.40)
$
(85,784,208.
20)
$
(21,494,064.
44)

Running Head: CORPORATE FINANCIAL MANAGEMENT
IRR
IRR (Internal Rate of Return) is one of the capital budgeting techniques used to select or reject
the proposal. It is the interest rate at which the NPV of all the cash flows from a project or
investment equal zero. It is used to measure the attractiveness of a project or investment. It has
been found that if IRR value of new project is exceed then the company required rate of return
than that project is beneficial. It IRR rate is falls below the required rate of return then the
company should rejected the project otherwise it will face the challenges (Finance Management,
2018). This technique of investment appraisal also considers the time value of money. Time
value of money is the most important thing in the evaluation of rate of return. It also helps to
measure the future earning potential of money. The advantage of the company is that it is a very
simple method to interpret the project investment after the evaluation of IRR. The manager of the
organization can take the decisions easily for the investment project (Greco, Figueira, and
Ehrgott, 2016). However, the company use this method helps to evaluate the interest rate
effectively but due to mixture of positive or negative future cash flows the chances of evaluating
the appropriate amount is decreasing.
In the present case scenario the internal rate of return is the rate at which, the cash flows are
equivalent to the present value of the cash flows. The internal rate of return is negative at 6%,
this suggests that the internal rate of return is less than the cost of the capital and it’s a huge risk
to for the company. Hence, on the basis of the internal rate of return the project shall be rejected
(de Souza Rangel, ET AL 2016).
NPV $ (21,494,064.44)
IRR 6%
Payback period 5.33
Profitability index 0.11

Running Head: CORPORATE FINANCIAL MANAGEMENT
Payback Period
Payback Period is the technique of investment appraisal. It refers to the period of time which is
required to recover the funds used in the investment or to reach at the break-even point (Cleartax,
2019). The company should select the project which requires least number of years to recover. It
is a simple method of evaluation of time for the initial investment to return. Each and every
concept of investment appraisal technique considers the concept of time value of money but this
technique does not considered the concept of time value of money. The chance of risk is high in
using the technique of payback period as the evaluation of time is not appropriate. The company
does not rely on this method as the calculation is based on assumptions.
The payback period of the company will determine the real time in which the cost of the
investment can be recovered. In the present case scenario the pay-back period of the Super tyre
tends to be more than 5.33 years. The reason is due to the negative cumulative cash flows, the
project tends to create the negative value for the company. Therefore, on the basis of the payback
period the project shall be rejected by the company (Zhang, Yang, Li and Li, 2015).
Profitability Index
Profitability index is one of the financial metric that is used to tell whether the proposal for
which the funds are being utilized shall be accepted or not. It uses the time value concept of
money and is calculated by dividing the present value of the cash flow by the original cost of the
investment. The profitability index of the Supertyre is 0.11 which is far below from the standard
measurement of more than 1 or equal to 1. Form the point of view of the profitability index the
project shall be rejected as it is below standard ratio which is 1. This also indicates that in future
this project is not going to deliver any kind of the potential growth (CFGI, 2018).

Running Head: CORPORATE FINANCIAL MANAGEMENT
Conclusion
According to the financial evaluation, the liquidity position of the company is improving as it
invests in current assets instead of fixed assets. The debt ratio of the company is also decreasing
which indicates that the organization borrow less amount on credit. The dividend policy of the
company also studied in the report in the organization context. Dividend Policy of Rio Tinto is
increasing with the 27 percent but it is also decreasing with the percentage of 2.8. It indicates the
company has to increasing the dividend paid amount otherwise the shareholders does not invests
in it and then it has to borrow the money on debts. In the task 1, it is concluded the financial
position of Rio Tinto is growing. As per the above evaluation of the financial position of the
organization, it is concluded that the overall financial position of the company is strong and
effective. The company is well managed as the board of directors performs their responsibilities
very well. The executive committee of the company is also performs their functions effectively
as it controlled the laws and policy so that it operates smoothly. In this report, the financial ratio
of Rio Tinto has been evaluated with the financial data to analyze its financial position in the
market. In the task 2, from the overall analysis it can be concluded that the project is not a
feasible project and it has been evaluated on the basis of the four parameters such as NPV,
internal rate of return, the profitability index and the payback period of the company. The overall
scenario determined the results and it reflects that the project is not a viable project from the
point of view of the company.

Running Head: CORPORATE FINANCIAL MANAGEMENT
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