Financial Analysis of APN Outdoor

This assignment delves into the financial analysis of APN Outdoor Group Limited, focusing on their 2016 Annual Report. Students are tasked with analyzing the company's financial performance by applying various capital budgeting techniques and capital structure methods to assess investment proposals and return on investment. The analysis encompasses key ratios like Asset Turnover and Debt-to-Equity ratio, as well as a comparison of APN Outdoor to its industry peers.

A study on Capital structure and
Capital investment
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Executive Summary
The present assignment deals with case study on ASX limited company that specialize in
offerings Advertising services and asked its finance team to prepare a report that will throw some
light on capitalize of the firm. The report has covered different ways to assess the capital
structure which will reveals about profitability and wealth maximization done by company over
the year. By going this report, the reader will get insight on how market returns and company's
asset and liabilities are used to determine the wealth earning capacity of the firm and how a firm
is meeting the interest of shareholders.
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Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
After tax cash flows.....................................................................................................................3
Payback period.............................................................................................................................6
Discounted payback period..........................................................................................................7
NPV.............................................................................................................................................8
Profitability Index (PI).................................................................................................................9
Part B.............................................................................................................................................10
Conclusion.....................................................................................................................................11
Bibliography..................................................................................................................................12
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Introduction
The assignment discusses on investment proposal and capital structure of the company to assess
the financial stability of the firm. The report covers different methods of capital budgeting
techniques which are used to make a decision of acceptance of any project. It also highlights on
maximizing of shareholders value by capital structure.
Part A
After tax cash flows
Base case (units in $millions)
Year calculati
ons
1 2 3 4 5 6 7 8
Revenue
inflows
1.445 1.590 1.748 1.923 2.115 2.326 2.558 2.814
Cost inflows - 1.181 1.252 1.327 1.407 1.491 1.580 1.675 1.775
Nets cash
flow before
tax
= 0.264 0.338 0.421 0.516 0.624 0.746 0.883 1.039
Depreciation - 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19
Income
before taxes
= 0.07 0.14 0.23 0.33 0.43 0.55 0.69 0.85
Taxes 30% 30% on
Income
tax
0.02 0.04 0.07 0.10 0.13 0.17 0.21 0.26
After tax net
income
= 0.05 0.10 0.16 0.23 0.30 0.38 0.48 0.59
Add back
depreciation
+ 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19
After tax
cash flows
= 0.24 0.29 0.35 0.42 0.49 0.57 0.67 0.78
After tax
salvage
value
+ - - - - - - - 0.07
After tax
total net
cash flows
= 0.24 0.29 0.35 0.42 0.49 0.57 0.67 0.85
Workings:
Annual sales for first year = $1,445,000 or $1.145 million
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Annual expenses for 1st year $(900,000+ 210,000+ 46,000+ 25,000) = 1,181,000 or
$1.181million
Revenue: increase 10 %
Expenses: 6% of 1,181,000= 1251,860
Depreciation = 1,650,000- 100,000/8= $193,750 or $0.19 million
Salvage value= $100,000-(100,000x 0.30) = $70,000
Year calculations 1 2 3 4 5 6 7 8
Revenue
inflows
1.445 1.531 1.622 1.719 1.822 1.931 2.046 2.168
Cost
outflows
- 1.181 1.299 1.429 1.572 1.729 1.902 2.092 2.301
Nets cash
flow before
tax
= 0.26 0.23 0.193 0.15 0.09 0.03 -0.05 -0.13
Depreciation - 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19
Income
before taxes
= 0.07 0.04 0 - - - - -
Taxes 30% 30% on
Income tax
0.02 0.01 - - - - - -
After tax net
income
= 0.05 0.03 - - - - - -
Add back
depreciation
+ 0.19 0.19 - - - - - -
After tax
cash flows
= 0.24 0.22 - - - - - -
After tax
salvage
value
+ 0.24 0.07 - - - - - -
After tax
total net
cash flows
= 0.24 0.29 - - - - - -
Worst case (units in millions)
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Best case (units million)
Year calculation
s
1 2 3 4 5 6 7 8
Revenue
inflows
1.445 1.661 1.910 2.196 2.525 2.903 3.338 3.838
Cost inflows - 1.181 1.216 1.252 1.289 1.327 1.366 1.406 1.448
Nets cash
flow before
tax
= 0.26 0.45 0.66 0.91 1.20 1.54 1.93 2.39
Depreciation - 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19
Income
before taxes
= 0.07 0.26 0.47 0.72 1.01 1.35 1.74 2.2
Taxes 30% 30% on
Income tax
0.02 0.08 0.14 0.22 0.30 0.41 0.52 0.66
After tax net
income
= 0.05 0.18 0.33 0.50 0.71 0.94 1.22 1.54
Add back
depreciation
+ 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19
After tax
cash flows
= 0.24 0.37 0.52 0.69 0.90 1.13 1.41 1.73
After tax
salvage
value
+ - - - - - - - 0.07
After tax
total net
cash flows
= 0.24 0.37 0.52 0.69 0.90 1.13 1.41 1.80
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Payback period
Base case
year Cash flow Cumulative cash flow
0 (1.65) (1.65)
1 0.24 (1.41)
2 0.29 (1.12)
3 0.35 (0.77)
4 0.42 (0.35)
5 0.49 0.14
6 0.57 0.43
7 0.67 0.24
8 0.85 0.61
Payback period formula= Initial Investment/Cash Inflow per Period
Payback period= 4+ (0.35/0.49)
= 4+0.71= 4.71 years
Worst case
year Cash flow Cumulative cash flow
0 (1.65) (1.65)
1 0.24 (1.41)
2 0.29 (1.12)
3 - -
4 - -
Payback period: In this case, the investments incurred gets negative value which represents that
company might incur a huge loss on investments. In the third year, the income becomes and cash
inflow stops within the company. Therefore, a shortfall of cash invested is difficult to recover
from the company.
Best case
year Cash flow Cumulative cash flow
0 (1.65) (1.65)
1 0.24 (1.41)
2 0.37 (1.04)
3 0.52 (0.52)
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4 0.69 0.17
5 0.90 0.73
6 1.13 0.40
7 1.41 1.01
8 1.80 0.79
Payback period
= 3+ (0.52/0.69) = 3+ 0.75= 3.75 years
Discounted payback period
Base case
year Cash flow Present value Discounted cash
flow
Cumulative
cash flow
0 (1.65) 1.000 (1.650) (1.650)
1 0.24 0.862 0.206 -1.444
2 0.29 0.743 0.215 -1.229
3 0.35 0.641 0.224 -1.005
4 0.42 0.552 0.231 -0.774
5 0.49 0.476 0.233 -0.541
6 0.57 0.410 0.233 -0.308
7 0.67 0.354 0.237 -0.071
8 0.85 0.305 0.259 0.188
Discounted Cash Inflow = Actual Cash Inflow/ (1 + i)n
Discounted payback period= 7 + (0.071/0.259)= 7.27 years
Worst case
year Cash flow Present value Discounted cash
flow
Cumulative
cash flow
0 (1.65) 1.000 (1.650) (1.650)
1 0.24 0.862 0.206 1.444
2 0.29 0.743 0.215 1.229
3 - 0.641 - -
4 - 0.552 - -
5 - 0.476 - -
6 - 0.410 - -
7 - 0.354 - -
8 - 0.305 - -
In this scenario, the discounted payback period cannot be calculated due to shortfall of cash
inflow.
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Best case
year Cash flow Present value Discounted cash
flow
Cumulative
cash flow
0 (1.65) 1.000 (1.650) (1.650)
1 0.24 0.862 0.206 -1.444
2 0.37 0.743 0.274 -1.170
3 0.52 0.641 0.333 -0.837
4 0.69 0.552 0.380 -0.457
5 0.90 0.476 0.428 -0.029
6 1.13 0.410 0.463 0.434
7 1.41 0.354 0.499 0.065
8 1.80 0.305 0.549 0.484
Discounted payback period= 5+ (0.029/0.463)= 5.06 years
NPV
Base case
year Cash flow Present value (16%) Discounted cash flow
1 0.24 0.862 0.206
2 0.29 0.743 0.215
3 0.35 0.641 0.224
4 0.42 0.552 0.231
5 0.49 0.476 0.233
6 0.57 0.410 0.233
7 0.67 0.354 0.237
8 0.85 0.305 0.259
Total PV of cash flow: $1.838
Initial investment: $1.650
NPV= Total PV value- initial investment
NPV = 1.838-1.650 = $ 0.188 million
Worst case
year Cash flow Present value Discounted cash flow
1 0.24 0.862 0.206
2 0.29 0.743 0.215
3 - 0.641 -
4 - 0.552 -
5 - 0.476 -
6 - 0.410 -
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7 - 0.354 -
8 - 0.305 -
NPV: 1.650-0.421 = $ 1.229 million
Best case
year Cash flow Present value (16%) Discounted cash flow
1 0.24 0.862 0.206
2 0.37 0.743 0.274
3 0.52 0.641 0.333
4 0.69 0.552 0.380
5 0.90 0.476 0.428
6 1.13 0.410 0.463
7 1.41 0.354 0.499
8 1.80 0.305 0.549
Total PV of cash flow: 3.132
Initial investment: 1.650
NPV = 3.132 -1.650 = $1.482 million
Profitability Index (PI)
PI= 1+ (NPV/Initial Investment)
Base case: 1+ (0.188/1.650) = 1.11
Worst case: 1+ (1.229/1.650) = 1.744
Best case: 1+ (1.482/1.650) = 1.898
 Besides worst case and best case projections, the company can opt for other capital
budgeting approaches such as ARR, IRR which helps in comparing the profit earned
rather than on cash flows. Unlike payback period it does not consider the time value of
money involved. On the other hand, the techniques like IRR can also use to estimate the
future cash flow which also actuates the projects managers to attain the efficinecy of
capital invested into the projects. 1 It considers the time value of money and takes into
total cash inflows and outflows to measure the profitability test and return on investment.
Thus, the capital budgeting techniques not only serves for knowing the risk factor but
also assist in comparing short terms profit in different project investment done by
business.
1 Capital-Investment. (2017, Sep). Capital Investment Appraisal / Appraisal Techniques. Retrieved Sep 2017, from
http://www.capital-investment.co.uk: http://www.capital-investment.co.uk/capital-investment-appraisal.php
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 Based on NPV and Payback period, the Base case and Best case give positive sign on
acceptance of the proposal. Out of two scenarios, the best case is observed to have better
profitability and early return on investment i.e. 3.75 years and NPV is $1.482 million
(positive). A project is accepted if the NPV is the positive and lower value of payback
period. Therefore, considering both the methods, the proposal on the best case can be
accepted. 2
Part B
 A capital structure is made of debt and equity capital. The debt to equity ratio measures
amount of borrowing vise shareholders funds in the company. In annual report 2016 of
APO, the total debt to equity ratio is 38.14 or 0.38.3 A low ratio figure shows that firm is
financially strong with accumulation of assets to bear the risk in future. APO‘s capital
structure is within the range of 0.6 which indicates that company is able to generate
wealth for its shareholders.4
WACC calculation
Tax rate = 30%
Cost of debt: 2.06% (1- 30%) = 0.014 or 1.4 4%
Cost of Equity: risk free return+ beta (market return- risk free rate)
2.4%+ 1.3(7%-2.4%)
= 8.38%
WACC= Cost of equity x cost of debt
WACC after tax = 0.50(1.14) + 0.50(8.38)
= 4.176%
 APO debt to equity ratio is 0.38 and its competitors named Enero Group Ltd has 0.031
which means that company Enero ltd is financial more strong due to lower total debt to
equity ratio compared to APO. This indicates that company liquidity position and
currents assets are sufficient to meet its regular expenses which prevent the firm for
2 Agriculture and Consumer Protection. (2017, Sep). Investment decisions - Capital budgeting.
Retrieved Sep 2017, from http://www.fao.org:
http://www.fao.org/docrep/w4343e/w4343e07.htm
3 WSJ. (2017, Sept). APN Outdoor Group Ltd. Retrieved Sep 2017, from http://quotes.wsj.com/:
http://quotes.wsj.com/AU/XASX/APO/financials
4 Tijdhof, L. (2017, sept). WACC: Practical Guide for Strategic Decision-Making – Part 1.
Retrieved sep 2017, from http://zanders.eu/: http://zanders.eu/en/latest-insights/wacc-practical-
guide-for-strategic-decision-making-part-1/
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borrowing of funds from the market. Therefore, Enero group has better capital structure
than APO.5
 Other ratios of APN are a total debt to total capital ratio is 27.61 or 0.27 which measures
the dependdencys on debt to finance its day to day activities of business. Higher the ratio
greater is a risk for the business. The debt to capital ratio is less than 1 which means debt
is manageable and it's less risky for firm to take a loan or invest their money. Another
ratio i.e. debt to total asset an indicator of financial leverage. It tells about total assets that
were financed to pay creditors. APN has 22.75 or 0.22 which indicates that company is
having sufficient assets to pay off its liabilities. 6
 There is no significant changes, however slight decrease in total debt and and increases
in total assets are observed in the year 2016 which has strenthened the financial capacity
to bear risk in future.
 In past three years, the firm has been able to attain considerable return on equity and net
margin to 14.64. The total debt has reduced in past three year to 102.68 million. On the
other hands shareghoders equity has increased to 269.20 million which shows increased
in return to shareholder thereby maximising their wealth.7
 It is impotant to minimise cost of capital for firms so as to to fulfil the expectations of
sahrehodkers and investors by earning enough revenue to keep the market value per share
unchanged and increased price of market share will give adequate return.
 It is recommended that company can adopt Net present value as capital structure that will
require lower cost of capital to estimates retrun on investment and take decision for
projects 8.
5 WSJ. (2017, Sep). Enero Group Ltd. Retrieved Sep 2017, from http://quotes.wsj.com:
http://quotes.wsj.com/AU/XASX/EGG/financials
6 WSJ. (2017, Sept). APN Outdoor Group Ltd. Retrieved Sep 2017, from http://quotes.wsj.com/:
http://quotes.wsj.com/AU/XASX/APO/financials
7 APN Outdoor Group Limited . (2016). 2016 Annual Report. Retrieved Sep 2017, from
http://investors.apnoutdoorcorporate.com: http://investors.apnoutdoorcorporate.com/Investor-
Centre/?page=Financial-Reports
8 VAIDYA, D. (2017, Sep). CAPM BETA – DEFINITION, FORMULA, CALCULATE BETA IN
EXCEL. Retrieved Sep 2017, from http://www.wallstreetmojo.com:
http://www.wallstreetmojo.com/capm-beta-definition-formula-calculate-beta-in-excel/
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Conclusion
To conclude, the report gives a glimpse of capital budgeting techniques and capital structure
methods helps the projects managers in taking decisions on investment proposal and estimates
their return on investment. Therefore, the above analysis helps the managers to take correct
decisions to fulfill their investment needs.
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Bibliography
Capital-Investment. (2017, Sep). Capital Investment Appraisal / Appraisal Techniques.
Retrieved Sep 2017, from http://www.capital-investment.co.uk: http://www.capital-
investment.co.uk/capital-investment-appraisal.php
Agriculture and Consumer Protection. (2017, Sep). Investment decisions - Capital budgeting.
Retrieved Sep 2017, from http://www.fao.org:
http://www.fao.org/docrep/w4343e/w4343e07.htm
APN Outdoor Group Limited . (2016). 2016 Annual Report. Retrieved Sep 2017, from
http://investors.apnoutdoorcorporate.com: http://investors.apnoutdoorcorporate.com/Investor-
Centre/?page=Financial-Reports
Tijdhof, L. (2017, sept). WACC: Practical Guide for Strategic Decision-Making – Part 1.
Retrieved sep 2017, from http://zanders.eu/: http://zanders.eu/en/latest-insights/wacc-practical-
guide-for-strategic-decision-making-part-1/
VAIDYA, D. (2017, Sep). CAPM BETA – DEFINITION, FORMULA, CALCULATE BETA IN
EXCEL. Retrieved Sep 2017, from http://www.wallstreetmojo.com:
http://www.wallstreetmojo.com/capm-beta-definition-formula-calculate-beta-in-excel/
WSJ. (2017, Sept). APN Outdoor Group Ltd. Retrieved Sep 2017, from http://quotes.wsj.com/:
http://quotes.wsj.com/AU/XASX/APO/financials
WSJ. (2017, Sep). Enero Group Ltd. Retrieved Sep 2017, from http://quotes.wsj.com:
http://quotes.wsj.com/AU/XASX/EGG/financials
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