Financial Analysis of Two Companies - Desklib

This document provides a financial analysis of two companies based on holding period return, expected return, total return, and financial ratios. It also includes a case study on a cupcake business with computations of contribution margin, break-even point, net present value, and profitability index.

DOLLARS AND SENSE
STUDENT ID:
[Pick the date]

CASE STUDY 1
TASK 1
The holding period return for each of company for year from 30 June 2013 to 30 June 2018 is
computed using the following approach.
Formula for holding period return
Holding period= Pricecn+1−Pricecn+Dividend
Pricen
Closing adjusted prices as on June 30
Dividend date June 30, 2013 to June 30, 2018
Annual holding returns
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TASK 2
Expected return for each of company based on five-year historical sample of return is
highlighted below.
Expected Return
Dominos Pizza Enterprises= 104.41+70.94 +95.11−21.12+4.71
5 =50.81% p . a .
Retail Food Group= 27.05+ 30.26+12.40−5.13−84.83
5 =−4.05 % p . a.
TASK 3
Total return to the shareholders for each of the company over five year from 30 June 2013 to
30 June 2018 is highlighted below.
Total return
Total return ¿ the shareholders= [ P5−D1−5
P0 ]1
5
−1
For Dominos Pizza Enterprises= [ 51−3.288
9.78 ]1
5 −1=40.89 %
For Retail Food Group= [ 0.54−1.1275
3.1785 ]1
5 −1=−12.10 %
TASK 4
It can be said based on the above analysis that total returns to the shareholders of Domino’s
Pizza Enterprises are significantly higher than the total returns to the shareholders of Retail
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Food Group. For DPE, the appreciation in share price from 2013 to 2016 was quite
spectacular. However, the performance of share price in the last two years has been rather
lacklustre. With regards to RFG, the key deterioration of shareholders’ wealth has taken place
in 2017-2018 when the share lost more than 80% of market capitalization.
TASK 5
Computation of annual growth in earnings per shares, net profit margin, asset turnover ratio,
leverage ratio, return on equity, quick ratio, net debt to equity ratio for the financial year
2017/18 is shown below.
Required input variables
Required financial ratio
TASK 6
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1) A) Profitability – The performance with regards to profitability has been quite impressive
for DPE which during the period under consideration has brought about margin expansion
in excess of 500 bps which augers well for profit growth when the topline growth is also
factored in. No such growth has been witnessed in the EPS or profit margins for RFG.
Further, in 2018, the company has posted high loss owing to which the stock value has
also plummeted (Brealey, Myers & Allen, 2014).
B) Efficiency - Contrasting trends have been witnessed by DPE and RFG with regards to
asset turnover ratio. This is because RFG has shown consistent improvement while DPE has
shown deterioration of this performance metric. However, the interesting aspect is even after
the above trends, the asset turnover ratio continues to be higher for DPE. One potential
explanation of decrease in asset turnover ratio for DPE is on account of steep rise in assets in
recent times (Lasher, 2017).
C) Liquidity – With regards to quick ratio, over the years DPE has maintained a stable value
which has seen major increase in the year ending on June 30, 2018 as it has crossed 1 or
100% thereby implying that liquid assets are more than current liabilities. RFG on the other
hand has no clear trend and wild swings are observed. But, the quick ratio does not indicate
any cash crunch for the company in the near future (Petty et. al., 2016).
D) Solvency - There is general trend towards deterioration of these ratios for both companies
as the extent of leverage seems to have increased primarily on business expansion. This trend
seems more prominent in case of DPE when compared wit RFG. However, this should not
result in any major escalation os any solvency risks since the business model of the company
continues to be quite robust (Damodaran, 2015).
CASE STUDY 2
TASK 1
Contribution margin =?
Ingredient cost per unit=$ 0.38
Revenue per unit =$ 3∧¿
Hence,
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Royalty cost per unit =( 8
100 )∗3=$ 0.24
Marketing cost per unit=( 5
100 )∗3=$ .15
Variable cost per unit = ( Ingredient cost per unit + Royalty cost per unit +Marketing cost per unit )
Variable cost per unit = ( 0.38+0.24+ 0.15 )=$ 0.77
Contribution margin per unit=Revenue per unit−Variable cost per unit
Contribution margin per unit=$ 3−$ 0.77=$ 2.23
TASK 2
Number of cupcakes that must be sold in year at break-even
¿ cost=18300+ 3500+66528+6320=$ 94,548
Total annualoutgoings=$ 3500
Weekly rent = $350 and hence, yearly rent=52∗350=$ 18,300
Yearly wage cost= ( 17∗8∗252 ) + ( 16∗8∗252 )=$ 66 , 528
Yearly contribution of employees∈the superannuation= ( 9.5
1000 )∗66528=$ 6320
Number of cupcakes sold at break−even= ¿ cost
Contribution margin per unit =94548
2.23 =42,399
TASK 3
Annual profit before tax =?
Number of cupcakes can produce in 8 hours shift = 144 each day for 252 days
Fixed cost = $94,548
Yearly sales ¿ cupcakes=252∗144=36,288
Yearly contribution margin=Contributionmargin per unit∗Yearly sales¿ cupcakes
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Yearly contribution margin=2.23∗36288=$ 80,922
Yearly lossincurred =¿ cost−Yearly contribution margin=$ 94548−$ 80922=$ 13,626
TASK 4
Net profit per year =?
Number of cupcakes sold in first year = 70,000
Number of cupcakes sold in second year = 80,000
Number of cupcakes sold in third year = 90,000
TASK 5
Net present value of business =?
Business sold at the end of third year = $150,000
Cost of capital = 16% p.a.
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Net present value=(−200,000)+( 43086
1.16 ) + ( 58696
1.162 ) +
( 224306
1.163 )
Net present value=$ 24,467
TASK 6
Profitability index =?
Business sold at the end of third year = $150,000
Profitability Index= PV of cash inflows
Initial Investment =( 224,467
200,000 )=1.12
TASK 7
From the computations above, it is evident that the NPV comes out positive while a value
higher than 1 is assumed by profitability index. This provides conclusive evidence in relation
to the given venture being financially viable. As a result, investment should be made in this
business (Berk, DeMarzo, Harford, Ford, Mollica and Finch, 2016).
TASK 8
The link provided indicates the key risks that are witnessed in the cupcake business. For
minimising these risks, it is recommended that the cupcake pricing should not be too high as
there are cheaper substitutes available which adversely impact sales in the long term. Also,
lower margins would deter new players to enter the cupcake business in the vicinity. Another
key aspect is to ensure that new variety of cupcakes are introduced so as to provide customers
with a new product to try which would enhance repeat purchases.
References
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N. (2016) Fundamentals
of corporate finance. London: Pearson Higher Education
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc
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Damodaran, A. (2015) Applied corporate finance: A user’s manual. 3rd ed. New York:
Wiley, John & Sons
Lasher, W. R., (2017) Practical Financial Management. 5th ed. London: South- Western
College Publisher
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2016)
Financial Management, Principles and Applications. 6th ed. NSW: Pearson Education,
French Forest Australia
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