REA Share Portfolio Evaluation

This assignment evaluates the suitability of including shares of REA Group (REV.AX) in an investment portfolio. It analyzes the company's past performance, particularly its financial deterioration in recent fiscal years, highlighting potential risks to investors. The analysis also considers the implications for portfolio return and advises investors on whether to include or exclude REA Group shares based on the identified risks.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
1. Formulating outline of the company, its core activities, factors in company’s activities and
market:........................................................................................................................................2
2i. Identifying the substantial shareholders:...............................................................................2
2ii. Identifying the people involved in firm governance:...........................................................2
3i. Drafting the debt ratio, return on assets, and return on equity of REV:...............................3
3ii. Identifying the overall phenomenon captured by variable TA/OE:.....................................4
3iii. Depicting the reason behind higher ROE and lesser ROA:................................................4
4i. Drafting an adequate graph/chart which depicts the changes in monthly share price cover
last two years against All Ordinary Index:.................................................................................5
4ii. Stating whether share prices are related with All Ordinary Index price movement:...........5
5. Depicting the overall significance of announcements and its impact on share price of the
organisation:...............................................................................................................................6
6i. Identifying and calculating the beta of REV:........................................................................6
6ii. Drafting the overall CAPM retune of the REV:..................................................................6
6iii. Indicating whether REA is a conservative investment for investors:.................................7
7i. Drafting the WACC of REA:................................................................................................7
7ii. Identifying the impact of high WACC has on management’s evaluation on perspective
investment project:.....................................................................................................................7
8i. Stating whether optimal capital structure is used by REA:..................................................8
8ii. Depicting what they have done to adjust their gearing ratio:..............................................8
9. Discussing the dividend policy adopted by the management:...............................................9
10. Providing recommendations why the company could be included in his/her portfolio:......9
Reference and Bibliography:....................................................................................................10

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1. Formulating outline of the company, its core activities, factors in company’s activities
and market:
Real Estate Investar Group Limited mainly operations in the online market, were
relevant services and direct investment property opportunities are presented to Australiana
and New Zealand investors. The company adequately operates through subscription
transaction services and property segments. The company adequately provides tools,
resources, and new services to investors. In addition, the company adequately identifies,
analyses, acquires, track and account for investment property (Rei-group.com.au 2018).
Moreover, the company provides end-to-end solution to consumers regarding their
investment in property. The company is mainly operating in Australian market and has
relevant competitors from different established companies. Lastly, the company conducts
operations such as property sales and mortgage broking in Australia.
2i. Identifying the substantial shareholders:
Main substantial shareholders Number of Share held % of issued share
INVIA CUSTODIAN PTY LTD 10,627,914 10.94%
GOLDEN MAIL PTY LTD 10,576,125 10.88%
HB SUPER HOLDINGS PTY LTD 8,255,983 8.50%
POHUTUKAWA PTY LTD 8,034,281 8.27%
LV2 PTY LTD 7,924,705 8.16%
2ii. Identifying the people involved in firm governance:
Position Name of the Persons
Non-Executive Chairperson Simon Baker

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CEO and Managing Director Clint Greaves
Independent non-executive Director Joe Hanna
Independent non-executive Director Ian Penman
3i. Drafting the debt ratio, return on assets, and return on equity of REV:
Particulars 2017 2016 2015
Net Profit After Tax (2,222,750) (1,365,347) (2,094,189)
Total Assets 4,728,346 7,052,950 2,661,357
Ordinary Equity 11,285,121 11,285,121 4,165,796
Total Liabilities 2,974,531 3,304,531 4,687,467
Return on Assets -47.01% -19.36% -78.69%
Return on Equity -19.70% -12.10% -50.27%
Debt Ratio 62.91% 46.85% 176.13%
Particulars 2017
EBIT (4,125,977)
TA 4,728,346
NPAT (2,222,750)
EBIT (4,125,977)
TA 4,728,346
OE 11,285,121
NPAT/OE (EBIT/TA) * (NPAT/EBIT) * (TA/OE)
NPAT/OE -19.70%

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3ii. Identifying the overall phenomenon captured by variable TA/OE:
Particulars 2017 2016 2015
TA/OE 41.90% 62.50% 63.89%
From the evaluation of overall table difference between total assets and equity is
detracted. The table indicates that overall accumulation of assets has greatly reduced during
2017, while the accumulation of ordinary assets remained same from 2016 to 2017. This is
the main reason behind the drastic fall in return from investment, which is been calculated in
above tables. The decline in percentage from 62.50 to 41.90% is an indication that the
company has sold its asset during 2017, which drastically reduced its financial viability (Rei-
group.com.au 2018).
3iii. Depicting the reason behind higher ROE and lesser ROA:
Particulars 2017 2016 2015
Total Assets 4,728,346 7,052,950 2,661,357
Ordinary Equity 11,285,121 11,285,121 4,165,796
EBIT (6,948,799) (6,558,403) (5,091,144)
Return on Assets -146.96% -92.99% -191.30%
Return on Equity -61.57% -58.12% -122.21%
From the overall evaluation of ROA and ROE indicates a drastic fall in its valuation,
which incurred during 2017. This was mainly due to the fall in total assets, which resulted in
the decline of ROA from the level of -92.99% to -146.96%. on the other ha nth change in
ROE is relatively minimum from -61.57% to -58.12% (Rei-group.com.au 2018). This
indicates that due to the continuous fall in EBIT and return on assets the overall return from

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assets have inclined immensely. The main difference is the changes in assets, which is
maintained by the company during 2015 to 2017.
4i. Drafting an adequate graph/chart which depicts the changes in monthly share price
cover last two years against All Ordinary Index:
11/1/2015
12/1/2015
1/1/2016
2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
(0.60)
(0.40)
(0.20)
-
0.20
0.40
0.60
0.80
Share Price Movement
Return REV.AX Return All Ordinary Index
4ii. Stating whether share prices are related with All Ordinary Index price movement:
From the overall evaluation of REV shares return and All ordinary index return, no
similarities can be identified. As depicted in the above figure, the return of All ordinary index
is smooth and has relevantly levels, while the overall return of REV is fluctuating constantly
and is behaving in uncorrelated manner. REV has a correlation of -0.25796 with All ordinary
index, which indicates that both the securities are not correlated (Asx.com.au 2018).

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5. Depicting the overall significance of announcements and its impact on share price of
the organisation:
Date Announcements Factors
14-Dec-2017 Appendix 3B-release of security from escrow Financial performance
23-Nov-2017 AGM results Financial performance
20-Nov-2017 Release of security from escrow Financial performance
02-Nov-2017 Change in Directors interest notice Earnings forecast
31-Oct-2017 Appendix 4C- quarterly Financial performance
6i. Identifying and calculating the beta of REV:
From the overall evaluation Beta of the organisation is not detected from any website,
while adequate valuations are being conducted for the identification of beta. The beta is then
calculated to be at the levels of -0.03.
6ii. Drafting the overall CAPM retune of the REV:
Particulars Values
Beta -0.03
Risk free rate 4%
Market risk premium 6%
CAPM 3.94%

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6iii. Indicating whether REA is a conservative investment for investors:
The calculation mainly indicates that beta of the company is at the levels of -0.03%,
which indicates that investors could use the overall stock to hedge their portfolio. The
investment option is mainly considered to be conservative, as no high risk is involved from
investment in the stock.
7i. Drafting the WACC of REA:
Particulars Values
Total Equity 11,285,121.00
Total Debt 350,496.00
Total Capital 11,635,617.00
Cost of debt 7.88%
Cost of equity 3.94%
Tax 30.00%
WACC 3.99%
7ii. Identifying the impact of high WACC has on management’s evaluation on
perspective investment project:
From the overall evaluation of WACC the mangers can detect the minimum
requiremnet needed from a relevant project. Moreover, WACC mainly indicates that overall
cost of capital of an organisation and investors need to get higher return from their
investment. The WACC is also calculated by the investors to detect the overall minimum
return, which is needed by the company to obtain during the fiscal year. The managers with
the help of WACC are mainly able to understand the minimum requirement, which needs to

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be provided by any investments or projects obtained by the company. Hence, organisation
needs to select projects that have higher return than WACC, as it needs to maintain high
return from evaluation. Therefore, the managers of REA mainly need to be obtain projects
that have higher return from 3.99%. In this context, Chauhan (2016) stated that WACC is
required by investor to understand the overall payments that is needed by the company to pay
during the fiscal year.
8i. Stating whether optimal capital structure is used by REA:
Particulars 2017 2016
Total Assets 4,728,346 7,052,950
Total Liabilities 2,974,531 3,304,531
Debt Ratio 62.91% 46.85%
The debt ratio of the company has mainly inclined over the period of one fiscal year,
which indicates the low financial position of the organisation. The relevant debt rate of the
company has mainly inclined from 46.85% to 62.91%, which indicates the falling financial
condition of the company from 2016 to 2017 (Asx.com.au 2018). In addition, the decline is
mainly due to the fall in assets, which was accumulated by the company from 2016 to 2017.
Moreover, inclination in the debt ratio could directly increase the chance of insolvency
position of REA.
8ii. Depicting what they have done to adjust their gearing ratio:
Not adequate decision was taken by the management in controlling the overall
increment in debt ratio. Instead the company declines its overall accumulated assets to danger

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levels, which increased the debt ratio. The share issues have been conducted by the company,
which is been stated by the directors of the organisation.
9. Discussing the dividend policy adopted by the management:
The evaluation of the annual report indicates no dividend policy has been maintained
by the organisation during the past fiscal years. The company has not paid any kind of
dividend to her shareholders since its inauguration
10. Providing recommendations why the company could be included in his/her
portfolio:
The overall evaluation of the financial report and share price of the organisation it is
advisable to ignore shares of REA in the portfolio. The performance of the company has
mainly deteriorated in the past fiscal years, which could increase risk of the portfolio and
reduce its return. Hence, investors need to ignore shares of REA, while drafting the portfolio.

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Reference and Bibliography:
Agliardi, E., Agliardi, R. and Spanjers, W., 2016. Corporate financing decisions under
ambiguity: Pecking order and liquidity policy implications. Journal of Business
Research, 69(12), pp.6012-6020.
Asx.com.au. (2018). [online] Available at: https://www.asx.com.au/asx/share-price-
research/company/REV [Accessed 31 Jan. 2018].
Au.finance.yahoo.com. (2018). REV.AX: Summary for REI GROUP FPO - Yahoo Finance.
[online] Available at: https://au.finance.yahoo.com/quote/REV.AX?p=REV.AX [Accessed
31 Jan. 2018].
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
corporate investment during the global financial crisis. Journal of Business Finance &
Accounting, 43(5-6), pp.513-542.
Berlinger, E., Lovas, A. and Juhász, P., 2017. State subsidy and moral hazard in corporate
financing. Central European Journal of Operations Research, 25(4), pp.743-770.
Bris, A., Koskinen, Y. and Nilsson, M., 2014. The euro and corporate financing before the
crisis. Journal of Financial Economics, 114(3), pp.554-575.
Chauhan, G.S., 2016. Reconciling theory and evidences for corporate financing in
India. Journal of Emerging Market Finance, 15(3), pp.295-309.
Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A. and Dushnitsky, G., 2017. A
review and road map of entrepreneurial equity financing research: venture capital, corporate
venture capital, angel investment, crowdfunding, and accelerators. Journal of
Management, 43(6), pp.1820-1853.