Capital Budgeting and Dividend Policy Analysis

This assignment delves into the crucial relationship between capital budgeting, dividend policy, and firm value. Students are tasked with analyzing various academic articles and real-world case studies to understand how different capital budgeting techniques and dividend policies impact shareholder wealth. The analysis should draw upon the provided literature, including works by Graham & Sathye, Hamza & Hassan, Jagongo & Mutswenje, Mbabazize & Daniel, Metallica Minerals, Michaely & Qian, Minnis & Sutherland, Omar et al., Renneboog & Szilagyi, Robb & Robinson, Rossi, Sari & Kahraman, Schmidlin, Travlos et al., Wahlen et al., and Widyastuti. By critically examining these sources, students will develop a comprehensive understanding of the complex interplay between financial decisions and firm value.

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the university
Name of the student
Authors note

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FINANCE FOR BUSINESS
Table of Contents
Description of company:..................................................................................................................2
Ownership and governance structure of company:.........................................................................2
Calculation of performance ratios:..................................................................................................3
Significant factors influencing the share price of Metallic Minerals:.............................................6
Calculation of Beta values and expected rate of returns:................................................................6
Weighted average cost of capital:....................................................................................................6
Debt ratios for the past two years:...................................................................................................7
Dividend policy:..............................................................................................................................8
Letter of recommendation:..............................................................................................................8
References and Bibliography list:..................................................................................................10

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Description of company:
Metallic Minerals Limited is a bauxite developer of Australia that has assets based in
Cape York Peninsula of Queensland. Currently, company is concentrating on development and
production of its bauxite assets and is transitioning from exploration of minerals. It would help
organization in fulfilling the goal of becoming a sustainable, successful and profitable bauxite
mine producer. Opportunities to unlock the value from noncore assets are being investigated by
company that will help in generating revenue and increase production efficiency. Some of the
operations that are owned by company involve Urquhart bauxite project, HMS exploration, Cape
York regional bauxite and Urquhart point HMS project (metallicaminerals.com.au, 2018). It has
been indicated by Urquhart bauxite project that there will be potential for delivering strong
financial returns with minimum capital expenditure. Organization has received approval from
Commonwealth and Queensland government for mining lease. It is also seeking approval from
government regarding haul road. Cash reserves of company have been bolstered by availability
of standby credit facility, conversion of options and completion of right issue
(metallicaminerals.com.au, 2018).
Ownership and governance structure of company:
The board of directors of metallic minerals comprised of two non-executive directors,
non-executive chairman and alternate non executive director. There are no substantial
shareholders having higher than 20% of shareholders and the shareholder having higher than 5%
of shareholdings is Jien mining Pty limited. It can be seen that there are no shareholders having
more than 20% of shares and hence it can be concluded that company is a non-family company.

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Main people involved in governance firms are non-executive chairman, non executive
director and alternate non executive director.
Chairman of metallic minerals is Mr, Wang ruobing and he is the largest shareholder of
company through its Australian subsidiary. CEO of company is Steve Boulton that has
experience in this position over past fifteen years. Other board members include Peter Turnbull
who is the non-executive director of company and he has enabled development of business on a
global perspective and has considerable experience in commercialization and digital economy.
John Haley is the chief financial officer and company secretary and Simon Slesarewich is chief
executive officer (metallicaminerals.com.au, 2018). It can be seen that surname of substantial
shareholders do not have same surname as that of any members of board of directors. Yes, one
shareholder having highest number of shares is involved in the governance of metallic minerals.
Calculation of performance ratios:
The performance of metallic minerals has been evaluated by computation of key
performance ratios such as return on assets, debt ratio and return on equity. Return on assets for
company for four consecutive years is negative. Value is computed at -90.57% in year 2014 and
this has increased to 108.95% in year 2015 and -48.5% in year 2016 respectively. This negative
value is indicative of the fact that assets are not utilized profitably for generating revenue.
Return on equity for metallic minerals in year 2014 and 2015 stood at -95.10% and -
86.81% respectively. This value has increased significantly in year -117.45% in year 2016 and
has reduced to -43.92% in year 2017. There has been improvement in return generated from
equity in sense of increasing utilization of shareholder equity. However, value of return

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generated on equity has been negative and it is indicative of the fact that equity of organization
has not been utilized efficiently for generating return to shareholders (Omar et al., 2014).
Looking at the value of debt equity, it can be seen that debt ratio has increased
significantly from 0.048 in year 2014 to 0.053 in year 2015 and 0.072 in year 2017 respectively.
Increase in value of debt ratio is illustrative of the fact that proportion of debt in relation of total
equity has increased. However, in the financial year 2017, debt ratio stood at 0.050 and this fall
in ratio depicts that company is paying off its debt or they are not able to acquire any other debt
in their capital structure.
Particulars` 2014 2015 2016 2017
Net Profit after Tax (NPAT) A -
1533312
4
-
772235
3
-
574733
1
-
255912
1
Total Assets (TA) B 1693033
7
939575
2
527521
2
608764
1
Ordinary Equity (OE) C 1612236
5
889559
7
489357
3
582634
2
Total Liabilities D 807972 500155 381639 261299
Return on Assets (ROA) E= A/B -90.57% -82.19% -
108.95
%
-48.51%
Return on Equity (ROE) F=A/C -95.10% -86.81% -
117.45
%
-43.92%
Debt Ratio G=D/B 0.048 0.053 0.072 0.050
TA/OE is the total assets divided by total equity and the relationship between return on
assets and return on equity is considerably impacted by it. ROE depicts that how well company
is utilizing their equity for generating revenue. An increase in value of total assets is likely to
increase the value of return generated on assets and would decrease value of return on equity

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provided there is an increase in profit generated by company (Renneboog & Szilagyi, 2015). If
the company generates negative profits, then the impact on ROA and ROE would be negative.
ROA is greater than ROE because the value of total assets is more than value of ordinary
equities. Throughout the years of analysis, value of assets has exceeded value of equities;
however, their individual value has been declining.
Graph with the description of results:
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
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
Stock Price Movement
metallic Mineral All Ordinaries Index
From the above graph, it can be seen that there is wide fluctuations in the prices of shares
of metallic minerals in the beginning of year 2017. In the year 2015 and until end 2016, the
movement of share price index has been in line with All ordinaries index. All ordinaries index
have been fluctuating and the graph depicts that line is sometimes above price of shares of
metallic minerals and for few months, ordinaries index price is below the share price. In the later
parts of years, there have been wide fluctuations in the price of shares of metallic minerals. In the
recent year, price of shares is below ordinaries index (Armenter & Hnatkovska, 2017).

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Therefore, in recent years, there has been much wider volatility in share price and in the
beginning year, share price line is closely related.
Significant factors influencing the share price of Metallic Minerals:
Share price of Metallic minerals is influenced by the announcement made by company
regarding grant of mining lease by the State government. Development of Urquhart bauxite has
been done by imposition of development and conditions. The appointment of haulage and mining
contractors are done in the project of bauxite and the project is fully funded. Some of the projects
is being evaluated by company for the acquisition purpose. Australian mine shares are expected
to be granted to metallic minerals on the completion of definitive feasibility study is also likely
to influence share price (Faccio & Xu, 2015). Therefore, the share price of organization has the
likelihood of impacting by their strategically decisions.
Calculation of Beta values and expected rate of returns:
Particulars Amount
Beta of the company A 1.15
Risk Free Rate B 4%
Market Risk Premium C 6%
Required Rate of
Return
D=B+[Ax(C-
B)]
6.30%
The investment of company is determined by the value of beta and beta value being 1.15
indicates that investment strategy is aggressive. Value of beta is higher and it depicts that there is
higher volatility along with higher return and higher risks. Investors who are risk averse would
not like to make investment in this company.

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Weighted average cost of capital:
Particulars Amount
Weightag
e Cost Return Rate
Tax
Rate WACC
Total Long Term Debt 0 0.00% 0
0.000000000
%
30.00
% 0.00%
Total Equity 5826342 100.00% 6.30% 6.30%
TOTAL 5826342 100% 6.30%
It can be seen that there is no long-term debt attributable to company in the current year
and hence cost of equity will be equal to weighted average cost of capital. Therefore, WACC is
same of cost of equity of 6.30%.
WACC is the composite cost of capital that is used by investors in evaluating the project
undertaken by company. This particular measure helps in forming estimation about
organization’s expected cost. Computation of capital budgeting is the discount rate used by
company. Whether company should undertake any project is terms of risk of compensation and
return generated. Higher risks are generated by higher value of WACC and for undertaking
additional amount of risks, investors should be provided with higher return (Hamza & Hassan,
2017).
Debt ratios for the past two years:
Debt ratios for the past two years of Metallic minerals stood at 0.072 and 0.050 for
financial year 2016 and 2017 respectively. There has not been any stability in value of dividend
and in the current situation; the capital structure of organization cannot be evaluated using the
value of total equity (Graham and Sathye, 2017). It is so because company is incurring loss year
after year and the company cannot seek any further long-term borrowing.

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Dividend policy:
Dividend policy of Metallic minerals has been implemented in accordance with
Corporation Act and as per rules that are listed on Australian stock exchange. Payment of
dividend to shareholder have incorporated the guidelines and this ensures that share price of
metallic mineral will be traded fairly. Payment of dividend has not been recognized in the
financial statement for the year ending 30th June, 2017. As per the dividend policy of company,
ordinary shareholders are entitled to participate in dividend payments. Company for avoiding
any kind of compliance issues does principles prescribing the implementation of dividend policy
(Chittenden and Derregia, 2015).
Letter of recommendation:
Dear XYZ
Queensland
Australia
Respected Sir,
I would like to give an opinion of making investments in shares of metallic minerals after
conducting a detailed analysis and evaluation of company in terms of their capital, debt structure,
financial leverage and share price. From the computation of ratios, it can be inferred that both
return on assets and return on equity is negative and this is indicative of the fact that organization
are not able to efficiently utilize their underlying assets and shareholders’ equity. Debt ratio has
decreased in recent year because of decline in total value of liabilities. This depicts that liabilities
are being paid and there is no further acquisition of long-term borrowing. Moreover, metallic
minerals is generating year on year loss and this is not favorable for investors willing to make

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investment in this company (Minnis & Sutherland, 2017). Furthermore, share price of company
has been highly volatile from 0.03 in year 2015 to end of year 2017. Therefore, investing in
stocks of Metallic mineral would be risky and thereby it has the possibility of not generating
favorable to investors in recent years.
Therefore, as part of recommendation to XYZ, investment in this company should be
avoided and currently they should not involve shares of this company into their portfolio of
investment.
Thanking you,
LMN
Investment Company

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References and Bibliography list:
Armenter, R., & Hnatkovska, V. (2017). Taxes and capital structure: Understanding firms’
savings. Journal of Monetary Economics, 87, 13-33.
Breuer, W., Rieger, M. O., & Soypak, K. C. (2014). The behavioral foundations of corporate
dividend policy a cross-country analysis. Journal of Banking & Finance, 42, 247-265.
Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement audits.
Accounting Horizons, 29(2), 423-429.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative
Analysis, 50(3), 277-300.
Graham, P.J. and Sathye, M., 2017. Does National Culture Impact Capital Budgeting Systems?.
Australasian Accounting Business & Finance Journal, 11(2).
Hamza, S. M., & Hassan, Z. (2017). IMPACT OF DIVIDEND POLICY ON SHAREHOLDERS
WEALTH: A COMPARATIVE STUDY AMONG DIVIDEND PAYING AND NON-
PAYING TECHNOLOGY BASED FIRM’S IN USA. International Journal of
Information, Business and Management, 9(3), 1
Jagongo, A. O., & Mutswenje, V. S. (2014). A survey of the factors influencing investment
decisions: the case of individual investors at the NSE.
Mbabazize, P.M. and Daniel, T., 2014. Capital Budgeting Practices In Developing Countries: A
Case Of Rwanda. Research journali’s Journal of Finance vol. 2 No 3 Hal. 34, 38.

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Metallicaminerals.com.au. (2018). Retrieved 22 January 2018, from
http://www.metallicaminerals.com.au/wp-content/uploads/2016/09/Metallica-Minerals-
Limited-Annual-Financial-Report-30062017.pdf
Michaely, R., & Qian, M. (2016). Stock Liquidity and Dividend Policy: Evidence from a Natural
Experiment.
Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research, 55(1), 197-233.
Omar, N., Koya, R. K., Sanusi, Z. M., & Shafie, N. A. (2014). Financial statement fraud: A case
examination using Beneish Model and ratio analysis. International Journal of Trade,
Economics and Finance, 5(2), 184.
Renneboog, L., & Szilagyi, P. G. (2015). How relevant is dividend policy under low shareholder
protection?. Journal of International Financial Markets, Institutions and Money.
Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The
Review of Financial Studies, 27(1), 153-179.
Rossi, M. (2015). The use of capital budgeting techniques: an outlook from Italy. International
Journal of Management Practice, 8(1), 43-56.
Sari, I.U. and Kahraman, C., 2015. Interval type-2 fuzzy capital budgeting. International Journal
of Fuzzy Systems, 17(4), pp.635-646.
Schmidlin, N. (2014). The Art of Company Valuation and Financial Statement Analysis: A value
investor's guide with real-life case studies. John Wiley & Sons

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Travlos, N. G., Trigeorgis, L., & Vafeas, N. (2015). Shareholder wealth effects of dividend
policy changes in an emerging stock market: The case of Cyprus.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement
analysis and valuation. Nelson Education.
Widyastuti, P. (2016). THE INFLUENCE OF FINANCIAL PERFORMANCE AND
DIVIDEND POLICY ON FIRM VALUE. JOURNAL OF BUSINESS STUDIES, 2(1),
16-25.