Finance for Business - Presentation

Finance for
Business

Introduction
 The Analysis has been done for the project primarily into three key
parts whereby the first part includes the research conducted on
financial markets.
 The first part specifically covered the important aspects of the
financial markets like common stocks, bonds and preferred stocks.
The five basic principles of the finance has been well analyzed.
 The analysis of the Australian financial markets have been well done
whereby important aspects of the Australian Bond Markets and Share
market related information has been done for the better
understanding of the financial market relation important facts and
data.
 Finally, risk analysis has been done for the project by taking
important aspects in the form of project that have been analyzed.

Research on Financial Markets
 The three types of financial products which are used in the Australian Stock exchange and which
are preferred by the investors as well are common stocks, bonds and Preferred Stocks.
 Common Stocks
 Ownership status: In case of common stocks, the investors have full power and ownership.
 Risks: One of the features of a common stock is that the level of risk which is associated with
such stocks are high and therefore the investors needs to consider the same while making
investments.
 Nature of Funding: The nature of funding for such types of instruments are equity based.
 Income Source: The source of income in such a case is from dividend.
 Voting Rights: The individual who has the possession of the shares have the voting rights
associated with the same.
 Maturity: There is no term as maturity for such stocks and are considered to be permanent
unless the company goes into liquidation.
 Priority on Liquidation: These types of stocks do not enhoy any sort of priority at the time of
liquidation.

Research on Financial Markets
Bonds
 Ownership Status: In the case of bonds, there is no case for full ownership as
the same are considered to be debt capital.
 Risks: The risk which is associated with a bond is generally low in comparison to
common stocks and preferred stocks.
 Nature of Funding: The nature of funding for such kinds of instruments is debt
sources and is quite different from that of equity sources.
 Income Source: Interest payments, coupon payments are common sources for
income for a bond.
 Voting Rights: The concept of voting rights does not apply in the case of bonds.
 Maturity: The bonds are issued for a certain time frame and the same are
expected to mature after a certain date which is predetermined.
 Priority on Liquidation: There is a priority on bonds during the time of
liquidation as they fall under the head of secured creditors of a business.

Research on Financial Markets
Preferred Stocks
 Ownership Status: The full ownership is also not present in case of a preferred
stocks which makes its partially owned.
 Risks: The risks which arise in case of preferred stock are less in comparison to
common stocks.
 Nature of Funding: The nature of funding for such types of instruments are equity
based.
 Income Source: The only source of income under this option is also dividend
which is offered by the business.
 Voting Rights: In such stocks, voting rights are not generally available but the
same depends on the nature of the stock.
 Maturity: The preferred stocks are also given a term for maturing considering the
nature of the stock.
 Priority on Liquidation: These types of stocks are given priority at liquidation but
the same is provided after bonds and other debt instruments.

Five Basic Principle of Finance
The five-basic principle of finance which can be identified in relation to
investment options which is available for a business are listed below in
details:
 Cash Flow is the only thing that Matters:
 Money Has a Time Value:
 Risk Requires a Reward:
 Market Prices Are Generally Right:
 Conflicts of Interest Cause Agency Problems:

Fact Finding of Australian
Financial Markets
 The bond can be traded openly in Australian Securities Exchange
which is considered to be the largest market. The different types of
bonds which are corporate bonds government bonds and other kinds
of bonds.
 The bonds which are floated in the market are often rated using
Standard & Poor’s credit rating, Moody’s credit rating, Fitch’s credit
rating and DBRS’s credit rating considering the nature of bonds which
is being considered (Borgonovo and Plischke 2016).
 The YTM of a bond is in direct relation with the coupon rate which is
associated with the bond. Besides this, the formula of YTM
incorporates current coupon rate, face value and market value so
that the computation which is done is accurate. It can be said that
the coupon rate is used for the computation of YTM of a business.

Fact Finding of Australian Share
Market
 The name of stock market in the Australian Region is the Australian
Securities Exchange, which acts as a primary securities exchange for the
investors willing to invest in the stock market. The ASX acts a key market
operator, which acts as a clearing house and as a payment facilitator, it also
oversees various compliances with the various operating range of operating
rules and aims at promoting the standard of corporate governance.
 The company analyzed for the purpose of analyzing the market
capitalization of a listed company has been Fortescue Metal Group which is
listed in the Australian Stock Exchange with its ticker symbol as FMG.
 the market cap has been well analyzed for the company by taking the share
price of the company multiplied by the outstanding shares of the company.
The market capitalization of the FMG stock has been around 38.43 billion in
the time period analyzed.

Risk Analysis and Project
Evaluation
 Base Case
Project Investment Analysis
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment ($2,450,000)
Salvage Value $250,000
Working Capital Investment ($500,000)
Total Investment/Cash Outflow ($2,950,000) $250,000
Cash Inflows:
Units Sold 400000 400000 400000 400000
Average Price $22 $22 $22 $22
Total Sales $8,800,000 $8,800,000 $8,800,000 $8,800,000
Cash Outflows:
Variable Cost Per Unit $12 $12 $12 $12
Units Sold 400000 400000 400000 400000
Total Variable Costs ($4,800,000) ($4,800,000) ($4,800,000) ($4,800,000)
Fixed Costs ($250,000) ($250,000) ($250,000) ($250,000)
Depreciation Cost ($550,000) ($550,000) ($550,000) ($550,000)
Total Costs ($5,600,000) ($5,600,000) ($5,600,000) ($5,600,000)
Cash Flow Before Tax $3,200,000 $3,200,000 $3,200,000 $3,450,000
Taxation @ 30% ($960,000) ($960,000) ($960,000) ($1,035,000)
Cash Flow After Tax $2,240,000 $2,240,000 $2,240,000 $2,415,000
Add: Non Cash Expense (Depreciation) $550,000 $550,000 $550,000 $550,000
Add: Working Capital Recovery $500,000
Free Cash Flows ($2,950,000) $2,790,000 $2,790,000 $2,790,000 $3,465,000
Discount Factor @ 10% 1.00 0.91 0.83 0.75 0.68
Discounted Cash Flows ($2,950,000) $2,536,364 $2,305,785 $2,096,168 $2,366,642
Net Present Value $6,354,959

Risk Analysis and Project
Evaluation Project Investment Analysis (Sensitivity Analysis)
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment ($2,450,000)
Salvage Value $250,000
Working Capital Investment ($500,000)
Total Investment/Cash Outflow ($2,950,000) $250,000
Cash Inflows:
Units Sold 400000 360000 324000 291600
Average Price $22 $20 $18 $16
Total Sales $8,800,000 $7,128,000 $5,773,680 $4,676,681
Cash Outflows:
Variable Cost Per Unit $12 $13 $15 $16
Units Sold 400000 360000 324000 291600
Total Variable Costs ($4,800,000) ($4,752,000) ($4,704,480) ($4,657,435)
Fixed Costs ($250,000) ($275,000) ($302,500) ($332,750)
Depreciation Cost ($550,000) ($550,000) ($550,000) ($550,000)
Total Costs ($5,600,000) ($5,577,000) ($5,556,980) ($5,540,185)
Cash Flow Before Tax $3,200,000 $1,551,000 $216,700 ($613,504)
Taxation @ 30% ($960,000) ($465,300) ($65,010) $0
Cash Flow After Tax $2,240,000 $1,085,700 $151,690 ($613,504)
Add: Non Cash Expense (Depreciation) $550,000 $550,000 $550,000 $550,000
Add: Working Capital Recovery $500,000
Free Cash Flows ($2,950,000) $2,790,000 $1,635,700 $701,690 $436,496
Discount Factor @ 10% 1.00 0.91 0.83 0.75 0.68
Discounted Cash Flows ($2,950,000) $2,536,364 $1,351,818 $527,190 $298,132
Net Present Value $1,763,504

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