Finance for Business - Australian Stock Exchange

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Introduction........................................................................................................................2
Discussion and Analysis....................................................................................................3
Part 1. Research on Financial Markets.............................................................................3
1.1 Key Financial Products............................................................................................3
1.2 Five Basic Principle of Finance................................................................................8
Part 2: Fact Finding of Australian Financial Markets.........................................................9
2.1 Evaluation of Bond Market of Australia....................................................................9
2.2 Fact Finding of Australian Share Market...............................................................11
Part 3: Risk Analysis and Project Evaluation..................................................................13
3.1 Sensitivity Analysis.................................................................................................13
3.2 NPV Breakeven Analysis.......................................................................................13
Conclusion.......................................................................................................................14
References.......................................................................................................................15
Working Notes.................................................................................................................17
1) Base Case Result........................................................................................................17
2) Sensitivity Analysis......................................................................................................18
3) NPV Breakeven...........................................................................................................19

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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 where important and
key financial products were taken into analysis including the financial products offered
by companies that are primarily in the form of common stocks, bonds and preferred
stocks and the same has been well analyzed from the view point or perspective of an
investor which has been well taken into consideration for analyzing the cash flow of the
company. The five basic principles of the finance has been well applied in the context of
assignment whereby key events in the financial markets have been taken into
consideration for well relating the same with the basic principles of finance. 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 based on the findings and data that have been
given for the project analyzed. The key approach that have been followed for finding out
the viability of the project has been primarily done with the help of the Net Present
Value as a key tool for finding out the overall viability of the project that has especially
taken into consideration. For the purpose of better analysis and findings the annual data
that were taken into consideration has been done by applying the sensitivity analysis as
a key risk assessment tool which has been well applied for the purpose of well finding
out the outcome of the project if key and crucial factors changes.

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Discussion and Analysis
Part 1. Research on Financial Markets
1.1 Key Financial Products
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. The comparison between the three different types of instruments
is explained below showing features for the same.
Common Stocks
1. Ownership status: In case of common stocks, the investors have full power and
ownership.
2. 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.
3. Nature of Funding: The nature of funding for such types of instruments are
equity based.
4. Income Source: The source of income in such a case is from dividend.
5. Voting Rights: The individual who has the possession of the shares have the
voting rights associated with the same.
6. Maturity: There is no term as maturity for such stocks and are considered to be
permanent unless the company goes into liquidation.
7. Priority on Liquidation: These types of stocks do not enhoy any sort of priority
at the time of liquidation.
Bonds
1. Ownership Status: In the case of bonds, there is no case for full ownership as
the same are considered to be debt capital.
2. Risks: The risk which is associated with a bond is generally low in comparison to
common stocks and preferred stocks.
3. Nature of Funding: The nature of funding for such kinds of instruments is debt
sources and is quite different from that of equity sources.
4. Income Source: Interest payments, coupon payments are common sources for
income for a bond.
5. Voting Rights: The concept of voting rights does not apply in the case of bonds.

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6. Maturity: The bonds are issued for a certain time frame and the same are
expected to mature after a certain date which is predetermined.
7. 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.
Preferred Stocks
1. Ownership Status: The full ownership is also not present in case of a preferred
stocks which makes its partially owned.
2. Risks: The risks which arise in case of preferred stock are less in comparison to
common stocks.
3. Nature of Funding: The nature of funding for such types of instruments are
equity based.
4. Income Source: The only source of income under this option is also dividend
which is offered by the business.
5. Voting Rights: In such stocks, voting rights are not generally available but the
same depends on the nature of the stock.
6. Maturity: The preferred stocks are also given a term for maturing considering the
nature of the stock.
7. Priority on Liquidation: These types of stocks are given priority at liquidation
but the same is provided after bonds and other debt instruments.
Examples of Real Life Companies
Common Stock of Megaport Ltd
Particulars Common Stock
First issuance January 2016
Offer price 1.25
Shares offered 20.0 Million
Raised capital 25.0 Million
Trading market Australian Securities Exchange
Market capitalization $1.6 Billion
Market price 10.60

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The above chart shows the fluctuations in the prices of the common stock during
the period of five years and the analysis is conducted considering the market trends
which can be identified for the business. Due to the fluctuation in price of the common
stock, it can be clearly said that there is significant risks associated with the inclusion of
the same in the portfolio of an investor (Asx.com.au. 2020). The analysis is considered
with the help of estimates which is available from the website of the company. In
addition to this, the investor also needs to have proper knowledge of risks and returns
which is related to the business before taking a decision regarding making investments
in any undertaking.
Bonds:

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Particulars Bond (Euro Bond)
First issuance 20 April 2015
Offer price $100
Trading market Australian Securities Exchange
Trading volume 111,960
Market capitalization 600 Million
Coupon rate 5.625%
Payment frequency 1
Market price 112.970
The information which is presented in the table and also the chart shows the
initial prices and the coupon payments which is associated with the bond. The
fluctuation of bonds is not to that extreme level as in case of common equity but the

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same are still visible from the figure which is presented above. The type of returns
which is generated from such kinds of bonds are generally interest or coupon based
considering the condition in which the bond was issued in the first place (Usmani et
al.2016) The investor should consider such an option considering all other options of
investments which is available.
Preferred Stocks
Particulars Preferred stocks Downer Edi Ltd
First issuance 11 June 2015
Offer price 100
Trading market Australian Securities Exchange
Trading volume 3000
Yield 4.78%
Market price 101.27

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The above graph shows preferred stocks for the business of Downer Edi Ltd
which is engaged in mining operations in the country. The company issued a preferred
stock during the period and the analysis for the same is presented in the above figure
(Asx.com.au. 2020). The source of income for such source of capital is from dividend
payments and therefore the same helps in generation of appropriate income as returns
for the investors.
1.2 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: The element of cash flow is the
major factor which is considered by an investors for making any investments.
The cash flow information are considered as the same are indicators for the
success of the business and also helps the businesses to achieve growth and

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sustainability in the long run operations of a business (Marchioni and Magni
2018). In other words, it can be effectively be said that the cash flow of the
business depends on the activities of the business and also the valuation of the
business depends on cash flow of the business. Money Has a Time Value: The investors often make their investments
considering the time value of money aspect in the equation and thereby
appropriately calculates their own returns for the purpose of future viability. The
time value of money in a business is the indicator of the market trends and how
the value of money would increase in the near future. Therefore, it can be said
that most of the investors keep an eye on time value of money for making their
investments. Risk Requires a Reward: The most important estimates which are considered
by investors is the risk and reward relation which is associated with any
investments (Booth and Choudhary 2013). Numerous examples are available
from the market for companies like apple and web jet where higher risks often
signifies that the investor would also generate appropriate return considering the
nature of investment. Therefore, it can be said that the risks and return factor
plays a vital role in taking decisions whether to make investments or not. Market Prices Are Generally Right: The market prices of different shares are
also important indicators of how the businesses are performing considering the
nature of operations of the business. Even the smallest of the events can impact
the share prices of a business. Therefore, it can be said that the market price
place an important role in framing the investments which helps in proper decision
making process. Conflicts of Interest Cause Agency Problems: The conflicts of interest which
is associated with proper knowledge of the policies of the business. The conflict
is mainly detected in case when a scandal takes place which significantly
impacts the operations and investment function of the business. An instance can
be given of AMP ltd which lost most of its investors due to a scandal which was
committed by the senior executives of the company.
Part 2: Fact Finding of Australian Financial Markets
2.1 Evaluation of Bond Market of Australia
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.

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Bond Rating Services in Australia
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).
Distinction Between Government Bonds and Australian Corporate Bonds
The main points of distinction which can be identified are listed below in detail
considering governmental bonds and corporate bonds which are circulated in Australia:
• The guarantee is provided by the government in case of government bonds while
the same is provided by corporate houses in case of corporate bonds..
• Corporate Bonds are measured in terms of credit ratings considering their
respective financial performance of the company while ratings in case of governmental
bonds are provided based on fiscal deficit of the country and the policies which are set
by the government.
Relation between YTM and Coupon Rate
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.
Interest rate Risks and Impact on Bond Prices

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The interest rate is the payments which are received for the bonds and the same
is the reason due to which investors makes investments in the bonds of a company.
The same is also an indicator of the interest conditions in the market. If the interest rate
is higher than the coupon rates of a bond than naturally the demand for the bond would
be impacted and the opposite is also possible considering the bond market.
2.2 Fact Finding of Australian Share Market
1) 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 among the various listed companies that are operating in the
Australian Region. The ASX also helps the retail investors in well understanding the
financial markets by providing a detailed set of information.
2) 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 and 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.
3) The All Ordinary Share Index is considered as one of the oldest index operating in
the Australian Region and is primarily considered as the total market barometer for the
Australian Stock Market and it also contains the 500 largest of the various Australian

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Companies by or in the form of market capitalization of each of the stock. The stock
index is considered as the prime benchmark for analyzing for the Australian
Equities/stocks. The stock index was established in the year 1979 and has a starting
level of 500, it also accounts for around 92% of the Australian Equity Market. The index
analyzed is a market value weighted index is a stock market index whereby
components of the stock market are weighted in accordance to the total market value of
their outstanding shares. The index is a market cap weighted index whereby
components are based and weighted in accordance to the total market value of the
outstanding number of shares.
4) The graphical chart has been drawn for the All Ordinary Index for a sum of three
years whereby relevant changes in the prices of the index has been well taken into
consideration for the purpose of analysis:

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5) The trend in the chart well shows that the index on a positive note has shown a
consistent level of improvement in terms of the positive trend, however the same has
also been volatile in the trend period of three years analyzed and the same has been in
particular due to the increasing price levels of the various shares and stocks that in
particular were listed in the Australian Stock Exchange. Lower rate of inflations and
stable interest rate were some of the key facts and data that have been well taken into
consideration for the purpose of analysis of the company.
Part 3: Risk Analysis and Project Evaluation
3.1 Sensitivity Analysis
Base Case
The project investment analysis can be well done with the help of the key capital
budgeting tools that have been well analyzed for the purpose of analyzing the project
investment that has been done. The analysis has been primarily done by taking all the
cash inflows and cash outflows of the company and the same has been well done by
taking important data that were available to us for the purpose of analysis. The Net
Present Value for the project in the base case was determined to be around $6.354
Million as shown in Appendix 1.
Sensitivity Analysis Results
The analysis of the results has been well determined with the help of the
changes in the key factors like costs and price per unit of the products that the company
will be selling (Appendix 2).

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3.2 NPV Breakeven Analysis
The breakeven analysis has been done in order to well identify the number of
quantity that the company indeed need to sell for the purpose of well identifying the total
sales quantity that the company needs to sell so that it can get a positive NPV or NPV
equal to zero which well states that the project will be giving an exact return of 10%
(Appendix 3).
Conclusion
The analysis of the project was done in three parts whereby in the first part
important financial instruments that a company uses for raising external financing has
well been analyzed. The five key and basic principles of finance has also been analyzed
and how the same can be well applied by the managers has also been discussed.
Important aspects of the Australian Bond markets in the field of bond rating services,
nature of YTM and how changes in the interest rate affects the bond prices has well
been discussed. On the other hand, key facts about the Australian Share Market and
the index which is primarily used by the investors as a key benchmark has well been
discussed in the second part. Finally, the risk management and project risk analysis
was done by taking the changes that would be observed in the project and that has
been well done with the help of sensitivity analysis in order to find out the viability of the
project.

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References
Asx.com.au. 2020. [online] Available at:
https://www.asx.com.au/asxpdf/20150423/pdf/42y1rbh7yg8nq0.pdf [Accessed 9 Jan.
2020].
Asx.com.au. 2020. Charting or technical analysis is a popular method used by
professional traders to evaluate how and when to trade into and out of the financial
markets.. [online] Available at: https://www.asx.com.au/prices/charting/?
code=DOW&compareCode=&chartType=line&priceMovingAverage1=&priceMovingAve
rage2=&volumeIndicator=Bar&volumeMovingAverage=&timeframe=Daily [Accessed 25
Jan. 2020].
Au.finance.yahoo.com. 2020. Yahoo is now a part of Verizon Media. [online] Available
at: https://au.finance.yahoo.com/quote [Accessed 9 Jan. 2020].
Booth, A.T. and Choudhary, R., 2013. Decision making under uncertainty in the retrofit
analysis of the UK housing stock: Implications for the Green Deal. Energy and
Buildings, 64, pp.292-308.
Borgonovo, E. and Plischke, E., 2016. Sensitivity analysis: a review of recent
advances. European Journal of Operational Research, 248(3), pp.869-887.
Marchioni, A. and Magni, C.A., 2018. Investment decisions and sensitivity analysis:
NPV-consistency of rates of return. European Journal of Operational Research, 268(1),
pp.361-372.

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Usmani, M., Adil, S.H., Raza, K. and Ali, S.S.A., 2016, August. Stock market prediction
using machine learning techniques. In 2016 3rd International Conference on computer
and Information Sciences (ICCOINS) (pp. 322-327). IEEE.

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Working Notes
1) Base Case Result
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
Project Investment Analysis

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2) 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
Project Investment Analysis (Sensitivity Analysis)

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3) NPV Breakeven
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 113599 113599 113599 113599
Average Price $22 $22 $22 $22
Total Sales $2,499,188 $2,499,188 $2,499,188 $2,499,188
Cash Outflows:
Variable Cost Per Unit $12 $12 $12 $12
Units Sold 113599 113599 113599 113599
Total Variable Costs ($1,363,193) ($1,363,193) ($1,363,193) ($1,363,193)
Fixed Costs ($250,000) ($250,000) ($250,000) ($250,000)
Depreciation Cost ($550,000) ($550,000) ($550,000) ($550,000)
Total Costs ($2,163,193) ($2,163,193) ($2,163,193) ($2,163,193)
Cash Flow Before Tax $335,995 $335,995 $335,995 $585,995
Taxation @ 30% ($100,798) ($100,798) ($100,798) ($175,798)
Cash Flow After Tax $235,196 $235,196 $235,196 $410,196
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) $785,196 $785,196 $785,196 $1,460,196
Discount Factor @ 10% 1.00 0.91 0.83 0.75 0.68
Discounted Cash Flows ($2,950,000) $713,815 $648,922 $589,929 $997,334
Net Present Value $0
NPV (Breakeven Analysis)