Financial Analysis and Information

FINANCIAL ANALYSIS
(FINA)
Assessment 2 - Resit
Course - Graduate MBA
Word Count - 3154

Overview
This paper presents a financial statement analysis, and the primary goal of the
assessment is to develop analytical, critical thinking and communication
skills using which we can provide a review on the findings, I have reviewed
and analysed few key aspects of XYZ plc financial disclosures, this
document evaluates organisational financial disclosures and other items,
which influences the company’s financial ability. This assessment provides
an understanding of dynamics, which reflect the ability of financial position
of an organisation. Various financial methods and techniques are used in
this assessment like Dividend discount model (DDM), Capital Asset Pricing
Model (CAPM) ; Weighted Average Cost of Capital (WACC); Net Present
Value (NPV), Internal Rate of Return (IRR) etc.,

CONTENTS
Overview
A. Financial analysis related to investment strategy
1. Source of financing
1.i.Dividend Discount Model (DDM) 3
1.ii.Capital Asset Pricing Model (CAPM) 3
1.iii.Merits & Demerits 4
2. Optimum Cost of Capital 5
3. Evaluate the restructuring decision
3.i.Net Present Value (NPV) 5
3.ii.Internal Rate of Return (IRR) 5
4. Analysing the sensitivity of projected NPV
5. Impact of BREXIT 6
B. Financial analysis for internal management
1. XYZ PLC 6
2. Phase 3 Sports Club 8
3. Budget Planning 12

A(1) What will be the cost for each source of financing? Consider both DDM
(i.e. Dividend Discount Model) and CAPM (i.e. Capital Asset Pricing
Model) method for common equity. Please provide your comments on
the assumptions of each approach and their merits and limitations.
 Dividend Discount Model (DDM)
“The Dividend Discount Model is a valuation formula used to find the fair value
of a dividend stock.”
The Dividend Discount Model states that the value of the stock is the sum of
discounted values of future dividends. The discount rate applied is the
investors required rate of return.
Information Value
Expected Growth Rate 5.0%
Current Annual Dividend £ 1.20
Risk-Free Rate 1.3%
Estimated Market Return 10%
Beta 1.5
Future Forward Dividend
(Current Annual Dividend*(1 + Expected Growth
Rate)
£ 1.26
Discount Rate
(Beta * Estimated Market Return + Risk-Free
Rate)
16.3%
Dividend Discount Model
(Future Forward Dividend / (Discount Rate -
Expected Growth Rate))
£11.15
The fundamental analysis use above model or some of their variations for estimating
the fundamentals price-earnings multiple of security. Towards this end, they devote
considerable efforts in assessing the impact of various kinds of information on a company's
future profitability and the expected return of the stakeholders. If the prevailing price or the
P/E multiple of a security is higher than the estimated fundamental value, they recommend a
selling stance with respect to that security. Since once the information become common
knowledge, the price of the security may be expected to fall. On the other hand, if the
security is under-priced in the market the prevailing price of the security being lower than
the estimated fundamental value, they recommend buying the security, counting upon a
price arise.
 Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) describes the relationship between
systematic risk and expected return for assets, particularly stocks. CAPM is
widely used throughout finance for pricing risky securities and generating
expected returns for assets given the risk of those assets and cost of capital.
Rf + Beta (Rm – Rf)
= 3% + 1.5 (10 – 3)