Financial Management : Sample Assignment

Running Head: FINANCIAL MANAGEMENT 0
Financial Management

FINANCIAL MANAGEMENT 1
Contents
Part 1..........................................................................................................................................3
Part 2..........................................................................................................................................6
Capital structure ratios............................................................................................................6
Working Capital Management Policies..................................................................................6
Policies of Investments...........................................................................................................6
Debt to Equity Ratio...................................................................................................................8
Profitability ratios.....................................................................................................................12
Part 3........................................................................................................................................15
Distribution Policy................................................................................................................15
Trends Dividend Share.........................................................................................................17
Dividend equation tax system in Australia...........................................................................18
Franked dividends................................................................................................................18
Un-franked dividends...........................................................................................................18
Part 4........................................................................................................................................20
Dividend Reinvestment Plan................................................................................................20
References................................................................................................................................22

FINANCIAL MANAGEMENT 2
Part 1
WACC PARTICULARS AMOUNT IN $
E MARKET VALUE OF
THE COMPANY'S
EQUITY 3113.798
D MARKET VALUE OF
COMPANY'S DEBT 5572.90
E+D
TOTAL MARKET
VALUE OF THE
COMPANY 8686.70
Re COST OF EQUITY 11.3%
Rd COST OF DEBT 1.3%
T TAX RATE 30.00%
E/
(E+D)*COST
OF EQUITY
D/(E+D)*COST
OF DEBT
(1-TAX
RATE)
WACC
0.040 0.008 70.00% 4.61%

FINANCIAL MANAGEMENT 3
CALCULATI
ON OF
MARKET
VALUE OF
DEBT
LATEST
TWO YEAR
AVERAGE
AMOUN
T IN $
TOTAL
CURRENT
PORTION OF
LONG TERM 70.8
LONG TERM
DEBT AND
CAPITAL
ELASE
OBLIGATIO
N 5572.9 5643.70
CALCULATION OF
COST OF EQUITY
RISK FREE
RETURN
BETA
OF THE
EXPECTE
D
MARKET
EXPECTE
D
AMRKET
COST
OF
EQUIT

FINANCIAL MANAGEMENT 4
ASSET RETURN RETURN
-RISK
FREE
RETUN
Y
2.70% 0.98 8.74% 6.0% 11.3%
CALCULAITON OF COST OF
DEBT
INTEREST
EXPENSE
LATEST
TWO
YEAR
AVERAG
E DEBT
COST OF
DEBT
70.80 5572.9 1.3%
WEIGHTS E/(E+D) D/(E+D)
WEIGHT OF
EQUITY 0.36
WEIGHT OF
DEBT 0.64

FINANCIAL MANAGEMENT 5
Part 2
Capital structure ratios
An optimal capital structure is a financial measurement which is used by the firm to
determine the best available combination of debt and equity to use for the operations and
expansions. This structure is helpful in reducing the cost of capital so the company is not
dependent on the creditor and is able to generate finances through equity (Graham, Leary and
Roberts, 2015). The calculation of cost of equity and cost of debt is required to calculate the
WACC. Companies can raise capital with either debt or equity. Each strategy has its own
benefits and limitations. The debt is usually cheap in comparison to the cost of equity.
Working Capital Management Policies
Working capital is a financial measure which determines the availability of the operating
liquid assets for the business, organisation or any entity. The working capital is considered as
a part of the operating capital. The formula of calculating the working capital is the current
assets minus current liabilities (Gitman, Juchau and Flanagan, 2015). The relationship
between the working capital and the profitability and the liquidity is core and critical (Hope,
Thomas and Vyas, 2017). Various measures have been adopted by the managers of the
companies to make sure that proper cash is available or relevant marketable securities are
there to meet the meet the obligations of the payments when they are about to be paid. If the
working capital ratio of the company is higher it will eventually reflect the flexibility of the
finances. The liquidity is relatively higher and the risk is lower.
Policies of Investments
For some investors the company’s performance is evaluated on the basis of the assets owned
by the organisation. The profitability and the liquidity of the company will be accumulated to
a limited extent and they are not easily converted into cash. This kind of decision becomes a

FINANCIAL MANAGEMENT 6
mark and there is a constant fear of losing out of current assets and the fear of reduced profit
margins (Magni, 2016).
Majorly there are lot of policies yet the Fortescue metal Groups Limited adopts the policy
which is kind of a liberal one. It is also known as fat cat policy. In comparison to its
competitors Fortescue metal Groups Limited is generally maintain the ample amount of
current assets for its own operational reasons. This goal can be achieved by holding ample
amount of cash, inventories, credit policy which is highly liberal also the customers and
debtors who can pay within the period of 90 days (Daraban, 2017).

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Debt to Equity
Ratio
2014 2015 2016 2017
Debt 9809 11855 8437 4749
Equity 8035 9797 11301 12637
Debt to Equity
Ratio 1.22 1.21 0.75 0.38
Debt to Equity Ratio
The debt to equity ratio is a financial ratio indicating which indicates the proportion of the
shareholders in association with the debt component used to finance the assets of the
company. This ratio is also known as risk, gearing ratio. From the above table it can be
observed that the debt to equity ratio of Fortescue metal Groups Limited 0.42 as compared to
the previous year which was 0.75(Mazzi, André, Dionysiou and Tsalavoutas, 2017).

FINANCIAL MANAGEMENT 8
2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Debt to Equity Ratio
Debt to Equity Ratio
Long Term Debt To Capital
201
4 2015 2016 2017
Long term Debt
964
8 11664 8327 4646
Equity
803
5 9797 11301 12637
Debt to Equity Ratio 1.20 1.19 0.74 0.37

FINANCIAL MANAGEMENT 9
2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Long Term Debt to Capital
Long Term Debt to Capital

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Total Debt To
Capital
2014 2015 2016 2017
Total Debt 12585 15818 12538 9351
Equity 8035 9797 11301 12637
Debt to Equity
Ratio 1.57 1.61 1.11 0.74
2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Total Debt Rtaio
Total Debt Rtaio

FINANCIAL MANAGEMENT 11
Profitability ratios
The ratios of the profitability are the financial ratios which are used to measure and evaluate
the capacity of the company to generate the profits related to the revenue, cost of operations,
assets in the balance sheet and shareholder’s equity as well (McKay and Haque, 2016). The
net profit of the company in the table below is 25% of the turnover which is pretty low as
compared to the previous years.
Profitability Ratios
Net Profit Ratio
2014 2015 2016 2017
Net Profit 2898 413 13325 2721
Turnover 12477 11164 9538 10982
Debt to Equity
Ratio 0.23 0.04 1.40 0.25

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2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Net Profit Ratio
Net Profit Ratio
Return on Equity
2014 2015 2016 2017
Net Income 2898 413 13325 2721
Average total
Assets
23294.
5 25951.5 26926 25445
Return on Equity 0.12 0.02 0.49 0.11
Return on Equity is the amount of net income which is generally returned as a percentage of
shareholder’s. Return on equity measures the profit of the corporation profitability by
revealing how much profit a company is making. The return of equity is 0.11 in the year 2017

FINANCIAL MANAGEMENT 13
whereas it was 0.49 in the year 2016. The trend states that the return on equity has increased
from the past years on an average.
2014 2015 2016 2017
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Return on Equity
Return on Equity

FINANCIAL MANAGEMENT 14
Dividend Pay-out Ratio
201
4 2015 2016 2017
Total Dividend 29 19 7 46
Net Income
289
8 413 13325 2721
Dividend Pay-out
Ratio 0.01 0.05 0.00 0.02
Part 3
Distribution Policy
Financial Management that dividend policy represents the financial decision making of the
enterprise. There a robust relationship between the dividends of the company, financing and
the investment decisions that the managers have to take care of (Christensen, Nikolaev and
Wittenberg‐moerman, R.E.G.I.N.A. 2016). To exercise the obligation of the dividend a firm
can take the benefits of many dividend policies. The policy can have smoothened dividend or
the stable dividend. One of the types of the policy is residual dividend policy where the
consideration of dividend takes place after making the investment decision. The major feature
of this policy is that under this policy the dividends will be abandoned and the investments
need the level of earnings. The second kind of the policy is the smoothened policy where the
long terms residuals are taken on the basis of the formal application. The last policy is the
stable policy where the dividend increases based on long term earning.

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2014 2015 2016 2017
0.00
0.01
0.02
0.03
0.04
0.05
Dividend Pay Out Ratio
Dividend Pay Out Ratio

FINANCIAL MANAGEMENT 16
The corporation of FMG was that the company was not paying any dividends until the year
2008. The negative net income after tax is the reason. In the year 2014 the dividend pay-out
ratio of the company was 1 %. In the year 2010 corporation made plans for around $8.5
billion expansion of its Pilabara iron ore operations to increase the production level from
$120 million to $155 billion (Billett, Hribar and Liu, 2015). Therefore, it is very likely that
the Fortescue Limited has adopted the residual policy of the dividend policy.
Trends Dividend Share

FINANCIAL MANAGEMENT 17
Dividend equation tax system in Australia
Taxations of dividends are differently and the same is depending on the residency of the
shareholder, whether they are residence or non-residence of Australia. Profits paid to
investors by Australian resident organizations are saddled under a framework known as
'imputation (Andrade, Bernile and Hood III, 2014). It is called an imputation framework in
light of the fact that the duty paid by a business firm might be ascribed or credited to the
shareholders. The expense paid by the organization is designated to shareholders by method
for franking credits joined to the profits they get. The premise of the framework is that if an
organization pays or acknowledges the profits which have been franked, an individual might
be qualified for a franking charge balance for the duty the organization has paid on its salary.
The franking charge balance will cover or incompletely cover the duty payable on the profits.
The Fortescue Metal Group Limited investors’ can directly receive cash on some of the
shares to reinvest in the money (McKinney, 2015).
Franked dividends
A resident’s business corporation, or a New Zealand franking organization that has chosen to
join the Australian imputation system, may pay or acknowledge you for a franked profit.
Profits can be completely franked (implying that the entire measure of the profit conveys a
franking credit) or somewhat franked (implying that the profit has a franked sum and an un-
franked sum). The profit articulation or circulation explanation you get from the organization
paying the franked profit must express the measure of the franking credit and the measures of
the franked and un-franked parts of the profit (Morningstar, 2018).
Un-franked dividends
A resident’s business firm may pay or acknowledge you for an un-franked profit. There is no
franking credit connected to these profits (Nguyen and Tran, 2016). In the event that you get
an un-franked profit announced to be channel outside wage on your profit proclamation or

FINANCIAL MANAGEMENT 18
appropriation explanation, incorporate that sum as an un-franked profit on your government
form (Scott, 2015).
Price Earnings
Ratio
2014 2015 2016 2017
Price 2695 54 5730 2367
Earnings 2898 413 13325 2721
Price Earnings
Ratio 0.93 0.13 0.43 0.87

FINANCIAL MANAGEMENT 19
Part 4
Dividend Reinvestment Plan
The amount of the dividend was announced by the company
2014 2015 2016 2017
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Price Earning Ratio
Price Earning Ratio
From the last year it can be observed Money related administration arrangements can
influence the organization’s performance either exclusively or interactively. The results and
the outcomes are represented in the accounting as well as the net income as well as the stock
price. For example, capital structure policies which include the current price of the stock.
Fortescue Metals’ price earnings ratio is 0.87 as compared to the previous year which was
0.40. Thus means that the company was earning sufficient this year to provide the share to the
shareholders (Yarram and Dollery, 2015). The market price of the company shrinks
according to the dividend distributed by the company. The annual dividend rate is 11.33%
and the market share is 4.54 with the beta value of 1.50. The other corporate policies have
been adopted by the management in order to ensure efficiency and effectiveness.

FINANCIAL MANAGEMENT 20
It is clear from the above graph that the trend of cash flow policy of the Fortescue Metal
Groups Limited. The cash flows have been negative in the year 2012 and the year 2013 and
after that the cash flows have been converted into positive figures.

FINANCIAL MANAGEMENT 21
References
Andrade, S.C., Bernile, G. and Hood III, F.M. (2014) SOX, corporate transparency, and the
cost of debt. Journal of Banking & Finance, 38, pp.145-165.
Billett, M.T., Hribar, P. and Liu, Y. (2015) Shareholder-manager alignment and the cost of
debt.
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐moerman, R.E.G.I.N.A. (2016)
Accounting information in financial contracting: The incomplete contract theory perspective.
Journal of accounting research, 54(2), pp.397-435.
Daraban, M.C. (2017) Accounting as a 21st century business value driver. In CBU
International Conference Proceedings... (Vol. 5, p. 99). Central Bohemia University.
Geske, R., Subrahmanyam, A. and Zhou, Y. (2016) Capital structure effects on the prices of
equity call options. Journal of Financial Economics, 121(2), pp.231-253.
Gitman, L.J., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance. Pearson
Higher Education AU.
Graham, J.R., Leary, M.T. and Roberts, M.R. (2015) A century of capital structure: The
leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.
Hope, O.K., Thomas, W.B. and Vyas, D. (2017) Stakeholder demand for accounting quality
and economic usefulness of accounting in US private firms. Journal of Accounting and Public
Policy, 36(1), pp.1-13.
Magni, C.A. (2016) An average-based accounting approach to capital asset investments: The
case of project finance. European Accounting Review, 25(2), pp.275-286.

FINANCIAL MANAGEMENT 22
Mazzi, F., André, P., Dionysiou, D. and Tsalavoutas, I. (2017) Compliance with goodwill-
related mandatory disclosure requirements and the cost of equity capital. Accounting and
Business Research, 47(3), pp.268-312.
McKay, W. and Haque, T. (2016) A study of industry cost of equity in Australia using the
Fama and French 5 Factor model and the Capital Asset Pricing Model (CAPM): A pitch.
Journal of Accounting and Management Information Systems, 15(3), pp.618-623.
McKinney, J.B. (2015) Effective financial management in public and nonprofit agencies.
ABC-CLIO.
Morningstar, (2018) Fortescue Metals Group Ltd, [Online]. Available at:
http://www.morningstar.com/stocks/XASX/FMG/quote.html. [Assessed on 26th May 2018].
Nguyen, X.M. and Tran, Q.T. (2016) Dividend Smoothing and Signaling Under the Impact of
the Global Financial Crisis: A Comparison of US and Southeast Asian Markets. International
Journal of Economics and Finance, 8(11), p.118.
Scott, W.R. (2015) Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Yarram, S.R. and Dollery, B. (2015) Corporate governance and financial policies: Influence
of board characteristics on the dividend policy of Australian firms. Managerial Finance,
41(3), pp.267-285.