Zeta Resource Ltd. Investment Analysis

This assignment requires a comprehensive analysis of Zeta Resource Ltd., a leading investment company. Students must examine the company's financial reports, identify trends in earnings and revenue, and assess its investment policy and objectives. The analysis should also evaluate the company's cash flow position and working capital management, highlighting its ability to meet short-term liabilities. Finally, students are expected to provide an overall assessment of Zeta Resource Ltd.'s financial performance and risk management strategies.

ASSESSMENT 2 – PART B
(FINANCIAL MANAGEMENT ANALYSIS)
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Executive summary
This report provides a study on the financial statements parts of a company who is an exempted
closed-end investment company. Zeta resources Ltd. is engaged in investing the pooled funds of
the shareholders in compliance with the objective and policy of its investments. Zeta resources
Ltd. is having an aim and objective of producing and generating a return for the shareholders
with a risk level which is acceptable and attainable. The report is also to analyze the financial
performance of the company in the environment and to evaluate and analyze the conclusions
thereafter.
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Table of Contents
Executive summary.....................................................................................................................................2
(I) Debt Valuation.................................................................................................................................4
(II) Share valuation................................................................................................................................5
(III) Cost of Capital.................................................................................................................................8
(IV) Market Analysis.............................................................................................................................10
References.................................................................................................................................................11
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(I) Debt Valuation
1. Short-term and long-term debts used by the firm
As such the company is not having any short-term debt in its financial statements. However, the
company is having long-term debts in the form of LT Debt excl. Capitalized Leases.
2. Consistency of Company’s debt structure
On considering the Balance Sheet of Zeta Resource Ltd, it can be identified that till June 2017
the debt amount of the company has fluctuated heavily from the year 2015 to 2017. At the same
time, it can also be significantly identified that the total debt of the company comprises of the
long-term debts and there are no short-term debts present in the company (Bodie, 2013). And if
the particular situation of the company is compared with the industry standards then it can easily
be stated that debt structure of Zeta Resource Ltd is different than the industry standards.
3. Operation of industry Zeta Resources Ltd. in affecting the part of short-term to
long-term debts of Zeta Resources Ltd.
It has been significantly identified that there is a lot of difference between the debt structure of
the Zeta Resources Ltd. and the industry. On the other hand, the financial reports of the
organization for the past 3 years are clearly stating that the company has been influenced by the
industry in the context of debt structure. In case of Zeta resource, the proportion of long-term
debts is more in the capital structure.
4. Company’s cost of debt
Neither any terms for the repayment of interest nor the interest is charged in the financials of the
Zeta Resources Ltd. For the fiscal year ended on 30 June 2017 the loan given to the Zeta energy
was impaired through gains & losses, to the company’s fair value as determined by the directors
of the company (Higgins, 2012). The boards of directors have valued the investments (listed)
held by the Zeta Resources at the market value they are listed on, at the time of determining the
fair value of Zeta Resources Ltd. The amount of loan given to Zeta Energy is showcased in AUD
to the value of $20.669 million (2016: A$20.427million). However, the interest on a loan
provided to Kumarina is showcased in AUD and is free from the interest. No terms for the fixed
repayment are provided except that no repayment is due before June of 30, 2018.
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(II) Share valuation
1. Company’s cost of equity
Cost of equity refers to the cash flow risk to the company’s shareholders. The calculation of the
cost of equity is duly performed by adding a risk premium to the rate which is free in the long
run.
Where:
- Long-term risk-free rate
- Beta, represents the relative risk of the stock relative to the market
- Market risk premium, or
Cost of equity = (Dividend per share of the next year / Current market value of stock) + Growth
rate of dividends
Note: No dividend is provided by the period ended 30, June 2017. So it is impossible to
calculate the company’s cost of equity.
2. Discussion on Company’s revenue, earnings, EPS, dividends and growth
expectations
On considering the present and recent reports for the year 2017 of the Zeta Resource Ltd, it can
be clearly identified that revenue of the same is 11,308.9 AUD Thousand, which has increased
from the revenues of the last year (Purves, et. al., 2015). On the other hand EPS of the company
is also showing upward trend for the last 3 years. EPS of the company is 0.08 in the current year
which was (0.07) in the last year. On the other hand, it was identified that Dividend percent of
the company is has been decreased in the lasts and recent financial year which is 2017 (Brigham
and Houston, 2012).
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Form the above data it can be analyzed that there is an expectation of growth in the upcoming
fiscal year.
3. Valuation of Company’s stock using comparable approach and constant dividend
growth rate model
P/E ratio of Zeta Resources Ltd.
Stock value using constant dividend growth rate model = D1 / M + g
D1 = Current dividend per share
M = Current market value per share
G = Growth rate of dividend
Note: But we are not having any data relevant to Dividend of the company as the
respective company is not have not declared any dividend for the year ended 30 June 2017.
4. Most reasonable approach compared to market price of company’s stock
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Value of stock can be identified by formulating the dividend growth rate model and it will
generally showcase the most reasonable value of the company’s stock when compared to the
market price per share (Thella, et. al., 2011). This is simply because of the reason that the value
of the stock in this model has been determined by considering the dividend growth percent of the
company.
5. Additional data and information preferring for valuing the stock of the company
The beta value of the company's stock and Earnings growth of the company could be used for
valuing the company’s stock. It is because of the simple reason the earnings growth of the share
of the company could assist to understand the share performance in the last few years.
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(III) Cost of Capital
1. Weighted Average cost of Capital (WACC) of Zeta Resources Ltd.
It is the average rate of return a company expects to compensate all its diverse investors. The
weights used in the targeted capital structure of the company are the fraction of each financing
source (Kastellorizos, 2011). It is also known as a calculation of firm’s cost of capital in which
each capital category is proportionately weighted.
2. Company’s tax rate in calculating WACC
At the time of calculating the weighted average cost of capital for the Zeta Resources Ltd, the tax
rate has been deducted for the debt cost, because if the corporate tax is present then the debt cost
may change. If we want the actual cost, then the tax rate should be deducted (Brigham and
Ehrhardt, 2013).
3. Reason of difference in the debt cost and the equity cost
The reason for getting the difference in the calculation of debt cost and cost of equity is the
consideration of the Current market price of the share, which is definitely not considered while
calculating the debt cost calculation. This in term reflects that the earnings of the company
depend on the current liabilities also and the only way to get the result it should be considered at
the time of calculating the cost of capital (Madura, 2011).
4. Pros and Cons of including current liabilities in the calculation of cost of capital
Yes according to the analyst, the Current Liabilities should be included in the calculation of the
cost of capital.
Pros of including the current liabilities in the calculation of the cost of capital:
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The company can easily identify the actual and reasonable cost of its capital because of the much
high cost of current liabilities.
Cons of including the current liabilities in the calculus of cost of capital:
By including the current liabilities in the cost of capital, the cost of capital of the company
increases.
5. The major value of calculation of WACC for Zeta Resources Ltd.
Cost of debt is the major value of WACC. The company’s management of can understands that whether
they should borrow money or not from the external sources of the market for investment just by simply
considering the cost of debt.
6. Examples of recently used WACC in the Zeta Resources Ltd.
Calculation of Economic Value added:
Economic value added is calculated by deducting the cost of capital from the net revenues of the
Zeta Resources Ltd. In calculating the Economic value added, WACC helps as the company’s
cost of capital. Exactly that’s how the WACC can also be called a tool for the creation of value.
7. The capital structure of Zeta Resources Ltd.
On referencing the financial statements of the company, the analyst analyzed that company has
long-term debts only and the company is not having any proportion of short-term debts in its
capital structure. On comparing this with the industrial norms, it can be conveyed that it is
entirely different from the standards of the industry.
8. Optimal capital structure
That portion of equity and debt capital which creates the highest value for the company and at
the same time having the capital cost at its lowest point. It can be differentiated if the rate of
interest in the economy changes or rate of economic inflation changes.
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6.
(IV) Market Analysis
1. Comment on the financial performance of Zeta Resource Ltd
In the above-detailed study, it has been identified that Zeta Resource Ltd. is one of the topmost
and leading investments company, investing the pooled funds of its shareholders simply in
accordance with its investments policy and objectives (Healy and Palepu, 2012). The company s
having an aim and objective of producing and generating returns for the shareholders with an
acceptable risk level.
2. Literature search on the company
If we consider the financial report of the company, it can be easily identified that the financial
reports of the company have provided the true and fair view of the performance of the company
(Michalski, 2013). It is simply because of the reason that the company’s earnings have
frequently increased in some of the last recent years and along with that, there has been an
increase in the company’s revenues also.
3. Comment on any other item that is important or different about the company
Cash inflow is a very important tool for any organization to determine the financial position of
the company (WORSE, 2013). Rise in the flow of liquid cash of the company which frequently
states that the working capital of the company is using in the daily operations and activities of
the business. This flow of liquid cash showcases that the company will not face any difficulty in
facing the short-term liabilities of the company (Gill, et. al., 2010).
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References
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Madura, J., 2011. International financial management. Cengage Learning.
Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements.
Cengage Learning.
Gill, A., Biger, N. and Mathur, N., 2010. The relationship between working capital management
and profitability: Evidence from the United States. Business and Economics Journal, 10(1), pp.1-
9.
Michalski, G., 2013. Portfolio management approach in trade credit decision making. arXiv
preprint arXiv:1301.3823.
WORSE, I., Class of 2013 ASX Minerals IPOs: Funding at a Decadal Low.
Kastellorizos, P., 2011. Third Annual report on Zeta Project.
Thella, J.S., Manna, M., Mukherjee, A.K. and Banerjee, P.K., 2011. Zeta potential: holistic
approach to control electro-kinetics in dispersion-selective flocculation systems. In MPT-2011:
XII International Conference on Mineral Processing Technology.
Purves, N., Niblock, S.J. and Sloan, K., 2015. On the relationship between financial and non-
financial factors: A case study analysis of financial failure predictors of agribusiness firms in
Australia. Agricultural Finance Review, 75(2), pp.282-300.
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