Financial Management: Analysis of Fortescue Metals Group Limited

This report analyzes the financial performance of Fortescue Metals Group Limited using modern financial analysis techniques. It covers the company's weighted average cost of capital, cost of capital, dividend structure, and corporate financial policies.

Running Head: Financial Management
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Financial Management
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Contents
Introduction:.....................................................................................................................3
Fortescue Metals group limited overview:.......................................................................3
Fortescue Metals group limited’s weighted average cost of capital:................................3
Fortescue Metals group limited’s cost of capital:.............................................................4
Fortescue Metals group limited’s dividend structure:......................................................5
Fortescue Metals group limited’s corporate financial policies:........................................5
Conclusion:.......................................................................................................................5
References:.......................................................................................................................6
Appendix:.........................................................................................................................7

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Introduction:
The report emphasizes on the Fortescue Metals group limited. In this report, the
performance of the company has been measured to identify the market performance and the
investment position of the company. In the report, modern financial analysis techniques have
been applied on the company to measure the performance.
Fortescue Metals group limited overview:
The company is running its operations under the iron ore manufacturing industry. The
main operations of the company include production and exploration of iron ore in Australian
market. Company has started operating its business in the year of 2003 (Home,
2018).Company has been awarded as amongst the top 5 iron ore production companies.
Fortescue Metals group limited’s weighted average cost of capital:
Total cost of capital of an organization can be calculated on the basis of the weighted
average cost of capital of the company. Weighted average cost of capital (WACC) of an
organization could be derived from the total cost of equity and total cost of debt of the
company. Cost of equity and cost of debt is multiplied from their capital fraction to measure
the total capital of the company.
In case of Fortescue Metals group limited, cost of equity and cost of debt of the
company is 5.05% and 3.75%. It further explains that the cost of equity and cost of debt of
the company is 5.05% and 3.75%. The fraction of debt and equity in context with the capital
of the company is 49.08 and 50.92%.
So, the WACC of the company is:
= (5.05% * 49.08) + (3.75% + 50.92%)
= (0.0183+ 0.025)
= 4.41% (Annual report, 2017)
The measurements and the analysis on Weighted average cost of capital explains that
the total cost of capital of the company in current scenario is 4.41%. It explains about the cost

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of the company’s capital. Company must ensure that the projects and the investment of the
company offer more than 4.41%.
Fortescue Metals group limited’s cost of capital:
Capital structure is a systematic approach which focuses on the financing of business
activities on the basis of the combination of liabilities and the equities. Capital structure
techniques explore the companionship among the equity and debt of the company. It briefs
about the risk and return position of an organization.
Annual report (2017) of Fortescue Metals group limited explains that the debt and
equity of the company is 51% and 49% respectively.
(Annual report, 2017)
The capital structure of the company is 51:49. The cost of equity is 5.05% and the Cost
of debt of the company is 3.75%. It explains that if the debt amount is increased more than
the cost of capital of the company would be reduced.
However, if the risk position is concerned than the debt position of the company must
be lower than the equity of the company. So, the current position of the company is optimal.
Company should not make further changes in the structure.

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Fortescue Metals group limited’s dividend structure:
Dividend is the return amount given to the shareholders of the company against their
investment after a particular time period. Dividend policies are of two types: relevant and
irrelevant dividend policies. The company follows the relevant dividend policy as the
dividend payout ratio of the company is better.
The dividend policy of the company explains that the target policy of the company is
relevant dividend policy. However, the payout ratio of the company is not stable. The payout
ratio has been affected due to taxation factor, economical factors and the profitability level of
the company.
Fortescue Metals group limited’s corporate financial policies:
Dividend amount has been announced by company on 10th July 2017 last time. The
dividend announcement has affected the stock price of the company. The share price was $
5.21 per share and the stock was 3,113.798 million. Study on Yahoo finance (2018) briefs
that the dividend announcement has positively impacted on the share price of the company.
The dividend announcement of the company is most crucial part which could impact on
the market position of the company in depth. The policy of Fortescue Metals Group Limited
explains that the company has maintained the policies in better way.
Conclusion:
The WACC position of the company is quite better. Optimal capital structure has been
maintained by the company. Relevant dividend policies are followed by the company.
Dividend offerings are also better. Financial and corporate policies of the company is
attractive. It explains about better performance.

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References:
Annual report. 2013. Fortescue Metals group limited. Available at:
https://www.fmg.co.nz/globalassets/about-fmg/corporate-information/annual-report-and-
publications/fmg-annual-report-2013.pdf (accessed 27/05/2018).
Home. 2018. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/ (accessed
27/05/2018).
Yahoo finance. 2018. Fortescue Metals group limited. Available at:
https://finance.yahoo.com/quote/FMG.AX/history?
period1=1495436782&period2=1526972782&interval=1d&filter=history&frequency=1d
(accessed 27/05/2018).

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Appendix:
Calculation of cost of debt
Outstanding
debt 12,19,57,87,831
interest rate 5.35%
Tax rate 30.0%
Kd 3.75%
Calculation of cost of equity
(CAPM)
RF 2.75%
RM 10.16%
Beta 0.90
Required rate of
return 5.05%
(Morningstar, 2018)
Calculation of dividend payout ratio
2015 2016 2017
Dividend paid to stakehoolders / 44,66,14,583 15,35,14,678 98,15,39,261
Net income 41,27,60,416 1,32,50,74,064 2,72,10,08,840
Dividend payout = dividend paid / Net
income 108.20% 11.59% 36.07%
Calculation of Retained earnings
2015 2016 2017
Retained earnings 1,45,86,65,074 1,45,23,60,512 1,40,55,92,556
Net income 41,27,60,416 1,32,50,74,064 2,72,10,08,840
Retained earnings = Retained earning /
Net income 353.39% 109.61% 51.66%
(Annual report, 2017)