Financial Analysis of Harvey Norman Company

This report conducts a financial analysis of the Harvey Norman Company for the year 2017-18. It evaluates the key accounting policies, accounting flexibility, and valuation of the company. The report also includes a two-valuation model and scenario analysis.

Running head: FINANCE AND ACCOUNTING
Finance and Accounting
Name of the Student:
Name of the University:
Author’s Note:

1FINANCE AND ACCOUNTING
Executive Summary
The aim for the project is to conduct a financial analysis of the Harvey Norman Company.
The financial report for the year 2017-18 was considered for the evaluation of the financial
statement of the data. The key accounting policies of the companies were recognised and the
justification for the use of the same was discussed. The valuation of the company was
evaluated in order to get the overall performance of the company. There were key valuation
measures and the sensitivity analysis of the same was done in order to get the overall impact
of the business conditions under different scenarios.

2FINANCE AND ACCOUNTING
Table of Contents
Accounting Policies...................................................................................................................3
Key Accounting Policies........................................................................................................3
Assessing Accounting Flexibility..........................................................................................3
Valuation....................................................................................................................................4
Model- Main Model and Scenario Analysis..........................................................................6
Diagnostics.............................................................................................................................7
Model Interpretation...............................................................................................................7
Reference....................................................................................................................................9
Appendix..................................................................................................................................10

3FINANCE AND ACCOUNTING
Accounting Policies
Key Accounting Policies
The key accounting policy identified, in relation to the Harvey Norman Company
were evaluated to evaluate the changes in the accounting policy. The accounting judgements
and forecasts for the company should be used carefully as the estimates and the assumptions
made by the company in terms of revenue recognition, impairment, depreciation of assets and
other key accounting policies should be identified from the financial statement of the
company (Correia, Jorge and Antunes, 2014).
The choice of the key policies of the management of the company should be such so
that the stakeholders of the company are presented with the true and fair view and should
match with the accounting and industry perspective accounting (McInnis, Yu & Yust, 2018).
Assessing Accounting Flexibility
The accounting flexibility analysis related to the key accounting policies of the
company may affect the valuation of the company. The management of the company should
not use too much of accounting flexibility so that the earnings of the company are misstated
in addition, the true financial position of the company cannot be assessed (Chen C et al.
2018).
The relevant key accounting standards used by the Harvey Norman Holdings Limited
and the key estimated used were related to revaluation of investment properties where the
investment properties are valued at the fair value on the balance sheet of the company. The
revaluation of property, plant and equipment was also done at the fair value to determine key
economic reality. The investment property depending upon the characteristics and type of the
asset class is revalued at the fair value or historical as the assessment of market may depend
on (Imoniana, Soares, & Domingos, 2018).

4FINANCE AND ACCOUNTING
It is the management discretion in certain other cases when the valuation of a
company depends on the accounting policy used (Dvorkin, Kirschen & Ortega-Vazquez,
2014). Valuation of asset either at historical or the fair value is dependent on the management
of the company and the same is decided by the characteristic and the type of asset class.
Valuation
 Cost of Capital
1) The cost of equity for the Harvey Norman Company was around 2.27% and the
same was evaluated using the Capital Asset Pricing Model.
Evaluation of CAPM
Beta 0.09195397
Risk Free Rate of Return 2.24%
Return on Market (Monthly) 0.22%
Return on Market (Annual) 2.66%
CAPM=Rf+(Rm-Rf)*Beta 2.27%
2) The cost of debt evaluated using the financial statement of the company, which
was evaluated using the interest bearing liabilities of the company and the interest
expense of the company.
Cost Of Debt
Interest Expenses 20072
Interest Bearing Liabilities 333858
Interest Cost 6.01%

5FINANCE AND ACCOUNTING
3) The Weighted Average Cost of Capital was evaluated after analysing the target
debt and target equity ratio for the company multiplied by the cost of debt and
equity. (Weight of Debt*Cost of Debt+ Weight of Equity*Cost of Equity).
Evaluation of CAPM
Beta 0.09195397
Risk Free Rate of Return 2.24%
Return on Market (Monthly) 0.22%
Return on Market (Annual) 2.66%
CAPM=Rf+(Rm-Rf)*Beta 2.27%
Cost Of Debt
Interest Expenses 20072
Interest Bearing Liabilities 333858
Interest Cost 6.01%
Calculation of WACC 4.01%
4) The Capital Asset Pricing Model may be appropriate for the evaluation of the cost
of capital for the company given that the risk for the company is stable and the
company has a target debt to equity ratio. The cost of capital method takes the
weighted average of the debt and equity financing done by the company in the
form of debt and equity investment.
5) The problems associated with the usage of the cost of capital is the use of the cost
of equity, which is used by the calculation of the Cost of Equity, which involves
evaluation of the CAPM model. The Return on Market and beta factor is based on
the historical data where the past data cannot be forecast of the future. However, it
is crucial to note that the cost of debt and the determining of the target debt and
equity ratio is not difficult in this case.

6FINANCE AND ACCOUNTING
Model- Main Model and Scenario Analysis
1) Valuation of Harvey Norman
Valuation using Dividend Discount Model
Particulars 2013 2014 2015 2016 2017
Basic Earnings Per Share 13.23 19.69 24.51 31.36 40.35
Dividend Per Share 9.00 14.00 20.00 30.00 26.00
Growth Rate 56% 43% 50% -13%
Payout Ratio 68.03% 71.10% 81.60% 95.66% 64.44%
Average DPS Growth Rate 27% Average Payout Ratio 76.17%
Terminal Growth Rate 6% Average EPS Growth Rate 25.83%
Cost of Equity 2.27% Omega Factor -3.73% 0.9627
Valuation using Dividend Discount Model
Particulars 2017 2018 Terminal Year
Basic Earnings Per Share 40.35 50.772405 51.7878531
Dividend Per Share 26.00 38.67111595 39.44453827
Average Growth Rate 25.83%
Average Payout Ratio 76.17%
Formula For Dividend Discount Model: D1/(1+ Re)+((D1+P1)+(Re-g))
Particulars Year 2018 (F) Terminal Year (D) Exptd. Share Price
Cash Flows 0.386711159 0.409728246 3.388
Fair Value Using DDM 0.386711159 3.797728246
Present Value @2.27% 4.18
Intrinsic Value of Share $4.18
2) The two-valuation model, which can be assessed for the valuation of the equity of the
firm, is the Dividend Discount Model and the use of Earnings Multiple Method. The
dividend Discount model evaluates the value of the equity of the firm by

7FINANCE AND ACCOUNTING
incorporating the dividend of the firm and the growth rate of the firm. The earnings
valuation model incorporates the Price to Earnings method in order to determine the
price of the company in terms of the earnings of the company and the respectable
valuation of the company is then based on the industry level pricing and earnings i.e.,
valuation.
Diagnostics
1) The terminal value incorporated in the dividend discount model was based on the fact
that the long term growth of the company will be around 6% and the dividends are
expected to be growing at a steady rate. The terminal value with the expected share
price using the two stage Dividend Discount Model was used to evaluate the value of
the Company (Drobetz W et al. 2018).
2) Calculation of Key Ratios and Financial Indicators The key ratio for the company is
expected to remain the same as per the industry average and as per the performance of
the company in the historical trend period (Yeh & Lien, 2017).
Valuation using Ratio Analysis
Calendar 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
23.62
Price/Sales 1.19 1.9 1.27 0.77 0.92 1.5 1.49 1.77 2.02 1.6
Price/Earnings 12.38 16.37 15.3 7.73 16.09 23.62 17.12 17.08 16.39 10.35
Price/Cash Flow 6.85 12.47 8.98 5.43 6.41 14.04 10.69 13.45 13.05 10.93
Price/Book 1.44 2.13 1.46 0.89 0.88 1.44 1.51 1.83 2.14 1.66
Price/Forward Earnings 10.05 — — 7.62 9.68 14.6 15.48 14.99 15.04 11.83
PEG Ratio 0.67 — — 1.17 — — — — — —
Earnings Yield % 8.08 6.11 6.54 12.94 6.22 4.23 5.84 5.86 6.1 9.66
Enterprise Value (Bil) 3.29 4.86 3.64 2.4 2.63 4 4.27 5.13 6.21 5.25
Enterprise Value/EBIT 8.39 10.69 9.39 5.75 12.44 17.1 12.66 12.49 11.89 7.96
Enterprise Value/EBITDA 6.84 8.97 7.7 4.73 8.74 12.36 10.29 10.51 10.34 7.12

8FINANCE AND ACCOUNTING
Model Interpretation
1) The analysis of the valuation model used is the dividend discount model used where
the key component was the growth factor used (Lilford, Maybee, & Packey, 2018).
The main scenario includes the growth factor used and the same can turn out to be
optimistic and pessimistic depending upon the business and macro-economic
conditions of the firm. If the risk increase for the firm the cost of equity and the
growth for the company will be capped and thus the valuation of the company will be
capped downwards implying wealth destruction (Mehta & Shah, 2018). If the risk of
the company further decline under the optimistic scenario for the company then the
growth rate for the firm will increase which will ensure that the value of the equity
rises in this case (Berry‐Stölzle, & Xu, 2018).
2) After analysing the financials and the business and macro environment analysis done
on the Harvey Norman Company it is crucial to note that the changing business and
macro-economic conditions may affect the valuation of the company (Correia, Jorge
& Antunes, 2014).

9FINANCE AND ACCOUNTING
Reference
Berry‐Stölzle, T. R., & Xu, J. (2018). Enterprise risk management and the cost of capital.
Journal of Risk and Insurance, 85(1), 159-201.
Chen, C. W., Collins, D. W., Kravet, T. D., & Mergenthaler, R. D. (2018). Financial
statement comparability and the efficiency of acquisition decisions. Contemporary
Accounting Research, 35(1), 164-202.
Correia, G. H. D. A., Jorge, D. R., & Antunes, D. M. (2014). The added value of accounting
for users’ flexibility and information on the potential of a station-based one-way car-
sharing system: An application in Lisbon, Portugal. Journal of Intelligent Transportation
Systems, 18(3), 299-308.Drobetz, W., El Ghoul, S., Guedhami, O., & Janzen, M. (2018).
Policy uncertainty, investment, and the cost of capital. Journal of Financial Stability, 39,
28-45.
Dvorkin, Y., Kirschen, D. S., & Ortega-Vazquez, M. A. (2014). Assessing flexibility
requirements in power systems. IET Generation, Transmission & Distribution, 8(11),
1820-1830.
Imoniana, J. O., Soares, R. R., & Domingos, L. C. (2018). A review of sustainability
accounting for emission reduction credit and compliance with emission rules in Brazil: A
discourse analysis. Journal of Cleaner Production, 172, 2045-2057.
Mehta, D., & Shah, S. (2018). Intrinsic Valuation by Two Stage Growth Model: Study of Oil
Marketing Companies in India. ANVESHAK-International Journal of Management, 7(1),
152-171.
Yeh, I. C., & Lien, C. H. (2017). Growth and value hybrid valuation model based on mean
reversion. Applied Economics, 49(50), 5092-5116.

10FINANCE AND ACCOUNTING
Appendix
Beta Calculation
Particulars ASX 200 Harvey Ltd
Date Adj Close Return Adj Close Return
10/12/2018 5895.7 3.36
9/30/2018 5895.7 0.00% 3.192928 5.23%
8/31/2018 6207.6 -5.02% 3.344972 -4.55%
7/31/2018 6319.5 -1.77% 3.366696 -0.65%
6/30/2018 6280.2 0.63% 3.319933 1.41%
5/31/2018 6194.6 1.38% 3.104837 6.93%
4/30/2018 6011.9 3.04% 3.366696 -7.78%
3/31/2018 5982.7 0.49% 3.183978 5.74%
2/28/2018 5759.4 3.88% 3.337748 -4.61%
1/31/2018 6016 -4.27% 3.6272 -7.98%
12/31/2017 6037.7 -0.36% 4.08851 -11.28%
11/30/2017 6065.1 -0.45% 3.771925 8.39%
10/31/2017 5969.9 1.59% 3.6272 3.99%
9/30/2017 5909 1.03% 3.312254 9.51%
8/31/2017 5681.6 4.00% 3.399877 -2.58%
7/31/2017 5714.5 -0.58% 3.575133 -4.90%
6/30/2017 5720.6 -0.11% 3.82925 -6.64%
5/31/2017 5721.5 -0.02% 3.347308 14.40%
4/30/2017 5724.6 -0.05% 3.303492 1.33%
3/31/2017 5924.1 -3.37% 3.555191 -7.08%
2/28/2017 5864.9 1.01% 3.843686 -7.51%
1/31/2017 5712.2 2.67% 4.369745 -12.04%
12/31/2016 5620.9 1.62% 4.242478 3.00%
11/30/2016 5665.8 -0.79% 4.361261 -2.72%
10/31/2016 5440.5 4.14% 4.030348 8.21%
9/30/2016 5317.7 2.31% 4.139479 -2.64%
8/31/2016 5435.9 -2.17% 4.262434 -2.88%
7/31/2016 5433 0.05% 4.409977 -3.35%
6/30/2016 5562.3 -2.32% 3.967339 11.16%
5/31/2016 5233.4 6.28% 3.778816 4.99%
4/30/2016 5378.6 -2.70% 3.737828 1.10%
3/31/2016 5252.2 2.41% 3.566337 4.81%
2/29/2016 5082.8 3.33% 3.741471 -4.68%
1/31/2016 4880.9 4.14% 3.805156 -1.67%
12/31/2015 5005.5 -2.49% 3.534491 7.66%
11/30/2015 5295.9 -5.48% 3.327518 6.22%
10/31/2015 5166.5 2.50% 3.247915 2.45%
9/30/2015 5239.4 -1.39% 3.082772 5.36%

11FINANCE AND ACCOUNTING
8/31/2015 5021.6 4.34% 3.005309 2.58%
7/31/2015 5207 -3.56% 3.36161 -10.60%
6/30/2015 5699.2 -8.64% 3.454562 -2.69%
5/31/2015 5459 4.40% 3.493285 -1.11%
4/30/2015 5777.2 -5.51% 3.640456 -4.04%
3/31/2015 5790 -0.22% 3.336601 9.11%
2/28/2015 5891.5 -1.72% 3.37452 -1.12%
1/31/2015 5928.8 -0.63% 3.351765 0.68%
12/31/2014 5588.3 6.09% 2.995355 11.90%
11/30/2014 5411 3.28% 2.547951 17.56%
10/31/2014 5313 1.84% 2.798195 -8.94%
9/30/2014 5526.6 -3.86% 2.778343 0.71%
8/31/2014 5292.8 4.42% 2.654051 4.68%
7/31/2014 5625.9 -5.92% 2.59556 2.25%
6/30/2014 5632.9 -0.12% 2.259229 14.89%
5/31/2014 5395.7 4.40% 2.266539 -0.32%
4/30/2014 5492.5 -1.76% 2.339657 -3.13%
3/31/2014 5489.1 0.06% 2.352935 -0.56%
2/28/2014 5394.8 1.75% 2.367278 -0.61%
1/31/2014 5404.8 -0.19% 2.302718 2.80%
12/31/2013 5190 4.14% 2.152075 7.00%
11/30/2013 5352.2 -3.03% 2.266852 -5.06%
10/31/2013 5320.1 0.60% 2.317069 -2.17%
9/30/2013 null null
Risk Free Rate
Particulars Change Change
Maturity Yield 1M (Value 1M ago) 6M (Value 6M ago)
1 year 1.912% -6.7 bp (1.979%) -4.9 bp (1.961%)
2 years 1.998% +0.5 bp (1.993%) -7.9 bp (2.077%)
3 years 2.034% +3.8 bp (1.996%) -14.8 bp (2.182%)
4 years 2.127% +6.6 bp (2.061%) -11.4 bp (2.241%)
5 years 2.235% +8.8 bp (2.147%) -14.1 bp (2.376%)
6 years 2.378% +11.0 bp (2.268%) -9.6 bp (2.474%)
7 years 2.498% +13.4 bp (2.364%) -4.8 bp (2.546%)
8 years 2.584% +14.8 bp (2.436%) +0.6 bp (2.578%)
9 years 2.701% +17.0 bp (2.531%) +7.0 bp (2.631%)
10 years 2.719% +19.5 bp (2.524%) +8.2 bp (2.637%)
12 years 2.783% +19.4 bp (2.589%) +8.6 bp (2.697%)
15 years 2.889% +18.3 bp (2.706%) +3.8 bp (2.851%)
20 years 3.049% +18.5 bp (2.864%) +1.4 bp (3.035%)
30 years 3.221% +17.6 bp (3.045%) -2.2 bp (3.243%)
Return From 5 Year Government Bond = 2.235%

12FINANCE AND ACCOUNTING