Introduction to accounting & finance - assignment

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INTRODUCE TO ACCOUNTING AND FINANCEBUS5IAFFinancial Management AnalysisStudent name: TIEN DUY DUONGStudent ID: 19131874Due date: 20/10/2017SummaryThis report will analyze the financial management of Harvey Norman Holdings Limited thatprimarily operate in Australian retail market. The report includes four parts: debt valuation, sharevaluation, cost of capital, and market analysis with a purpose is to report the performance andeffectiveness of financial management of the company.I. Debt Valuation1.Short-term debtInterest-bearing loans and borrowings (current)2014$0002015$0002016$000SecuredNon trade amounts outstanding:Bank overdraft29,78532,62036,243Commercial bills payable9,7509,7509,750Syndicated Facility Agreement370,000170,000260,000Other short-term borrowings7,368101,808102,110Lease liabilities-139364UnsecuredDerivatives payable1054,104325Non trade amounts owing to:Directors41,12178,97238,134
Other related parties11,72310,9565,932Other unrelated persons2089177Total interest-bearing loans and borrowings(current)469,872408,438453,035As the above table, the short-term debts used by the company mainly derived from SyndicatedFacility Agreement, bank overdraft and owing to directors. Besides, the company has somesources of the short-term debts such as commercial bills payable, other secured short-termborrowings, lease liabilities, derivatives payable, owing parties and persons.Long-term debtInterest-Bearing Loans and Borrowings (Non-Current)2014$0002015$0002016$000Secured:Non trade amounts outstanding:Other borrowingsSyndicated Facility Agreement142,000290,000200,000Lease liabilities1,042Other non-current borrowings87,383--Unsecured:Derivatives payable8,711--Total interest-bearing loans and borrowings (non-current)238,094290,000201,042As the above table, the main source of long-term debts used by the company is SyndicatedFacility Agreement. Other non-current borrowings and derivatives payable are also used by thecompany.2. Debt structure2014$0002015$0002016$000Short-term debt469,872408,438453,035Long-term debt238,094290,000201,0422014%2015%2016%ST Debt to Equity14.27%8.15%8.83%LT Debt to Equity7.23%5.79%3.92%
Total Debt to Equity21.5%13.94%12.75%LS Debt to Equity of retail industry: 9.21%LT Debt to Equity of retail industry: 28.83%(source: the comparison between the debt ratio of Harvey Norman Holdings Ltd and theaverage debt ratio of retail industry, it indicated that the long-term debt to equity ratio of thecompany is significant lower than that of the retail industry while the short-term debt to equityratio of the company is higher than that of industry in 2014 and approximately equal to industryratio in 2015 and 2016. The debt structure of the company may be consistent with the retailindustry.3.Retail industry is a sector involving buying final products or services from manufacturer andselling these products and services to customers. So the company does not rise a heavy level oflong-term debt to construct factory or buy equipment. Moreover, Harvey Norman Holdings focuson investment in franchise system which requires less startup fees because the franchise systemhas been tested by trial and error daily operations previously. Besides, the receivable turnover isquite low which means the profits can turn back to the company in a short-term period so thecompany is efficient in using higher proportion of short-term debts. Furthermore, retailing isaffected by seasonal factor, if the company want to expand their products, they just need to useshort-term debts to cover it.4. The cost of debt2014$0002015$0002016$000Financial costs36,43732,87228,706Total Debt ( excluded non-interest bearing)707,855698,306653,575The cost of debt5.15%4.71%4.39%After tax cost of debt4.99%4.57%4.26%
The cost of debt and the after tax cost of debt have been reduced from 4.99% in 2014 to 4.26% in2016 which proved that the company is earning a positive profits and able to pay their debts.II. Share valuation1. Cost of equityThe cost of ordinary shares based on the CAPM,The cost of equity =Risk-Free Rate of Return + Beta * Market risk premiumRisk- free rate of return is based on Australia Bond 10 Year Yield:201420152016Australia Bond 10Year Yield3.5462.9902.007(source: risk premium is 6%Beta is measured by using the regression on the Harvey Norman Holdings’ stock priceBeta= 0.91(source: cost of equity in 2014 = 3.546% +0.91*6% = 9%The cost of equity in 2015 = 2.99% +0.91*6% = 8.45%The cost of equity in 2016 = 2.007% +0.91*6% = 7.47%2.201420152016Total revenue (AUD)2,547,286,0002,718,437,0003,026,243,000Net profit (AUD)212,238,000268,914,000351,340,000EPS (cents/ share)19.9124.4831.36Dividends per share ex.special (cents/ share)14.0020.0030.00
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