Introduction to Finance | Report

Running head: INTRODUCTION TO FINANCE
Introduction to finance
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1INTRODUCTION TO FINANCE
Executive Summary
Many authors have highlighted the importance of the study of finance in their respective
journal. Concerning about the financial study it is also important to know how the financial
management work. It helps to understand the project viability, stock valuation, firm valuation the
key analysis of financial ratios. The paper is all about the understanding of finance in terms of
stock selection to invest. It researches the annual report of BHP and Wesfarmers and articulates
that to select the proper stock, clarity in corporate governance is very important. It has a positive
impact on the company performance. To choose the correct stock to invest this report takes
“Gordon growth model” and after evaluating the stock by the growth model, research suggests
that both the stock value is overpriced. It has been detected that there is a proportionate
relationship between executive remuneration and company’s financial performance. The paper
also concludes which stock is better to invest and which model has to adopt to do the valuation
of stock.

2INTRODUCTION TO FINANCE
Table of Contents
Introduction......................................................................................................................................4
Literature review..............................................................................................................................5
Methodology....................................................................................................................................6
Corporate governance......................................................................................................................6
1. Corporate governance structure of BHP and Wesfarmers.......................................................6
BHP..................................................................................................................................................6
Wesfarmers......................................................................................................................................9
Responsibility of the Board.............................................................................................................9
Functions of Board........................................................................................................................10
Independent Directors....................................................................................................................10
The pragmatic relation between corporate governance and firms performance............................12
CEO- Leadership...........................................................................................................................12
Capital Budgeting..........................................................................................................................12
Compensation................................................................................................................................13
Communication..............................................................................................................................13
Competition...................................................................................................................................13
Analysis.........................................................................................................................................13

3INTRODUCTION TO FINANCE
2. Comparison between compensation and company performance...........................................14
3. Share valuation.......................................................................................................................15
Constant growth valuation model..................................................................................................15
BHP’s stock valuation under constant growth model....................................................................16
Wesfarmers’s stock valuation under constant growth model........................................................16
Zero growth valuation model.........................................................................................................16
BHP’s stock valuation under zero growth model..........................................................................17
Wesfarmers’s stock valuation under zero growth model..............................................................17
Variable Growth Valuation Model................................................................................................17
BHP vs. Wesfarmers- stocks comparison......................................................................................20
Popular stock valuation model.......................................................................................................22
Dividend discount model (DDM)..................................................................................................22
Discounted cash flow model..........................................................................................................23
Recommendations..........................................................................................................................23
Conclusion.....................................................................................................................................23
Reference.......................................................................................................................................24

4INTRODUCTION TO FINANCE
Introduction
In the recent global competitive world, the business entity always intends to expand their
project. They need to produce at a large scale to meet the global demand as a result the company
needs to invest more. One of the most popular ways to raise money to invest is from public
through the issue of shares. The interest of the investors is always look upon the performance of
the stock, return of the stock, growth of the stock so all these depends on how well the company
perform (Revelli and Viviani 2015) The performance of the company will depend on some key
factors like company’s management, service, financial performance, corporate governance
structure. This report is critically analyze two Australian based mining company BHP and
Australian conglomerate Wesfarmers suggest which types of corporate governance should adopt
by them and for strong corporate governance and weak corporate governance what will be the
impact of the returns of investment. This report also highlights valuation techniques of the stock.
To select the right stock to invest an individual should always calculate the trend of the stock.
Therefore, valuation of the stock is necessary in the case of investment. The study researches all
the financial data of the selected two companies in terms of calculate the stock and therefore
suggests which company’s stock will best for investment. Analysis of financial ratio is also
included in this report to suggest the significance and interpretation of those particular ratios in
the selected company. The aim of this report is to provide legitimate research on stock selection
to invest. To make the healthy investment this study analyses various key financial and non-
financials path like corporate governance, this report asks about any correlation between good
corporate governance practice and impact of this on the return on investment. The report also
recommends how to evaluate the stock on depending on the Gordon Growth Model. Introduction
to finance may require acknowledging the financial management sometime (Ruppert 2014), so it

5INTRODUCTION TO FINANCE
is very essential that financial decisions look after the shareholders interest. After going through
the study, it was noted that there is some limitations such as dependency on the historical cost,
specific period based; there is some effects on inflation (Velte and Stawinoga 2017).
By doing the research of this financial study, report faced some issues these are:
 The financial statement is prepared on a certain time gap. It usually prepared on a
quarterly basis or half-yearly basis so to extract the accurate financial data is very hard to
get while analyze the stock.
 Ad- hoc transaction usually included in the financial statements, though it will not repeat
in the future.
 It has been observed that in the financial report, closing balances may not match the
economic reality.
Literature review
According to the Ruppert (2014), much of finance is concerned to measure and manage the
financial risk. The return of an investment is its earning revenue as a fraction of the initial
investment. In case of all investments, future returns are cannot be evaluated exactly. Thus, it is a
random variable.
According to the Davies (2016), corporate governance is a strategic approach. Examines
the corporate governance from a philosophical and big picture standpoint. Here the authors
explore a number of key themes.