Shell Investment Analysis

The assignment delves into a comprehensive analysis of investment opportunities within Royal Dutch Shell. It examines the company's financial performance, specifically focusing on key metrics such as net present value (NPV) and internal rate of return (IRR). The report aims to determine the viability and profitability of potential investments in Shell, providing insights for decision-making regarding resource allocation.

Running Head: Corporate Finance
1
Project Report: Corporate Finance

Corporate Finance
2
Part 2: Company Perspective
Background:
Woodside petroleum limited is an exploration and manufacturing company. This
company is operating its business in Australian market. Woodside petroleum has the largest
share in the gas and oil exploration industry of Australia. Head office of this company is
situated is at Perth in Australia. This company has registered its stock in stock exchange of
Australia. The main operations of this company are to exploration and deliver the oil and gas
products in the Australian market. Various mines are owned by the company in Australia
itself (Home, 2018). This company has most of the natural gas projects in Australia. 13.5%
share of oil and gas exploration industry is held by Woodside petroleum limited only. This
market share is the highest in the Australian market.
Oil and gas exploration industry of Australia is one of the largest industries in ASX.
This industry contributes 2.58% in the total GDP of the country. The current reports and the
future trends of oil and gas exploration industry of Australia explains that the company has
faced few losses in last year due to natural and environment factor and future trend explains
that the firms in oil and gas industry must run the business though concerning about natural
aspects (Annual report, 2018).
The main key opportunity of Woodside petroleum limited is high technology of which
would assist the organization to grab more market share. Through the help of technology,
international project could also be owned by the company and the mission of the company
could be accomplished. On the other hand, huge competition at international level is the main
threat of the company and the bad relations of the company with its stakeholders would also
impact over the performance of the company. Thus the company is required to manage the
threats by identifying and taking a better step at fair time.
Cash conversion cycle:
Cash conversion cycle (CCC) is a financial analysis process which is used by the
companies, management and the professionals to evaluate the cash turnover of the company.
It directly impacts over the liquidity and working capital management position of the
company. Cash conversion cycle calculations express about the total time in which the cash

Corporate Finance
3
of the company would be get back. Below table express about the cash conversion cycle of
last 2 years:
Calculation of cash conversion cycle of 2016
Sales
£
4,075
COGS
£
2,234
Inventor
ies
£
5
AR
£
172
AP
£
546
Days/
year 365
Cash conversion
cycle (CCC) =
Inventory
conversion period +
Receivables
collection
period
-
Payables
deferral period
=
Inventory/Sales per
day +
AR/Sales per
day -
AP/COGS per
day
= 0.45 +
15.4
1 - 48.91
= 33.05 days
Calculation of cash conversion cycle of 2015
Sales
£
5,030
COGS
£
3,073
Inventor
ies
£
19
AR
£
93
AP
£
813
Days/
year 365

Corporate Finance
4
Cash conversion
cycle (CCC) =
Inventory
conversion period +
Receivables
collection
period
-
Payables
deferral period
=
Inventory/Sales per
day +
AR/Sales per
day -
AP/COGS per
day
= 1.38 + 6.75 - 59.00
= - 50.87
(Arnold, 2013)
The above table of cash conversion cycle expresses about the total days which would
be required by the company to get back the total investment cash for operations and daily
activities. The CCC of 2015 was -50.87 days and in 2016, it was -33.05 days. This explains
that the average receivable collection days have been enhanced in 2016. Though, the current
CCC position of the company expresses that the current working capital position of the
company is in negative. It expresses that the current asset of the company is quite lower than
the current liabilities of the company. Though, the cash turnover of the company is quite
higher and explains that the good position could be maintained by the company.
Short term and long term debt financing:
In addition, financing options have been evaluated which had been opted by the
company to raise its short term and long term funds. For short term financing, accounting
payable is the most used source for the company. The current payables of the company are $
546. On the other hand, for long term financing, interest bearing liability is the most used
source for the company. The current interest bearing liability of the company is $ 4897. At
the same time, total short term debt of the company is $ 963 and total long term liabilities of
the company are $ 8128 (Brealey, Myers and Marcus, 2007).
It explains that the long term as well as short term, both financing sources have been
used by the company to manage its performance and the position in the market. Further, it
also explains that the debt financing sources have been used by the company to reduce the
level of the cost of the company.
Bond valuation:

Corporate Finance
5
Bond valuation is a process in which the current value of bond is calculated and it is
compared with the face value of the bond. This study is comprised to evaluate the position of
the bond in the market (Nobes and Parker, 2008). Bond valuation study has been conducted
over Woodside petroleum limited to evaluate the current bond position of the company.
Position of the company
Bond-1
Face value $ 100.00
Coupon 2.25%
Maturity 11
Yield (Half yearly) 2.62%
Price of bond
Bond-1
Face value 100
Coupon (half yearly) 1.13%
Maturity 11
Maturity (half yearly) 22
Yield (half yearly) 1.31%
Valuation of bond 78.44
(Besley and Brigham, 2008)
The current value of the bond is $ 98 which is quite higher than the bond value of the
company which is $ 78.44.
Compare:
The study over current bond value explains that this change have occurred due to
changes in the market. The YTM has impacted over the bond valuation. The current price of
bond is below par due to various market factors and the bond position in the market.
Share valuation:
Share valuation is a process in which the intrinsic value of share is calculated and it is
compared with the market value of the bond (Marginson, 2009). This study is comprised to
evaluate the position of the bond in the market. Share valuation study has been conducted
over Woodside petroleum limited to evaluate the current share position of the company.

Corporate Finance
6
Required rate of return
Risk free rate 1.25%
Expected rate of return on market
portfolio 9.00%
systematic risk of common stock 1.12
Required rate of return 9.93%
calculations:
r= R(f)+ beta{E(R(m)-R(f)}
Dividend Discount Model
Required rate of return 9.93%
Dividend amount 1.41
growth rate 5.00%
Intrinsic Value
$
30.03
Intrinsic value in euro
€
24.87
Share Price
€
28.83
Undervalued
(yahoo Finance, 2018)
The above calculations express that the intrinsic value of the share is Euro 24.87
which is lower than the market price of the company, Euro 28.83. For calculating the share
price of the company, dividend discount model has been used. As the current share price of
the company is undervalued, so it would be the right time for the investors to buy the shares
as in lower price the high worth shares could be bought by the investors now, it would offer
great return to the investors in near future.
gr
gD
V
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Corporate Finance
7
Part 3: Capital Budgeting
Free cash flows:
Free cash flows brief about the total cash inflow of a company (Phillips and
Stawarski, 2016). Following is the free cash flow of investment opportunity of Shell:
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Corporate Finance
8
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Corporate Finance
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Corporate Finance
10
The above calculations explain that the total free cash inflow of the project would be
22,10,21,44,825. It explains that the investment opportunity of the company is quite good.
Net present value:
Further, for analyzing the investment opportunity in a better way, NPV has been
calculated. Following is the calculations of NPV:
Calculation of Net Present Value (5.94%)
Years Cash Outflow Cash Inflow Factors P.V. of Cash Inflow
P.V. of Cash
Outflow
0 27,00,00,00,000 1 0 27000000000
1 1089990000 3633300000 0.94393053 3429582783 1028874835
2 1111789800 3705966000 0.89100484 3302033640 990610092
3 1100004828 3780085320 0.84104667 3179228160 925155394.6
4 1122004925 3855687026 0.79388962 3060989922 890748067.3
5 1144445023 3932800767 0.74937665 2947149066 857620378.2
6 1167333924 4011456782 0.7073595 2837542050 825724736.4
7 1190680602 4091685918 0.66769822 2732011413 795015321.1
8 1214494214 4173519636 0.63026073 2630405551 765448015.4
9 1238784098 4256990029 0.59492235 2532578499 736980343.3
10 1263559780 4342129830 0.56156536 2438389720 709571408.5
11 1288830976 4428972426 0.53007869 2347703903 683181835.6
12 1314607596 4517551875 0.50035746 2260390769 657773713.8
13 1340899747 4607902912 0.47230268 2176324886 633310541.8
14 1367717742 4700060970 0.44582092 2095385486 609757176.4
15 1395072097 4794062190 0.42082397 2017456292 587079780.9
16 1422973539 4889943434 0.39722859 1942425352 565245777.4
17 1451433010 4987742302 0.3749562 1870184877 544223799.3
18 1480461670 5087497148 0.3539326 1800631088 523983646.6
19 1510070904 5189247091 0.33408778 1733664064 504496242.7
20 1540272322 5293032033 0.31535566 1669187602 485733592.2
49003265123 41320534698
Net Present value = Present value of cash inflow-
present value of cash outflow $ 7,68,27,30,424
Calculation of Net Present Value (8%)
Years Cash Outflow Cash Inflow Factors
P.V. of Cash
Inflow
P.V. of Cash
Outflow

Corporate Finance
11
0 27000000000 1 0 27000000000
1 1089990000 3633300000 0.92592593 3364166667 1009250000
2 1111789800 3705966000 0.85733882 3177268519 953180555.6
3 1100004828 3780085320 0.79383224 3000753601 873219297.8
4 1122004925 3855687026 0.73502985 2834045067 824707114.6
5 1144445023 3932800767 0.6805832 2676598119 778890052.7
6 1167333924 4011456782 0.63016963 2527898224 735618383.1
7 1190680602 4091685918 0.5834904 2387459434 694750695.2
8 1214494214 4173519636 0.54026888 2254822798 656153434.3
9 1238784098 4256990029 0.50024897 2129554865 619700465.7
10 1263559780 4342129830 0.46319349 2011246261 585272662.1
11 1288830976 4428972426 0.42888286 1899510358 552757514.2
12 1314607596 4517551875 0.39711376 1793982005 522048763.4
13 1340899747 4607902912 0.36769792 1694316338 493046054.3
14 1367717742 4700060970 0.34046104 1600187652 465654606.9
15 1395072097 4794062190 0.3152417 1511288338 439784906.5
16 1422973539 4889943434 0.29189047 1427327875 415352411.7
17 1451433010 4987742302 0.27026895 1348031882 392277277.7
18 1480461670 5087497148 0.25024903 1273141222 370484095.6
19 1510070904 5189247091 0.23171206 1202411154 349901645.8
20 1540272322 5293032033 0.21454821 1135610534 330462665.5
41249620914 39062512603
Net Present value = Present value of cash inflow- present
value of cash outflow
$
2,18,71,08,312
The above calculations express that the investment opportunity of shell is way better
because it would offer huge profits to the company in 5.49% as well as 8%. It explains that if
the company would invest into this opportunity than $7,68,27,30,424 would be the total
profit of the company in case of 5.94% and $2,18,71,08,312 would be the total profit in case
of 8% (Moles, Parrino and Kidwekk, 2011). It explains that the both opportunities are good
for the company. And company is recommended to invest into this company.

Corporate Finance
12
References:
Annual Report. Woodside petroleum limited. Available at
http://www.woodside.com.au/Investors-Media/announcements/Documents/
01.03.2017%20Annual%20Report%202016.pdf [Accessed on 12th Jan 2018].
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-
Western.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc
Graw Hill, New York.
Home. 2018. Woodside petroleum limited. Available at
http://www.woodside.com.au/Pages/home.aspx [Accessed on 12th Jan 2018].
Marginson, D.E., 2009. Beyond the budgetary control system: towards a two-tiered process
of management control. Management Accounting Research, 10(3), pp.203-230.
Moles, P. Parrino, R and Kidwekk, D,.2011. Corporate finance, European edition, John
Wiley &sons, United Kingdom
Nobes, C. and Parker, R.H., 2008. Comparative international accounting. Pearson Education.
Phillips, P.P. and Stawarski, C.A. 2016. Data Collection: Planning for and Collecting All
Types of Data. John Wiley & Sons.
Yahoo Finance. 2018. Royal Dutch Shell plc. Available at
https://au.finance.yahoo.com/quote/RDSA.AS?p=RDSA.AS [Accessed on 12th Jan 2018].