Financial Analysis and Ratio Calculations

This solved assignment focuses on analyzing the financial performance of a company by calculating key financial ratios. It includes the calculation of the gearing ratio using long-term liabilities and total assets. Additionally, it demonstrates the calculation of the Capital Asset Pricing Model (CAPM) to determine the required rate of return for the company's investments. The assignment also presents a regression analysis with its statistics and coefficients, potentially exploring the relationship between financial variables.

Running Head: Corporate Finance 1
Project Report: Corporate Finance

Corporate Finance 2
Executive summary
The report has been presented to analyze the gearing ratio, total cost of capital and
capital structure of IRESS limited. In this paper, diverse methods and techniques have been
taken into the context to estimate the total cost, cost of equity (Ke), cost of debt (Kd) and cost
of capital (K) of IRESS limited. Further, financial stability of the company has been analyzed
through gearing ratios of the company. this report depict about a good performance and
stability of the company.

Corporate Finance 3
Contents
Introduction.......................................................................................................................4
IRESS Limited..................................................................................................................4
Calculation of WACC.......................................................................................................4
Return on equity (Ke)...................................................................................................4
Return on debt...............................................................................................................5
Risk free rate.................................................................................................................5
G (Growth rate).............................................................................................................5
Coefficients of Beta......................................................................................................5
WACC analysis............................................................................................................6
Calculation of gearing ratios.............................................................................................6
Findings............................................................................................................................7
Recommendation..............................................................................................................7
References.........................................................................................................................8
Appendix...........................................................................................................................9

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Introduction:
Security investigation is must for every financial analyst and the investor as the
dividends and the performance of the company depends over the security of a firm. Various
ways are there to investigate the performance of the security as well identify the position,
stability and performance of the company. Mainly, an investor looks over the performance of
the company through technical analysis and fundamental analysis. In technical analysis,
security price is analyzed and in fundamental analysis, financial analysis of the company is
analyzed. In this report, both the analysis has been done to analyze the performance of the
IRESS Company of Australia.
IRESS Limited:
IRESS limited is an Australian company. This company is specialized in the
developing of software system and it offers various services of wealth management and
financial market. This company offers services to financial institutions, stockholders and
research analysts (IRESS, 2017). The head office of the company is situated in Melbourne,
Australia. This company offers its services into global market as well. The revenue of the
company is AUD 389, according to the annual report, 2016. This company holds around
19.5% of ASX.
Calculation of WACC:
Weighted average cost of capital is a technique to identify the total cost of the
company in terms of payment to the equity holders and debt holders. WACC focuses over
various factors to analyze the total cost of the firm. Following are the way to analyze the
WACC of the company:
Return on equity (Ke):
Return on equity (ke) is analyzed by the company to identify the total cost of the
company in terms of equity only. In this, the total amount paid by the company to the equity
holders in terms of dividend is analyzed and it has been found that how much amount would
company paid to the equity holder. Two methods have been analyzed for this report. Which
are as follows?
Dividend discount model:

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This model is calculated to identify the total cost of equity in terms of expected
dividend, current price of the company, growth rate of the company etc (Morningstar, 2017).
through this calculations, it has been found that the total cost of equity of IRESS is 0.1447.
CAPM Model:
This model is calculated to identify the total cost of equity in terms of risk free rate,
beta, market return etc (Morningstar, 2017). Through these calculations, it has been found
that the total cost of equity of IRESS is 2.437%.
Return on debt:
Return on debt (kd) is analyzed by the company to identify the total cost of the company in
terms of debt only. In this, the total amount paid by the company to the debt holders in terms
of interest is analyzed and it has been found that how much amount would company paid to
the debt holder. Through these calculations, it has been found that the total cost of debt of
IRESS is 2.72%.
Risk free rate:
Australia’s government bond depict that the risk free rate of country of 10 years is
2.75% (Bloomberg, 2017).
G (Growth rate):
Growth rate of the company has been analyzed and it has been found that the return of
the company is enhancing by 14%.
Coefficients of Beta:
Beta coefficient of an organization depict about the fluctuations in the company’s
return in terms of the industry return. Through these calculations of Beta coefficient, it has
been found that the total beta of the company is 0.2013.

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WACC analysis:
Through the various calculations such as risk free rate, market return, beta, cost of
debt, cost of equity etc has been analyzed so that the total cost of the company to enhancing
the funds of the company could be found. Currently, the WACC of IRESS is 0.0253. In that
the total of debt of the company is 0.00922 and the total cost of equity is 0.0161 (yahoo
finance, 2017). The weight of the debt is quite lower than the debt of the equity. Thus the cost
of debt is lower than the cost of equity.
Calculation of gearing ratios:
Gearing ratios are the techniques to analyze the performance of the company and
stability of the company in context of debt, equity, total assets, current liabilities etc. the
formula of gearing ratios are as follows:
Where the capital employed is calculated as follows:
Capital Employed = Total assets- current liabilities
Through calculating the gearing ratios of the company, it has been found that the total
gearing ratio is 0.33937 of the company which is quite lower. This depict that the company is
enough stable. The risk level of the company is lower than the normal risk. Further, the cost
of the company is the 0.0253 (Reuters, 2017). Gearing ratio of the company depends over the
current liabilities, total assets, long term liabilities etc. the debt weight of the company is
Gearing ratio= Long term Liabilities/ capital employed

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lower than the equity weight and thus the level of the risk is very lower. Company could
reduce the level of cost by enchaining the equity funds more as the cost of equity is lower
than the cost of debt. There are not much difficulties linked with the calculation of gearing
ratios. It is quite easy for an analyst to identify the gearing ratio of a company.
Findings:
Through the reports, it has been investigated that the WACC of IRESS is 0.0253. In
that the total of debt of the company is 0.00922 and the total cost of equity is 0.0161 (yahoo
finance, 2017). The weight of the debt is quite lower than the debt of the equity. Thus the cost
of debt is lower than the cost of equity. Through these reports, it has been found that the
company could reduce the level of cost by enchaining the equity funds more as the cost of
equity is lower than the cost of debt.
Recommendation:
To conclude, it has been found that the company is quite stable and the risk level of
the company is also lower. The WACC of the company depict that the total cost of the
company is lower as well as the gearing ratios depict that the financial stability of the
company is good.

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References:
Bloomberg. (2017). Australian bonds and rates. https://www.bloomberg.com/markets/rates-
bonds/government-bonds/australia on 26th Sept 2017.
Morningstar. (2017). IRESS limited. Viewed from http://financials.morningstar.com/balance-
sheet/bs.html?t=IRE&region=aus&culture=en-US on 26th Sept 2017.
Reuters. (2017). IRESS limited. Viewed from
http://www.reuters.com/finance/stocks/overview?symbol=IRE.AX on 26h Sept 2017.
IRESS limited. (2017). Home. Viewed from https://www.iress.com/au/ on 26th Sept 2017.
Yahoo Finance. (2017). IRESS limited. Viewed from
https://finance.yahoo.com/quote/IRE.AX/history?
period1=1309458600&period2=1467225000&interval=1mo&filter=history&frequency
=1mo on 26th Sept 2017.

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Appendix:
Dividend Discount Model
Dividend expected 0.011964304
Growth rate 14%
Price per share 10.20771
cost of equity 0.144742195
Calculation of WACC
Price Cost Weight WACC
Debt 206 0.02718447 0.33937397 0.0092257
Equity 401 0.02437157 0.66062603 0.016100496
607 Kd 0.025326196
Calculation of cost of debt
Outstanding debt 206
interest rate 8
Tax rate 0.3
Kd 2.72%
Calculation of CAPM
RF 2.75%
RM 1.20%
Beta 0.201370214
Required rate of return 2.437%
Calculation of Gearing
ratio
Long term
liabilities 206
Current liabilities 55
Total assets 662
Gearing Ratio 0.33937

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SUMMARY OUTPUT
Regression Statistics
Multiple R 0.156443
R Square 0.024475
Adjusted R
Square 0.006738
Standard
Error 0.065826
Observations 57
ANOVA
df SS MS F
Significance
F
Regression 1 0.005979 0.005979 1.379869 0.245184
Residual 55 0.238321 0.004333
Total 56 0.244301
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.010005 0.008877 1.127028 0.264624 -0.00779 0.027795 -0.00779 0.027795
X Variable 1 0.20137 0.171426 1.174678 0.245184 -0.14217 0.544915 -0.14217 0.544915