Accounting and Finance Report: ARB Ltd and Saturn Pet Care Analysis

This finance report offers a comprehensive analysis of two businesses: Saturn Pet Care Ltd and ARB Ltd. Part A focuses on Saturn Pet Care, evaluating capital budgeting techniques (NPV, profitability index, payback period) to determine the optimal site (Bathurst vs. Wodonga) for a new product line. The report also addresses product cannibalization and marketing sales trends. Part B analyzes ARB Ltd's capital structure, comparing it to Modine Ltd, and assesses its financial ratios (profitability, solvency, efficiency). The report calculates the Weighted Average Cost of Capital (WACC) and Cost of Equity using CAPM, offering recommendations to improve ARB Ltd's capital structure and maximize shareholder wealth. The report concludes with suggestions for ARB Ltd to improve its capital structure and wealth maximization strategies.

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

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ACCOUNTING AND FINANCE
Executive Summary
The assignment will be providing insights of two different business which are engaged in two
different industry. The assignment is divided into two parts and each part deals with the analysis
of one of the business. In the first part, Saturn Pet care ltd which is engaged in manufacturing
food products has decided to expand its product line and thus for has tw0 options for production
of the new product in a site which are Bathurst Site and Wodonga Site. The first part will be
applying capital budgeting techniques for selecting the best possible option which is present to
the company. In the second part, analysis of the capital structure of ARB ltd is to be conducted
and recommendation is also to be provided how the business can improve its capital structure.

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Table of Contents
Part A...............................................................................................................................................3
Capital Budgeting of Bathurst Site..............................................................................................3
Product Cannibalization...............................................................................................................5
Estimation of Marketing Sales Trend..........................................................................................5
Original Cost of Factory Inclusion in NPV Analysis..................................................................5
Part B...............................................................................................................................................6
Introduction..................................................................................................................................6
Capital Structure and Cost of Capital..........................................................................................6
Weighted Average Cost of Capital..............................................................................................7
Cost of Equity Under CAPM Approach......................................................................................8
Comparison between ARB Ltd and Modine Ltd.........................................................................8
Financial Ratio Analysis of ARB Ltd..........................................................................................9
Change in Capital Structure.......................................................................................................11
Wealth Maximization Principle.................................................................................................11
Recommendations..........................................................................................................................12
Conclusion.....................................................................................................................................12
Reference.......................................................................................................................................13

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Part A
Capital Budgeting of Bathurst Site
Figure 1: (Image Showing Capital Budgeting Techniques for Bathurst Site)
Source: (Created by Author)

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Figure 2: (Image Showing Capital Budgeting Techniques for Wodonga Site)
Source: (Created by Author)
The above images show that for the purpose of selection of best possible site for the
business. NPV analysis, profitability index and payback period are calculated. When compared
with the results of capital budgeting for both the sites, it is clear that the best option which is
available to Saturn pet care is Wodonga site. As per the computation, Wodonga site has an NPV
of $ 95,94,827 which is much more than the NPV of Bathurst site whose NPV is shown to be $
58,44,567. This signifies that the cash flow which can be generated by Wodonga site is much
more than cash inflows which can be generated by Bathurst site as per the calculations. In case of
analysis of the profitability index, Wodonga site has a better index of 1.349 in comparison to
Bathurst site which has an index of 1.177. This shows that the site of Wodonga is more
profitable than Bathurst site and thus making Wodonga site a clear option (Zeitun & Tian, 2014).
In case of payback period, Wodonga site take lesser time to recover the initial investment made

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by the company in comparison to Bathurst site and thereby makes the Wodonga site the best
option for Saturn pet care for incorporating production of the new product.
Product Cannibalization
Product Cannibalization refers to a strategy which is followed by companies when they
are introducing a new product in the market. The strategy requires the business to reduce the
volume of sales of an existing product of the business so that a new product can be introduced in
the market. In the case of Saturn pet care, there is a possibility that the business would apply
such a strategy in order to launch the new product in the market.
Estimation of Marketing Sales Trend
As per Nathan who is a director of Saturn pet care has the opinion that the increase in
sales which has been estimated by the marketing department from year to year basis is incorrect
and thus the capital budgeting analysis might get affected and show incorrect results. The
concerns of Nathan is correct and the same can be rectified if the management follows NPV
analysis wherein the management can increase certain cash outflows so as to nullify the effect of
over estimated sales increase from year to year basis.
Original Cost of Factory Inclusion in NPV Analysis
As per the view of Nathan, the factory shed which was already there should be included
in the initial investment while conducting NPV analysis so as to produce a more accurate result.
The view of Nathan is wrong as NPV analysis only considers the actual cost of any investment
which is undertaken for the project. If original cost of the existing factory shed is included than
it produce an wrong result.

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Part B
Introduction
This part of the assignment deals with ARB ltd which is engaged in manufacturing
business of road motor accessories. The capital structure of ARB ltd is to be analysed and a
comparison is to be made with the capital structure of similar company engaged in a similar
business. The assignment will also make recommendation as to how the capital structure of the
company can be improved.
Capital Structure and Cost of Capital
The above table shows that the existing capital structure of the company is only made up
of equity capital and there is no presence of debt capital in the capital mix of the business (Yang
& Zhang, 2013). This shows that the company is solely dependent on the equity-based capital
and does not rely on any leverage. The company’s capital structure which is shown in the above
figure is $ 2,72,341.

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Weighted Average Cost of Capital
The above figure shows the changes which has happened in the cost of capital of the
company. The Weighted Average Cost of Capital (WACC) which is shown in the above figure
comes to 18.05% which has reduced from previous year. This is a favourable sign as the
reduction of cost of capital of the business signifies that the level of risks which is faced by the
business is also reduced (Frank & Shen, 2016). The cost of equity is calculated following general
method and the same is shown to be 18.05%. As there is no debt capital in the capital mix of the
company therefore the cost of equity which is calculated is considered to overall cost of capital
of the business.

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Cost of Equity Under CAPM Approach
Capital Asset Pricing Model (CAPM) is considered to be one of the most effective
methods of computing cost of equity of a business. CAPM is known to produce the most
accurate results when it comes to calculation of cost of equity (Barberis et al., 2015). The cost of
equity for the business under CAPM is shown to be 7.906% which is very much different from
cost of capital computed under general method (Hann, Ogneva & Ozbas, 2013). The cost of
capital computed shows favourable results as the market return is more than the cost of the cost
of equity which signifies that the business meets the expectations of the shareholders of the
company (Barth, Konchitchki & Landsman, 2013).
Comparison between ARB Ltd and Modine Ltd

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In order to make comparison with ARB ltd, a company is selected which is Modine Ltd.
Modine ltd is a company which is engaged in manufacturing activities of products which are
similar to ARB ltd and also belongs to the same industry as ARB ltd. The capital structure of
Modine ltd comprises of equity share capital of $ 421.20 million and also employs debt capital in
the capital mix of the business which amounts to $ 510.90, thus making the total capital
employed to $ 932 million. The capital structure of Modine Ltd shows that the it has more
amount of debt capital in comparison to equity capital. This shows that the business relies on
debt capital more than equity capital. Whereas, the capital structure of ARB ltd is made up of
only equity share capital and there is no presence of debt capital in the capital structure of the
company. Thus, it can be said that the capital structure of the Modine ltd is much better in
comparison with ARB ltd as it has the advantage of debt capital. In addition to this, the company
using the debt capital is also able to take advantage of tax reductions.
Financial Ratio Analysis of ARB Ltd

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As per the above table, the ratios which are computed shows computation of different
ratios such as profitability ratio, solvency ratio and efficiency ratio (Zainudin & Hashim, 2016).
The net profit margin of the company shows that it has decreased slightly from previous year as
the ratio is shown to be 0.128 in 2017 which was 0.133 in 2016. The return on equity and return
on assets have also decreased which signifies that the profit which is available to the

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shareholders and the return which is on an asset has reduced from previous year. The solvency
ratio shows that current ratio has increased from the previous year which is a positive sign which
displays that the business has appropriate liquidity. The inventory turnover ratio shows that it has
increased from previous year’s estimate which is a favorable sign for the business. The debtor
turnover ratio shows that the estimate has reduced from previous year’s figure.
Change in Capital Structure
The changes in capital structure of the company is shown in the above table. The
company at present is using only equity capital in the capital mix and the same has improved or
increased from previous year (Arrow, 2017). The changes in the capital structure shows that
there has been a 9.11% change in the capitals structure of the company.
Wealth Maximization Principle
The above figure shows that the NOPAT which is generated by the company. NOPAT
refers to the profit which is available to the shareholders of the company. The NOPAT for the