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

This report examines the capital budgeting processes of Saturn Pet Care, comparing two potential manufacturing sites, Wodonga and Bathurst, using Net Present Value (NPV), profitability index, and payback period. The analysis favors the Wodonga site. The report also assesses the capital structure of ARB Ltd, a manufacturing company, focusing on its equity-based structure, weighted average cost of capital (WACC), and financial ratios. It compares ARB Ltd with Modine Ltd, highlighting the benefits of a diversified capital structure. Furthermore, the report provides recommendations for ARB Ltd to improve wealth maximization by incorporating debt capital and enhancing its overall financial strategy. The report concludes with a detailed financial analysis and recommendations for improvement.

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

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Executive Summary
This report is associated to having an understanding of two companies, which are undergoing
two different functional activities. The first company on which the report has been constructed is
Saturn Pet Care and this enterprise concentrates on manufacturing products that are being used
by the animals and pets. In this scenario, the enterprise is looking to magnify their level of
operations and this is being done by bringing in innovative products for the customers and in
order to do the same the company has discovered two manufacturing sites and each one of them
are Wodonga and Bathurst respectively. The statement would comprise of undertaking capital
budgeting process with the help of which the production location that is ideally suitable for the
company can be selected.
On the other hand, the other company relates to ARB Ltd and this company is related to
manufacturing activities and therefore they manufacture road motor parts. This segment of the
report would therefore evaluate the ARB Ltd capital structure and with the help of which
usefulness of the company can be attained.

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Table of Contents
Part A...............................................................................................................................................3
Capital Budgeting of Wodonga and Bathurst Site.......................................................................3
Product Cannibalization...............................................................................................................5
Rectifying the Excessive Sales that are recorded........................................................................5
Inclusion of the Original Cost of the Old Factory Shed..............................................................5
Part B...............................................................................................................................................6
Introduction..................................................................................................................................6
Capital Structure and Cost of Capital..........................................................................................6
Weighted Average Cost of Capital..............................................................................................6
Cost of Capital with respect to CAPM........................................................................................7
Comparison of ARB Ltd and Modine Ltd...................................................................................8
ARB Ltd Financial Ratios...........................................................................................................8
Changes in the Capital Structure...............................................................................................10
Wealth Maximisation.................................................................................................................10
Recommendation and Conclusion.............................................................................................11
Reference List................................................................................................................................12

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Part A
Capital Budgeting of Wodonga and Bathurst Site
Figure 1: Capital Budgeting for Wodonga Site
(Source: As Created By Author)

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Figure 2: Capital Budgeting of Bathurst site
(Source: As Created By the Author)
The statements that are computed in accordance to the two production sites by calculating
the capital budgeting process has explained that out of the two sites, the site in Wodonga is much
more effective for Saturn Pet Care. The analysis that has been done in the above table has
explicitly addressed the payback period evaluation, index of profitability and analysis of the net
present value. In this manner, the analysis of the two manufacturing sites have indicated that the
net present value of Wodonga has been $ 95,94,827 and this value has been way higher than
Bathurst site as their value has been $58,44,567. On the other hand the profitability index of
Wodonga has revealed the same result as well as their index value has been 1.349, which is more
than 1.117, which the value for Bathurst. In the similar manner, it is seen that payback period for

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Wodonga has been better than Bathurst and thereby indicates the fact that Saturn would be more
profitable if they undertake the manufacturing process with the help of Wodonga site.
Product Cannibalization
This is known to be the strategy that is in general cases followed by the companies with
the help of which the companies diminishes their level of sales in order to bring in a new product
and accordingly endorse of their product in the market (Frank, & Shen 2016). In this manner, it
is seen that Saturn Pet Care can even undertake this process with the help of which they would
be able to endorse their product which the the administration of the company has though making
an introduction.
Rectifying the Excessive Sales that are recorded
According to the current circumstances, it is seen that Nathan is a director of Saturn Pet
Care and he has the point that the projected sales is much higher and therefore in order to
mitigate the planning approach that is undertaken by the management, this sales needs to be
reduced. The error that is found with respect to the projection of the sales can be resolved by
making use of net present value, which would increase the projection of the cash outflows with
the help of which the error that has been created can be resolved (Krüger et al., 2015).
Inclusion of the Original Cost of the Old Factory Shed
Nathan has the idea that the real cost of the factory spot has been brought in within the
initial investment that has been undertaken with the help of which the accurate projection can be
undertaken. This notion of Nathan is unfitting as it is seen that net present value looks to
consider the site for the factory that has been recently been built for the purpose of undertaking
the production activities (Lane, & Rosewall 2015).

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Part B
Introduction
This section of the assignment is associated with ARB Ltd and accordingly tries to assess
the capital structure of the organization. This company is mainly related to the production
industry and therefore their efficacy and limitations with respect to their capital structure needs
to be understood. This report would therefore assess the capital structure of the firm and
accordingly understand the changes that have taken place.
Capital Structure and Cost of Capital
By assessing the capital structure of ARB Ltd there has been an observation that the
company only utilises the equity capital. Debt capital is not employed by the firm and therefore
the capital of the firm is totally reliant on equity. The capital structure that is currently been
followed has been explained in the following table.
Weighted Average Cost of Capital
ARB Ltd has a weighted average cost of capital to be 18.05%. The observations indicate
that there has been a decline in the capital in accordance to the projections that have been last
year and this accordingly addresses the fact that financial expenses has declined and this is a

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positive signal (Magni, 2015). In the previous year, the weighted average cost of capital has been
19.01%.
Cost of Capital with respect to CAPM
ARB Ltd has an equity cost in accordance to CAPM to be 7.906% and this percentage
has been ideal by looking into the fact that the market return has been 8.54%. The values
therefore has been able to address the desires of the shareholders (Robinson, & Sensoy 2016).

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Comparison of ARB Ltd and Modine Ltd
It is seen that Modine Ltd operates in the manufacturing company and they manufacture
similar products as ARB Ltd. Modine Ltd makes use of both debt and equity as their capital and
thereby explains that the company looks to maintain a capital structure that is considerable with
the help of which the risks related to the business can be mitigated (Berk, & Van Binsbergen
2016). However, it is seen that ARB has their capital consisting of equity. The debt and the
equity capital for Modine Ltd has been $519.90 in millions and $ 421.20 in millions. The results
explain that Modine Ltd has effective capital framework than ARB Ltd.
ARB Ltd Financial Ratios
The profitability, efficiency and solvency ratio for ARB Ltd has been explained in the
tables below. The figures indicate that the current ratio has increased in accordance to the
projections that have been made in the last year and this explains the liquidity scenario has
developed. It is even observed that the debt to equity ratio has improved as well which explains
that there has been improvements in the level of debts (Ondraczek et al., 2015). The ratio that has

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increased for the company has been inventory turnover ratio and all the ratios explain that the
company has been performing in an effective manner.

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Changes in the Capital Structure
The table above has indicated the fact that there has been transformations in the structure
of the capital year after year and the company has their capital based on their equity.
Wealth Maximisation
ARB Ltd has been incompetent in undergoing developments that they thought of making
in the last year. The “NOPAT” for ARB has augmented by a bit, but it is seen that the
organization needs to look into their wealth maximisation concept.

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Recommendation and Conclusion
The following are the suggestions that can be provided to ARB Ltd:
 ARB Ltd requires to plan policies in order to enhance their concept of maximisation of
wealth with respect to their operational activities (Žižlavský, 2014).
 ARB Ltd has to bring in debt in their capital framework so that considerable and
equitable capital mix can be maintained.
The assessment of the financial analysis has been able to explain the fact that capital
structure of ARB Ltd can be enhanced by incorporating debt capital, which will be helpful in
reducing the extent of risk as the capital would be balanced in an effective manner. In this
manner, ARB Ltd has to be enhance their capital in order to pay back to the shareholders