HI5002 Finance for Business: Investment Advice for Amani Gold Ltd

This assignment presents a comprehensive financial analysis of Amani Gold Limited, a company listed on the ASX, conducted as a case study for the HI5002 Finance for Business course. The analysis includes an examination of the company's share price movements in comparison to the All Ordinaries Index, identifying volatility and correlation. It further identifies key announcements impacting share price, such as the Kebigada and Giro Gold Projects. The report calculates the required rate of return using the Capital Asset Pricing Model (CAPM) and evaluates the suitability of Amani Gold as a conservative investment. Finally, it computes the Weighted Average Cost of Capital (WACC) and discusses its significance in assessing the company's risk and return profile.

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCE FOR BUSINESS
Table of Contents
Answer to Question 4:.....................................................................................................................2
Part i:............................................................................................................................................2
Part ii:...........................................................................................................................................2
Answer to Question 5:.....................................................................................................................3
Answer to Question 6:.....................................................................................................................3
Part i:............................................................................................................................................3
Part ii:...........................................................................................................................................4
Part iii:.........................................................................................................................................4
Answer to Question 7:.....................................................................................................................5
Part i:............................................................................................................................................5
Part ii:...........................................................................................................................................5
References:......................................................................................................................................7

2FINANCE FOR BUSINESS
Answer to Question 4:
Part i:
Movement in monthly share price of Amani Gold Limited:
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
01/12/2017
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Share price trend of Amani Gold
Limited
Movement in monthly share price of All Ordinaries Index:
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
01/12/2017
-
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
Share price trend of All Ordinaries
Index
Part ii:
In the words of Gitman, Juchau and Flanagan (2015), share price movement is the change
in the price of an asset or security, particularly in the short-term. In accordance with the above

3FINANCE FOR BUSINESS
graphs, it could be observed that the stock price of Amani Gold Limited is fluctuating over the
years, while the All Ordinaries Index have maintained almost the identical share price over the
same time span. Therefore, it could be observed that high volatility is inherent in the stock price
of Amani Gold, while the All Ordinaries Index has lower volatility due to constancy in the stock
price movement.
On the other hand, the correlation between the chosen stock and the market index is
obtained as -0.30. If the correlation of two variables is above 0.5, it is positively correlated and a
correlation of above 0.8 is considered as strong (Lee, Sameen and Cowling 2015). In this case,
the correlation is negative, which denotes that the rise in All Ordinaries Index would result in
decline of the stock price of Amani Gold Limited and vice-versa.
Answer to Question 5:
The most significant announcements that have influenced the share price of Amani Gold
Limited are Kebigada and Giro Gold Project. The major concentration of the organisation has
been the Giro Gold Project in Congo for delivering a maiden resource. This was released 2017
after the announcement of a Maiden Indicated and Inferred Mineral Resource of 45.62 million
tonnes for 2.14 million ounces of gold for the Kebigada deposit (Spcagent.co 2018). This is
because these projects have the potential of hosting numerous ounces of gold. This significant
development in cross-border nation has direct impact on its share price, since it has failed to
generate sufficient revenues from the projects undertaken. As a result, the share prices have
fallen in the domestic market due to which the shareholders are provided with lower returns.
In addition, the organisation has 47,500,000 unlisted options, which were issued
previously as portion of the consideration for acquisition of the Giro Gold Project and these have
expired on 31st December 2016. This has resulted in fall of share price of the organisation
(McLean and Zhao 2014).
Answer to Question 6:
Part i:
Beta helps in measuring the volatility or systematic risk of a share or a portfolio
compared to the overall market. This is used in the Capital Asset Pricing Model (CAPM) that
computes expected asset return depending on beta and anticipated market returns (Scholes 2015).

4FINANCE FOR BUSINESS
As obtained from the annual report of Amani Gold Limited, the computed beta of the
organisation is obtained as 1.05.
Part ii:
According to the provided information, the risk-free rate is 4%, while the market risk
premium is 6%. Based on such information, the required rate of return for Amani Gold Limited
is depicted in the following table:
Computation of required rate of return:-
Particulars Details Units
Risk-free rate A 4%
Market risk premium B 6%
Beta C 1.05
Required rate of return/Cost of equity A+C*(B-A) 6.10%
Part iii:
In the words of Serghiescu and Văidean (2014), conservative strategy could be defined as
the procedure, in which the investors prefer to invest in stocks carrying lower amount of risk
while providing timely returns. A market comprises of different types of investors and they are
divided depending on their level of risk tolerance. According to this tolerance level, the nature of
the investors could be ascertained regarding whether they are highly aggressive, moderately
aggressive or they do not want to bear any risk. In case of conservative strategy, the investors are
either moderately aggressive or they are risk-averse. This strategy restricts the investors to obtain
greater returns; however, during crisis situations, it helps in avoiding losses. As the beta of
Amani Gold Limited is above 1, it indicates higher risk and the profit level of the organisation
has declined over the years. Hence, investing in the shares of the organisation could not be
termed as conservative investment, as the investors might incur huge losses in future.

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Answer to Question 7:
Part i:
According to the annual report of Amani Gold Limited, it has been found out that the
organisation has not presented any long-term loan in its balance sheet statement. Hence, it does
not have any cost of debt. Thus, the weighted average cost of capital is computed as follows:
Computation of weighted average cost of capital (WACC):-
Particulars Details Units
Total debt A $ 4,87,013
Total equity B $ 2,56,74,183
Total capital C=A+B $ 2,61,61,196
Percentage of debt D=A/C 1.86%
Percentage of equity E=B/C 98.14%
Cost of debt F 0%
Cost of equity G 6.10%
Tax rate H 30%
WACC (G*E)+(F*D)*(1-H) 5.99%
Part ii:
WACC is defined as the average of the minimal after-tax required rate of return that a
firm needs to earn for all its stockholders. In order to calculate WACC, long-term borrowings,
tax rate, common equity and preferred equity are taken into account. The public firms have
various financing sources and WACC plays a crucial role in balancing the related costs of the
different sources. If there is increase in WACC, the risk level of an organisation increases and
vice-versa (Werner and Stoner 2015). An increased WACC denotes that the organisation needs
to devise out a path to earn excess return that would help in combating with the increased level
of risk.

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References:
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy, 44(2), pp.370-380.
McLean, R.D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance, 69(3), pp.1377-1409.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Serghiescu, L. and Văidean, V.L., 2014. Determinant factors of the capital structure of a firm-an
empirical analysis. Procedia Economics and Finance, 15, pp.1447-1457.
Spcagent.co. (2018). [online] Available at:
http://spcagent.co/nwr-amani//wp-content/uploads/sites/38/2017/09/ANL-1.pdf [Accessed 3 Feb.
2018].
Werner, F.M. and Stoner, J.A., 2015. Transforming finance and business education: Part of the
problem. Journal of Management for Global Sustainability, 3(1), pp.25-52.