Managing Finance Case Analysis Report - FINA6000, University

This report provides a financial case analysis of two Australian companies, AGL Energy Limited and Origin Energy, examining their financial performance over a three-year period. The analysis covers key aspects such as Weighted Average Cost of Capital (WACC), exploring how changes in equity, debt, and beta factors influence the cost of capital. The report also delves into the companies' dividend policies, analyzing payout ratios, dividend payments, and their impact on share prices, relating these findings to dividend relevance theories. Furthermore, the report offers investment recommendations based on the findings, highlighting the significance of regular dividends and financial risk assessment. The report utilizes financial data and calculations to support its conclusions, providing insights into the companies' financial health and investment potential.

RUNNING HEAD: FINANCE
Managing finance

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Part A and B
Please refer to excel file for calculations.
Part C
Weighted average cost of capital determines the firm’s capital structure which consists of debt
and equity component. The WACC is calculated by giving weights to each element and then
multiplying the same with the cost of debt and cost of equity respectively. However, there are
various reasons due to which the cost of capital of the firm can be different (Fernandes, 2014). In
case of AGL Energy Limited, the WACC increases from 4.64% to 5.39% during the past three
years that are 2015, 2016 and 2017. This is because of the high portion of equity taken by the
company as compare to its debt. The changes occur in the capital are the results of fluctuations in
beta factor of the entity which continues to rise over the period of past three years. This boosted
up its cost of equity. Along with this, the cost of debt of AGL also rises from 4.5% to 5.0%
because of the change in the amount of borrowings taken by the company over the past three
years. Apart from the beta and interest expense, other factors which contribute to the fluctuations
in capital are the market return and risk free rate. However, in this case both are been kept same
for all the years. Same is the case with Origin Energy, company’s WACC rises from 3.47% to
4.27% during the years. However, it has high portion of debt as compare to AGL and moreover,
its beta has been reduced during the past years.
Part D
Dividend policy deals with the guidelines that are to be followed by the company on the basis of
which, it decides the dividend amount to be paid to the shareholders. For some investors, the

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relevancy of the dividend does not matter as they can purchase and sell their shares as and when
they want. However, it is also true that declaration of the same do affect the share prices of the
companies (Baker, 2009). Considering AGL, the company had a payout ratio of 275.76% in
2015 which became negative in 2016 and in 2017 it was reported at 61.73%. This was due to the
significant reduction in the dividends paid by the company and its EPS turning negative in 2016.
The company follows a regular dividend policy and the payments of the same have affected its
share prices positively. Its stock prices have shown an upward trend in past years as a result of
dividend declaration. In case of ORG, the dividend payout ratio was negative due to the negative
EPS of the company. In addition, the company did not pay any sort of dividend last year. This
shows that it follows a irregular policy and the payment of dividends has reduced its share prices
in 2015 and 2016. Thus, it can be said that theories of dividend relevancy given by Walter and
Gordon do applies to the patterns noticed above (Frankfurter, Wood & Wansley, 2003).
Part E
From the analysis, it will be recommended to purchase the shares of AGL Energy Limited as it
pay regular dividends to its shareholders and its stock prices has also risen in the past years.
Moreover, company has low debt which makes it less risky in financial terms.

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References
Baker, H. K. (Ed.). (2009). Dividends and dividend policy (Vol. 1). John Wiley & Sons.
Fernandes, N. (2014). Finance for Executives: A practical guide for managers. NPVPublishing
Frankfurter, G., Wood, B. G., & Wansley, J. (2003). Dividend policy: Theory and practice.
Elsevier.