Accounting and Finance: Capital Budgeting and Company Analysis

This comprehensive finance report analyzes the capital budgeting and capital structure of ARB Ltd, a manufacturing company producing road motor parts. The report begins with an overview of capital budgeting for potential expansion sites in Wodonga and Bathurst, concluding that Wodonga is the more viable option based on net present value, payback period, and profitability index. It then delves into product cannibalization strategies and addresses issues like excess sales forecasts and the proper inclusion of factory costs. Part B of the report provides an executive summary followed by an in-depth analysis of ARB Ltd's capital structure, its weighted average cost of capital (WACC), and the cost of capital in relation to the Capital Asset Pricing Model (CAPM). A comparison with Modine Ltd, a competitor, highlights the strengths and weaknesses of ARB Ltd's capital structure. The report also examines key financial ratios like efficiency, solvency, and profitability. The analysis concludes with recommendations for improving ARB Ltd's capital structure, including incorporating debt capital to reduce risk and maximize wealth, supported by a list of relevant references and an appendix.

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
Table of Contents
Part A...............................................................................................................................................2
Capital budgeting for the sites in Wodonga and Bathurst...........................................................2
Product Cannibalization...............................................................................................................3
Answer to excess recorded sales..................................................................................................4
Adding the real cost of the old factory shed................................................................................4
Part B...............................................................................................................................................5
Executive Summary.....................................................................................................................5
Introduction..................................................................................................................................6
Capital Structure and Cost of Capital..........................................................................................6
Weighted Average Cost of Capital (WACC)..............................................................................6
Cost of Capital in relation to CAPM...........................................................................................7
ARB Ltd vs. Modine Ltd.............................................................................................................8
Financial ratio of ARB Ltd..........................................................................................................8
Changes in the Capital Structure.................................................................................................9
Wealth Maximisation...................................................................................................................9
Recommendation and Conclusion...............................................................................................9
Reference List................................................................................................................................11
Appendix........................................................................................................................................12

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ACCOUNTING AND FINANCE
Part A
Capital budgeting for the sites in Wodonga and Bathurst
Figure 1: Wodonga Site Capital Budgeting
(Source: As Created by the Author)

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Figure 2: Bathurst Site Capital Budgeting
(Source: As Created by the Author)
“Saturn Pet Care”, an organization concentrating on the manufacturing of pet care
products are in the idea of expanding their business and therefore are looking to introduce a new
product line. It is due to this fact that the company has discovered two sites and they are
Wodonga Site and Bathurst Site in order to start their operations. However, in order to have an
understanding of the site that would be ideal for them, the technique of capital budgeting has
been undertaken. After the computation of the capital budgeting process for the two sites it has
been discovered that with respect to the objectives of the company, Wodonga site is a such
relevant and effective option for them because of the fact that the net present value, the payback
period and the profitability index of this location is way better than that of Bathurst. Hence, it is
recommended that “Saturn Pet Care” starts their new line of production from location of
Wodonga.
Product Cannibalization
This process associates with the strategy that is undertaken by several companies during
the time when a new product line is introduced in the market1. The process associates with the
company trying to reduce the sale of their existing product in the market so that they would be
able to advertise and market their new product in front of their customers. In the same way,
“Saturn Pet Care” cam make use of this strategy in order to market their new product in the
1 Lane, Kevin, and Tom Rosewall. "Firms’ investment decisions and interest rates." Reserve
Bank of Australia Bulletin. June quarter (2015): 1-7.

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ACCOUNTING AND FINANCE
economy with the help of which they would be able to attract new and existing customers into
their business.
Answer to excess recorded sales
The director of “Saturn Pet Care” has perceived that the sale that has been forecasted has
been found to be higher and this can hinder and the decisions related to planning that is
undertaken by the company. It is due to this fact that the company has to reduce their extent of
sales in order to undertake better and effective decisions for the firm. The estimation errors that
are seen within the company due to an increase in the cash outflow of the business can be
resolved with the use of the net present value analysis.
Adding the real cost of the old factory shed
The mindset that the director of “Saturn Pet Care” have with respect to the inclusion of
the real cost of the old factory shed within the initial investments that have been made is an
inaccurate one as it is seen that net present value looks to add in the shed that has been
constructed currently for the purpose of making production and the old factory shed.

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ACCOUNTING AND FINANCE
Part B
Executive Summary
The case study that has been taken into consideration in this paper of the assignment
concentrates on discovering the functional effectiveness of ARB Ltd, which is a manufacturing
organization that produces road motor parts. The extent of operational efficiency of the company
has been discovered with the help of the supporting report.

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ACCOUNTING AND FINANCE
Introduction
The report is looking to create an understanding about the operational functions of ARB
Ltd and this can be understood with the help of the existing capital structure, which is presently
being utilised by the firm and accordingly the preciseness of the functional activities of the firm
is evaluated. The mistakes and the errors that are within the capital structure framework can be
realised and accordingly plans and strategies can be advised that can be useful in improving the
capital structure model of ARB Ltd.
Capital Structure and Cost of Capital
The assessment of the capital structure of ARB Ltd has explained the fact that the present
capital structure of the company is only dependent on the capital generated from equities. This
addresses the idea that the capital structure consists of a considerable amount of risk as the
capital is not evenly distributed but is dependent on equities of the company2. The management
of the company has to take decisive steps with the help of which they can make changes in their
capital structure by incorporating debt capital as well and this manner the source of capital can
be increased and the associated risk can be distributed among the two sources of capital. This
would lead to an operational function that would be ideal for the development of the business.
Weighted Average Cost of Capital (WACC)
The “WACC” has been calculated for ARB Ltd in order to have an understanding of the
effectiveness of the company with respect to managing their cost of capital. The results have
indicated that “WACC” value has been “18.05%”. It is stated that “weighted average cost of
2 Michael, Rist. "Capital Allocation." Financial Ratios for Executives. Apress, Berkeley, CA,
2015. 115-123.

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capital” comprises of the costs that have been accumulated and these are the costs that are
observed in association to the capital3. The related costs can be discovered with the assistance of
the numerous sources that related to finance that are taken by the companies. The results that
have been obtained for ARB Ltd in accordance to their “WACC” has indicated a decline with
respect to the predictions that were constructed in the previous year and associatively the
financial expenses have reduced as well and the management of the company has a feeling that
the entire action has been positive for them. The “WACC” for the company in the preceding year
was found to be “19.01%” and the outcome addresses the fact that operations of ARB Ltd has
not been as active with respect to previous year.
Cost of Capital in relation to CAPM
The results that have been gathered with respect to the equity cost in relation to CAPM
for ARB Ltd is found to be “7.906%”. The outcome has been true, precise and vital for the
company because of the fact that when undertaking a comparison with the return rate that is
related to the market, which is seen to be “8.54%”, the CAPM value of the company has been
low. The results obtained from the analysis have been competent enough to answer the
objectives and the goals of the firm and accordingly has been successful in completing the
demands and the desires of the shareholders with respect to the attainment of wealth.
ARB Ltd vs. Modine Ltd
An analysis and accordingly a comparison of ARB Ltd has been initiated with a company
that is similar to the operations undertaken by ARB Ltd in order to clearly understand the capital
3 Krüger, Philipp, Augustin Landier, and David Thesmar. "The WACC fallacy: The real effects
of using a unique discount rate." The Journal of Finance 70.3 (2015): 1253-1285.

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structure as well the operational efficiency of ARB Ltd with respect to their rival companies. The
company that has been selected for the purpose of comparison has been Modine Ltd. The
initiation of the assessment has discovered that unlike ARB Ltd, Modine Ltd has a capital
structure that comprises of equity as well as debt capital. In this way, the risk related to capital
can be diminished and a better capital framework can be maintained4. On the other hand, capital
structure of ARB Ltd consists of only equity capital and therefore the extent of capital risk for
ARB Ltd is considerably higher than Modine Ltd. Modine Ltd has “$421.20 million” as equity
capital and “519.90 million” as debt capital. The comparison has been able to address the fact
that Modine Ltd has a much better and precise capital structure framework in comparison to
ARB Ltd and therefore ARB Ltd in order to reduce their extent of risk and improve their
operational efficiency has to incorporate the same.
Financial ratio of ARB Ltd
The ratio that has been computed for ARB Ltd has been “efficiency”, “solvency” and
“profitability” ratio. The financial reports that are published by the company have been essential
in order to calculate the concerned ratios. The results have implied that the current ratio of ARB
Ltd has improved from the forecasts that were made previously and the rise in the current ratio
explains that the liquidity strength of the company has enhanced as well. The results have even
highlighted that debt to equity ratio has improved, which answers that the company debt has
been improving. The inventory turnover ratio calculated for ARB Ltd has shown significant rise
4 Magni, Carlo Alberto. "Investment, financing and the role of ROA and WACC in value
creation." European Journal of Operational Research 244.3 (2015): 855-866.

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ACCOUNTING AND FINANCE
and thereby the results explain that ARB Ltd in the current timeframe has been operating
according to their objectives.
Changes in the Capital Structure
The calculated results have highlighted that there has been significant amount of
developments and transformations in the capital structure of ARB Ltd and the outcome has
justified the fact that the available capital for the firm has all been available through equity.
Wealth Maximisation
The results that have been calculated address the fact that ARB Ltd has not been able to
undertake improvements and developments with respect to the expectations of the
administration. It is seen that the net profit after tax for ARB Ltd has indicated a slender rise but
this increase is not in relation to the expectations of the management.
Recommendation and Conclusion
The outcome of the report has been helpful in providing suggestions and they are given as
follows:
 ARB Ltd needs to concentrate on incorporating debt capital as well and therefore needs
to construct strategies that would be helpful in the development of a better capital
framework and would even reduce the extent of risk that the company may face in the
future.
 It is essential for the companies to create plans and strategies with the help of which
maximisation of wealth can be attained in accordance to the operational activities of the
company.

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The report that has been framed with the assistance of financial assessment explains the fact
that the creation of debt capital can mitigate the degree of risk and accordingly ARB Ltd would
be able to payout the dividend to their shareholders.
Reference List
Krüger, Philipp, Augustin Landier, and David Thesmar. "The WACC fallacy: The real effects of
using a unique discount rate." The Journal of Finance 70.3 (2015): 1253-1285.

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ACCOUNTING AND FINANCE
Lane, Kevin, and Tom Rosewall. "Firms’ investment decisions and interest rates." Reserve Bank
of Australia Bulletin. June quarter (2015): 1-7.
Magni, Carlo Alberto. "Investment, financing and the role of ROA and WACC in value
creation." European Journal of Operational Research 244.3 (2015): 855-866.
Michael, Rist. "Capital Allocation." Financial Ratios for Executives. Apress, Berkeley, CA,
2015. 115-123.