BA301 Finance Report: Stock Selection and Corporate Governance

This report, prepared for an Introduction to Finance course, delves into the critical aspects of stock selection and corporate governance. It analyzes the financial performance and corporate governance structures of two Australian companies, BHP and Wesfarmers. The report investigates the relationship between corporate governance practices and investment returns, emphasizing the significance of strong governance for company performance. Stock valuation is performed using the Gordon growth model to assess the relative value of the stocks, and the analysis also includes the dividend discount model. The report compares executive compensation with financial performance, and offers recommendations on stock selection and valuation methodologies. The research utilizes secondary data, including annual reports and academic journals, to support its findings and conclusions. The report aims to provide insights into making informed investment decisions and understanding the dynamics of financial management.

Running head: INTRODUCTION TO FINANCE
Introduction to finance
Name of the student
Name of the university
Student ID
Author note

1
INTRODUCTION TO FINANCE
Executive Summary
Many authors have highlighted the importance of the study of finance in their respective
journal. Concerning about the financial study it is also important to know how the financial
management work. It helps to understand the project viability, stock valuation, firm valuation the
key analysis of financial ratios. The paper is all about the understanding of finance in terms of
stock selection to invest. It researches the annual report of BHP and Wesfarmers and articulates
that to select the proper stock, clarity in corporate governance is very important. It has a positive
impact on the company performance. To choose the correct stock to invest this report takes
“Gordon growth model” and after evaluating the stock by the growth model, research suggests
that both the stock value is overpriced. It has been detected that there is a proportionate
relationship between executive remuneration and company’s financial performance. The paper
also concludes which stock is better to invest and which model has to adopt to do the valuation
of stock.

2
INTRODUCTION TO FINANCE
Table of Contents
Introduction......................................................................................................................................4
Literature review..............................................................................................................................5
Methodology....................................................................................................................................6
Corporate governance......................................................................................................................6
1. Corporate governance structure of BHP and Wesfarmers.......................................................6
BHP..................................................................................................................................................6
Wesfarmers......................................................................................................................................9
Responsibility of the Board.............................................................................................................9
Functions of Board........................................................................................................................10
Independent Directors....................................................................................................................10
The pragmatic relation between corporate governance and firms performance............................12
CEO- Leadership...........................................................................................................................12
Capital Budgeting..........................................................................................................................12
Compensation................................................................................................................................13
Communication..............................................................................................................................13
Competition...................................................................................................................................13
Analysis.........................................................................................................................................13

3
INTRODUCTION TO FINANCE
2. Comparison between compensation and company performance...........................................14
3. Share valuation.......................................................................................................................15
Constant growth valuation model..................................................................................................15
BHP’s stock valuation under constant growth model....................................................................16
Wesfarmers’s stock valuation under constant growth model........................................................16
Zero growth valuation model.........................................................................................................16
BHP’s stock valuation under zero growth model..........................................................................17
Wesfarmers’s stock valuation under zero growth model..............................................................17
Variable Growth Valuation Model................................................................................................17
BHP vs. Wesfarmers- stocks comparison......................................................................................20
Popular stock valuation model.......................................................................................................22
Dividend discount model (DDM)..................................................................................................22
Discounted cash flow model..........................................................................................................23
Recommendations..........................................................................................................................23
Conclusion.....................................................................................................................................23
Reference.......................................................................................................................................24

4
INTRODUCTION TO FINANCE
Introduction
In the recent global competitive world, the business entity always intends to expand their
project. They need to produce at a large scale to meet the global demand as a result the company
needs to invest more. One of the most popular ways to raise money to invest is from public
through the issue of shares. The interest of the investors is always look upon the performance of
the stock, return of the stock, growth of the stock so all these depends on how well the company
perform (Revelli and Viviani 2015) The performance of the company will depend on some key
factors like company’s management, service, financial performance, corporate governance
structure. This report is critically analyze two Australian based mining company BHP and
Australian conglomerate Wesfarmers suggest which types of corporate governance should adopt
by them and for strong corporate governance and weak corporate governance what will be the
impact of the returns of investment. This report also highlights valuation techniques of the stock.
To select the right stock to invest an individual should always calculate the trend of the stock.
Therefore, valuation of the stock is necessary in the case of investment. The study researches all
the financial data of the selected two companies in terms of calculate the stock and therefore
suggests which company’s stock will best for investment. Analysis of financial ratio is also
included in this report to suggest the significance and interpretation of those particular ratios in
the selected company. The aim of this report is to provide legitimate research on stock selection
to invest. To make the healthy investment this study analyses various key financial and non-
financials path like corporate governance, this report asks about any correlation between good
corporate governance practice and impact of this on the return on investment. The report also
recommends how to evaluate the stock on depending on the Gordon Growth Model. Introduction
to finance may require acknowledging the financial management sometime (Ruppert 2014), so it

5
INTRODUCTION TO FINANCE
is very essential that financial decisions look after the shareholders interest. After going through
the study, it was noted that there is some limitations such as dependency on the historical cost,
specific period based; there is some effects on inflation (Velte and Stawinoga 2017).
By doing the research of this financial study, report faced some issues these are:
 The financial statement is prepared on a certain time gap. It usually prepared on a
quarterly basis or half-yearly basis so to extract the accurate financial data is very hard to
get while analyze the stock.
 Ad- hoc transaction usually included in the financial statements, though it will not repeat
in the future.
 It has been observed that in the financial report, closing balances may not match the
economic reality.
Literature review
According to the Ruppert (2014), much of finance is concerned to measure and manage the
financial risk. The return of an investment is its earning revenue as a fraction of the initial
investment. In case of all investments, future returns are cannot be evaluated exactly. Thus, it is a
random variable.
According to the Davies (2016), corporate governance is a strategic approach. Examines
the corporate governance from a philosophical and big picture standpoint. Here the authors
explore a number of key themes.

6
INTRODUCTION TO FINANCE
Methodology
This research takes all the secondary data of the selected companies. To calculate the
stock valuation this study critically analyzes the company’s annual report and several journal. To
proof the theory of positive relativity of remuneration and the company’s performance this study
has adopted some theoretical part of hypothesis. To calculate the stock price, theory of “Gordon
model” has been implemented.
Corporate governance
Corporate governance is a business practice, which follows certain rules, regulations and
principles by which the organization is regulated. It involves the interest of the shareholders.
Since the corporate governance draws, a framework to achieve the organization’s goal it follows
the management’s actions plan and internal controls of measurement (Tricker and Tricker 2015).
1. Corporate governance structure of BHP and Wesfarmers
BHP
BHP’s governance philosophy, believes extraordinary core value, which creates a long-term
worth creation. Put the good governance in good business, is the primary mechanism is to adopt
the best governance standards in Australia. As per the company’s report good governance is also
the responsibility of the management executives and it is embedded within the group. By
practicing the good governance, the group’s board and management are guided by the company’s
charter values (bhp.com, 2020).
Such corporate governance rules the entity how they deal with their business on a regular
basis, expand them to perform very productively and leading in a very sustainable growth

7
INTRODUCTION TO FINANCE
strategy. By adopting the corporate governance, management play a vital role in risk inaccuracy,
engagement of public policy and the commitment to the environment and sustainability.
Practicing good governance in the entity, BHP’s Executives superintends the Principal Executive
professional and senior management and assures that suitable procedures and controls are in
place casing management activities in working the company on the basis business principles
(McAlister and Ferrell 2016).
Among the corporate governance of the company, some examples are highlighted below:
The framework of BHP’s governance describes the interaction between their shareholders
and the board and CEO as well. It also depicts the flow of delegation of the stockholders.
Concerning about the major investors in the company first 4 shareholders out of top 10
shareholders are as follows
Shareholder Stake holding No of fully paid shares
HSBC Custody Nominees
(Australia) Limited
24.46% 785,602,425
J P Morgan Nominees Australia
Limited
16.86% 541,596,753
Citicorp Nominees Pty Ltd 5.01% 160,994,616
Citicorp Nominees Pty Limited
<Citibank NY ADR DEP A/C>
4.60% 147,717,926

8
INTRODUCTION TO FINANCE
The above table shows, major shareholders in BHP, among this HSBC is holding largest part of
the company as 24.46 percent stake, but not control the entity. The controlling power still lays in
hand of BHP.
This study also refers name of the board of directors and the executive management team are
mentioned below:
Board of Directors
Ken MacKenzie Chairman and independent non-executive director
Andrew Mackenzie Non independent director
Terry Bowen Independent Non-executive Director
Malcolm Broomhead Independent Non-executive Director
Ian Cockerill Independent Non-executive Director
Anita Frew Independent Non-executive Director
Carolyn Hewson Independent Non-executive Director
Susan Kilsby Independent Non-executive Director
Lindsay Maxsted Independent Non-executive Director
John Mogford Independent Non-executive Director
Shriti Vadera Senior Independent Director, BHP Group Plc
Caroline Cox Group General Counsel & Company Secretary and
Chairman of the Disclosure Committee
Executive Leadership Team
Andrew Mackenzie Chief Executive Officer
Peter Beaven Chief Financial Officer
Geoff Healy Chief External Affairs Officer
Mike Henry President Operations, Minerals Australia

9
INTRODUCTION TO FINANCE
Diane Jurgens Chief Technology Officer
Daniel Malchuk President Operations, Minerals Americas
Vandita Pant Chief Commercial Officer
Jonathan Price Chief Transformation Officer
Geraldine Slattery President Operations, Petroleum
Laura Tyler Chief Geoscientist
Athalie Williams Chief People Officer
The directors and the executives are very well structured and they are operating a good corporate
governance within the company.
Wesfarmers
Wesfarmers company having it’s headquarter in Perth. The company working as a
multinational conglomerate. Wesfarmers is listed on ASX index. The company’s governance
framework monitors the Board and Management’s error of the enterprise and enclosed in its
governing documents. The board of Wesfarmers is a strong promoter of good corporate
governance. The board is committed to provide the best interest to the shareholders and ensuring
the corporate governance obligations and responsibilities (wesfarmers.com 2020).
Responsibility of the Board
The employees have conducted the business. Managers and officers are working under
the direction of chief executive officer. Following the principle of good governance practice may
help to create enduring value for the shareholders.

10
INTRODUCTION TO FINANCE
Functions of Board
The group’s directors normally have six schedule meetings in a year where it focuses on the
enactment of the company, plans and prospects and the problems facing by the company
(Yarram, 2015). Following the rules and regulations of the corporate governance, the board acts
a several number of functions:
 Approving the groups purpose and values
 Ensuring the business strategy, business plans and policies.
 It regulates the company's strategic direction and portfolio of activities to create business
values.
 Assessing the business risks
 To assure the dividend policy of the company.
Independent Directors
As far, as concern about the directors all the non-management directors will be
independent. The company always wants to have minimum of seven independent directors. Only
the board will determine the independency of the directors and it is the company’s goal that two
third member of the directors will be independent. The board of directors is highly committed to
deliver a satisfactory return to its shareholders and fulfilling the corporate governance
obligations and responsibilities for the best interest of the stakeholders in every aspects.
Some of the board of directors and management executive are under mentioned:

11
INTRODUCTION TO FINANCE
Board of Directors
Michael Chaney Ao Chairman
Vanessa Wallace Director
Rob Scott Managing Director
Diane Smith-Gander Ao Director
Wayne Osborn Director
Sharon Warburton Director
Tony Howarth Ao Director
Jennifer Westacott Ao Director
The Right Honourable
Bill English Knzm
Director
Mike Roche Director
There are some major shareholders in Wesfarmers, are listed below:
Shareholder Stake holing No. of fully paid shares
HSBC Custody Nominees
(Australia) Limited
22.86% 259,230,418
J P Morgan Nominees Australia
Pty Limited
14.62% 165,763,879
Citicorp Nominees Pty Limited 5.80% 65,763,144
National Nominees Limited 2.62% 29,691,368