Financial Management Report: ABC Retail Company Analysis

This report presents a comprehensive financial analysis of ABC Retail Company, examining its performance from 2016 to 2018. Part A focuses on calculating key financial metrics like share price, market capitalization, and various financial ratios, including current, quick, working capital, operating profit, interest coverage, debt equity, and debt ratios. The analysis highlights trends in liquidity, profitability, and solvency, providing insights into the company's financial health. Part B delves into corporate governance, agency problems, and shareholder wealth maximization. It uses a real-world example of AMP Limited's 'fee for no service' scandal to illustrate agency problems and the ethical considerations in financial management. The report also discusses the legal inferences drawn from the case and concludes with a summary of the findings, emphasizing the importance of ethical conduct and sound financial practices.

Running head: FINANCIAL MANAGEMENT
Financial management
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Part A.........................................................................................................................................2
Answer 1................................................................................................................................2
Answer 2................................................................................................................................2
Answer 3................................................................................................................................3
Answer 4................................................................................................................................3
Answer 5................................................................................................................................4
Part B..........................................................................................................................................5
Introduction............................................................................................................................5
Agency problem and shareholder’s wealth maximization.....................................................5
Application through real world example................................................................................6
Legal inference obtained from the information.....................................................................6
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

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Part A
Answer 1
a. Share price of ABC as on 30th June 2018
P/E ratio = Share price / Earnings per share
Therefore, share price = P/E ratio * EPS
Share price = 7.66 * 0.020 = $ 0.1532
b. Market capitalisation
Particulars Amount (000)
EBIT $ 1,305.00
Less:
Interest expenses $ 1,245.00
Profit before tax $ 60.00
Less: Dividend paid $ 20.00
Profit available to shareholder $ 40.00
EPS 0.02
Number of outstanding share 2,000,000
Market capitalization = Number of share outstanding * share price
Therefore, market capitalisation = 20,00,000 * $ 0.1532 = $ 3,06,400
c. P/E ratio
Australian retail industry’s most recent P/E ratio is 15.8 whereas the P/E ratio of ABC
Retail Company is 7.66. The difference may be due to the lower amount of profitability for
the company and lower share price for ABC’s stock (Safitri 2013).

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Answer 2
Ratios Formula 2016 2017 2018
Current ratio Current assets/current liabilities 2.13 2.98 3.34
Quick ratio (current assets - inventory)/current liabilities 1.09 1.26 1.36
It is found from the current ratio and quick ratio of the company that both the ratios of
the company are in improving trend and is indicating that the company’s liquidity position is
good enough to pay off its short-term obligations (Van Den End and Kruidhof 2013).
Answer 3
Working capital management
Ratios Formula 2016 2017 2018
Working capital ratio Current assets/current liabilities 2.13 2.98 3.34
It can be identified that the working capital management ratio of the company is in
improving trend. Well management of the working capital will enable the company to
manage the cash shortfall in better way (Sagner 2014).
Answer 4
Profitability analysis
Ratios Formula 2016 2017 2018
Operating profit ratio Operating profit/sales 3.16% 3.26% 3.21%
Interest coverage ratio EBIT/Interest expenses 1.12 1.05 1.05
From the profitability ratios of the company it is identified that the operating profit
ratio of the company has not been changed much and it is moving around 3%. It does not
have any specific trend as it is increased from 3.16% to 3.26% and again reduced to 3.21%
over the last 3 years. However, the operating profit ratio of the company is quite low for long

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term sustainability. On the other hand, the interest coverage ratio of the company is in
reducing trend and reduced from 1.21 times to 1.05 times over the last 3 years. However, the
interest coverage ratio of the company for all 3 years is low and will not be sufficient for long
term sustainability (Innocent, Mary and Matthew 2013).
Answer 5
Solvency ratios
Ratios Formula 2016 2017 2018
Debt equity ratio Total liabilities/shareholders equity 6.92 6.02 5.92
Debt ratio Total liabilities/total assets 0.47 0.37 0.31
While considering lending to ABC Retail Company bank shall consider the solvency
ratios like debt equity ratio and debt ratio. From the debt equity ratio of the company it is
identified that the debt of the company is almost 6 times of its equities. On the other hand,
looking into the debt ratio of the company it is identified that the company’s major portion of
assets are financed through equity and less than 40% is financed through debt. Therefore, if
the bank considers the debt ratio it shall lend the borrowing to the company (Brîndescu–
Olariu 2016). However, considering the debt equity ratio it is found that as compared to each
dollar of equity it has $ 6 debt and therefore the bank shall not lend any further borrowing to
the company.

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Part B
Introduction
Corporate governance is the surrounding concept that states the way in which the
entity is controlled and managed. It issues a set of the rules that helps the entities to
implement accountability, transparency, openness and honesty. Under the business activities
ethics determine the applicability of morals while conducting the business of the entity.
Therefore, the corporate governance provides ethical framework for the entity’s governance.
Ethical approach improves the freedom for excellence that eventually corresponds with the
spirit of law (Takacs Haynes, Campbell and Hitt 2017). Though it is not easy to determine
that what is wrong or what is right subject to individual relativism and culture, the collapse or
failure indicates that the concept of ethics will help the entities to take decisions those will be
in best interest for the stakeholders.
Agency problem and shareholder’s wealth maximization
Agency problem is interest conflict among the managers, creditors and shareholders.
It leads to difficulty with regard to achievement of goal for maximizing the shareholder’s
wealth. Shareholders are considered as the active principles whereas the managers are
considered as the passive agents. Through the shareholders are the real owners of the
business, they cannot manage the company actively as the number of shareholders are high
and are dispersed over wide geographical location. Further, the stakeholders may not have the
required knowledge, skill, experience and expertise to run the business successfully.
However, the managers are concerned regarding personal wealth, salary, fringe benefits, job
security and salary (Ferrell, Liang and Renneboog 2016). It may cause to potential wealth
loss for the stakeholders that leads to conflict among the management and shareholders.
Agency problem among them takes place as the management tends to act for gaining their

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own goals at the cost of others. Further, as the management have more information regarding
the entity they are in the position to manipulate the data.
Application through real world example
In case of AMP limited it was found that the company made false representation to
ASIC regarding the ‘fee for no service’ scandal. While they were questioned by royal
commission of banking, head of advice for the company lost the count while counting for the
times the company misled the regulator of ASIC. It informed ASIC that they charged fees
for providing financial advice they did not received owing to administrative error instead of
stating that it was their deliberate policy. Owing to this, AMP faced shareholder’s revolt at
the AGM of the company (ABC News 2018).
Legal inference obtained from the information
The Hayne royal commission raised prospect that the super funds and banks who
charged their customers fees for no service may face the criminal sanction in the bombshell
that may have dramatic implication for multi-trillion dollar for the financial service sectors.
The commissioner further raised question of criminal action against AMP Limited as it
misled the regulator. When the CEO of the company was asked whether he was concerned
for the eventual recommendation of royal commission, the CEO said that AMP is focussed
on prioritising the customers as well as restoring their confidence regarding AMP (Clarke
2014).
Further, depended upon the flag raised by the ASIC treasurer, ASIC issued the AMP’s
statement for fees - for - no – service approaches that misled the regulator. The report
highlighted –
 ASIC is investigating the conduct of the company with regard to fees - for - no –
service as created in evidence given by the royal commission

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 ASIC is cooperating with Royal Commission on wide range of matters that included
present as well as previous investigations.
 In compliance with the general policy regarding public comment the commission will
not make any further public statement regarding their investigation for the highlighted
matters (Knaus 2018).
 All the financial institutions shall understand the significance of co-operation with
regulator and must comply with laws while providing information to ASIC. Providing
misleading or false statements to ASIC may lead in criminal as well as civil sanctions.
Conclusion
From the above discussion regarding the AMP’s scandal for fees - for - no – service,
it is concluded that what was done by the company was deeply disturbing. They said that the
y charged the customers basically for the services they did not actually provided. Further,
they admitted that the statements were misleading for ASIC as well as for the stakeholders
and that is significantly distressing. This behaviour shall attract penalties including jail.

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Reference
ABC News. (2018). 'Answer what you're asked': Commissioner loses patience with CBA
witness. [online] Available at: http://www.abc.net.au/news/2018-04-18/banking-royal-
commission-continues-amp-cba-grilling/9670432 [Accessed 12 Sep. 2018].
Brîndescu–Olariu, D., 2016. Solvency ratio as a tool for bankruptcy prediction. Ecoforum
Journal, 5(2).
Clarke, T., 2014. The impact of financialisation on international corporate governance: The
role of agency theory and maximising shareholder value. Law and Financial Markets
Review, 8(1), pp.39-51.
Ferrell, A., Liang, H. and Renneboog, L., 2016. Socially responsible firms. Journal of
Financial Economics, 122(3), pp.585-606.
Innocent, E.C., Mary, O.I. and Matthew, O.M., 2013. Financial ratio analysis as a
determinant of profitability in Nigerian pharmaceutical industry. International journal of
business and management, 8(8), p.107.
Knaus, C. (2018). AMP apologises to shareholders at AGM: 'We let you down'. [online] the
Guardian. Available at: https://www.theguardian.com/australia-news/2018/may/10/amp-
apologises-to-shareholders-at-agm-we-let-you-down [Accessed 12 Sep. 2018].
Safitri, A.L., 2013. Pengaruh Earning Per Share, Price Earning Ratio, Return On Asset, Debt
To Equity Ratio dan Market Value Added Terhadap Harga Saham Dalam Kelompok Jakarta
Islamic Index. Management Analysis Journal, 2(2).
Sagner, J.S., 2014. Working capital management. Applications and Cases, Willey, p.1.

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Takacs Haynes, K., Campbell, J.T. and Hitt, M.A., 2017. When more is not enough:
Executive greed and its influence on shareholder wealth. Journal of Management, 43(2),
pp.555-584.
Van Den End, J.W. and Kruidhof, M., 2013. Modelling the liquidity ratio as macroprudential
instrument. Journal of Banking Regulation, 14(2), pp.91-106.