Accounting and Finance Report: Grains Ltd Performance Analysis

This report provides a detailed analysis of Grains Ltd's financial performance. It begins by examining interest rates, comparing different scenarios and their impact on loan costs. The report then delves into portfolio analysis, calculating expected returns and portfolio beta, and interpreting the security market line to assess investment performance. Furthermore, the report applies the CAPM model to determine the required rate of return for Newcrest and Orica, and utilizes the constant dividend growth model to value shares. The analysis includes an evaluation of the performance of Orica and Newcrest through charts, concluding with recommendations for improving Grains Ltd's financial strategies in response to market risks and beta values.

ACCOUNTING
AND FINANCE
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Table of Contents
Introduction..........................................................................................................................................3
PART A.................................................................................................................................................3
a) If interest and principle are all repaid at the end of the three-month loan term, what is the
annual percentage rate on the loan offer make by the bank?...........................................................3
b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest
is discounted, should you accept this alternative.............................................................................3
Part B....................................................................................................................................................4
a) Expected return on the portfolio..................................................................................................4
b) Calculation of portfolio beta........................................................................................................5
c) Security market line.....................................................................................................................6
(d) Winners and losers in security market line................................................................................6
(e) Consideration of conclusion to be less certain...........................................................................6
Part C..............................................................................................................................................6
Required rate of return on CAPM model.........................................................................................6
Valuation by using constant dividend growth model.......................................................................7
Performance of Orica and Newcrest................................................................................................7
Conclusion............................................................................................................................................8
References............................................................................................................................................9
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INTRODUCTION
Financial resources included in the business need to be reported to all the users of the
business through maintaining various kinds of accounting reports prepared by an enterprise. This
project is about defining various concepts of interest rates in relation with the current performance
of an enterprise. This report also stresses on determining financial performance of an entity using
CAPM model.
PART A
a) If interest and principle are all repaid at the end of the three-month loan term, what is the annual
percentage rate on the loan offer make by the bank?
After analysing the case scenario of grains Ltd it has been find out that interest rate
determined by Reserve Bank of Australia is 3% rate per annum (Han, Subrahmanyam and Zhou,
2017). Commercial bank borrows moony from the apex financial institution named as central bank
by paying interest on the cash as well as bank rate. Amount of loan taken by an entity from the bank
are required to pay additional interest rate of 1%. So, total debt burden imposed on the business
concern is 4% when they take loan from the banks.
Total interest on loan= 3%+1% that is in total 4% will be paid by an individual for taking money as
a loan from the banks.
It can be said that the standard limit of interest rate is 3% which is usually charged by every
bank but additional 1% charged by the commercial bank will goes into their profit account.
b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest is
discounted, should you accept this alternative.
PV@4% PV@2%
1 9600 0.961538 9230.769 0.980392 9411.765
2 9600 0.924556 8875.74 0.961169 9227.22
3 9600 0.888996 8534.365 0.942322 9046.294
26640.87 27685.28
Interpretations
Time value of money concept is utilised in order to predict the interest rates on two different
discounting rates that is one for 4% and another on 2%. It can be said that higher present value
generated through 2% discount rate that is 27685 in relation to another discounting rate of 4%
which have generated lower interest in the near future (Kanas and Karkalakos, 2017). It is important
to know the future outcomes generated by an entity on a particular interest rate as this will help
Reserve bank of Australia in order to make payment to the commercial bank. In the above case, the
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results shows that in higher rate of interest there is lesser future value of interest is generated in
comparison with the other rate of interest charged by the commercial banks by providing loan to all
the customers. Hence, as the values of above method higher rate of interest will be rejected and 2%
rate of interest will be charged on the bank loan in order to attract wide number of customers
towards the bank loan offered by the commercial banks.
PART B
a) Expected return on the portfolio
SHARE PERCENTAGE OF
PORTFOLIO BETA EXPECTED RETURN
HARVEY NORMAN
HOLDINGS LIMITED 20% 1 16%
NATIONAL
AUSTRALIA BANK
LTD
30% 0.85 14%
QANTAS AIRWAYS
LIMITED 15% 1.2 20%
ORIGIN ENERGY LTD 25% 0.6 12%
BHP BILLITON
LIMITED 10% 1.6 24%
Share
Expected portfolio return
HARVEY NORMAN HOLDINGS LIMITED 3.200%
NATIONAL AUSTRALIA BANK LTD
4.200%
QANTAS AIRWAYS LIMITED
3.000%
ORIGIN ENERGY LTD 3.000%
BHP BILLITON LIMITED 2.400%
15.800%
Interpretations
Higher expected portfolio return will generate higher outcome for an enterprise in the near
future as this increases returns generated on all the investments made by an entity in different
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things. It can be said that total 15.80% returns expected on the created portfolio by the Grains plus
Ltd. National Australia bank Ltd will be able to generate higher return up to 4.20% as this required
to be maintained in an entity for long time.
b) Calculation of portfolio beta
Share Portfolio beta
HARVEY NORMAN HOLDINGS LIMITED 0.158
NATIONAL AUSTRALIA BANK LTD
0.1343
QANTAS AIRWAYS LIMITED
0.1896
ORIGIN ENERGY LTD 0.0948
BHP BILLITON LIMITED 0.2528
0.8295
Interpretations
Beta is an important symbol used to evaluate all the investments on the basis of risks factors
as higher the value of beta higher will be the market risks faced by the investments in which an
entity applied investments (Kang, de Gracia and Ratti, 2017). The overall value of beta is 0.82
which is less than one that means there is stable kind of risk faced by an entity. Grains plus Ltd has
higher value of beta in BHP billon Ltd so they are required to monitor the progress of this
company’s share.
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c) Security market line
Interpretations
Security market line is a graphical presentation method used to reflect overall performance
of an entity in relation to two parameters such as market return and capital asset pricing model.
Grains plus Ltd invested in four different companies and taken their shares such as Harvey Norman
holdings Ltd, Qantas airways, National Australia bank ltd and origin energy Ltd (Han,
Subrahmanyam and Zhou, 2017). It can be observed from the above figure that market return from
all the companies remain stable but CAPM is fluctuating in nature.
(d) Winners and losers in security market line
The security line shows the situation of failure as there are no winners and all are losers
according to the profit or market returns generated by all the companies in which an entity has
invested certain amount of money.
(e) Consideration of conclusion to be less certain
It can be concluded that the performance of an entity is constantly changing due to higher
values of beta of all the companies in which grains Ltd have gained share. The performance of an
entity is decreasing over the periods due to higher market challenges.
Part C
Required rate of return on CAPM model
Newcrest and Orica are required to amend their CAPM model rate which has observed at the
value of -0.03 for Newcrest and 0.65 for Orica. He required rate of return determined by an entity to
earn profit at the rate of 0.33 for Newcrest and 10.08 for Orica.
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Valuation by using constant dividend growth model
Gordon’s model of dividend growth will be used by an entity in order to ascertain the value
of share which will generate higher outcomes in the near future. The computed fair value of shares
of Orica is 0.032 and Newcrest is 0.29. These values show that the current market value of all the
shares is overvalued as compare to the value of the market. This is the reason the market return of
all the companies is decreasing and the popularity of an enterprise is declining which needs to be
improved with the passage of time.
Performance of Orica and Newcrest
Interpretations
The above line chart is reflecting the fluctuating nature of all stocks of Newcrest which is
the reason behind its decreasing market performance. The share price of the companies is increasing
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by showing upward trend but this doesn’t maintain its consistency at the same position as t is
decreases in a particular time interval (Bollen, Mao and Zeng, 2011). Orica has suffered with the
negative returns around half times out of the total returns generated by other entities trading in the
same kind of market by applying their analytical skills and the capabilities. The performance of
Newcrest is not high but showing stableness that will improve overall performance of an entity in
the near future.
CONCLUSION
It can be concluded from the above assignment that performance of grains Ltd is declining
over the period which needs to be regulated in a particular time. The reason behind the declining
performance is higher values of beta that is higher market risks.
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REFERENCES
Books and Journals
Bollen, J., Mao, H. and Zeng, X., 2011. Twitter mood predicts the stock market. Journal of
computational science. 2(1). pp.1-8.
Han, B., Subrahmanyam, A. and Zhou, Y., 2017. The term structure of credit spreads, firm
fundamentals, and expected stock returns. Journal of Financial Economics.
Kang, W., de Gracia, F. P. and Ratti, R. A., 2017. Oil price shocks, policy uncertainty, and stock
returns of oil and gas corporations. Journal of International Money and Finance. 70. pp.344-
359.
Kanas, A. and Karkalakos, S., 2017. Equity flows, stock returns and exchange rates. International
Journal of Finance & Economics.
Online
Cash rate, 2017. [Online]. Available through :< http://www.rba.gov.au/statistics/cash-rate/>.
[Accessed on 16th April 2017].
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