Investment Analysis and Advice for Wealthy Investors (FAR Limited)

This report provides financial advice to wealthy investors, focusing on FAR Limited, an Australian oil and gas exploration company. It begins with an executive summary and introduction, followed by a company description, including its history, activities, and ownership structure. The report analyzes substantial shareholders and the composition of the company's governance. It delves into accounting ratios, share price analysis, and the impact of events on share prices, along with beta value calculations and expected rates of return. Furthermore, the report examines the debt ratio and dividend policy. The analysis concludes with a recommendation letter for investors, referencing the provided annual reports and relevant financial data. The report emphasizes the importance of understanding financial statements, non-financial facts, and dividend policies when making investment decisions, particularly for potential investors. It highlights key financial metrics and their implications for investment strategies.

ADVICE FOR WEALTHY INVESTOR
Student Name: Student ID:
5/22/2018
FAR Limited

Contents
EXECUTIVE SUMMARY.................................................................................................................................3
INTRODUCTION...........................................................................................................................................4
COMPANY’S DESCRIPTION...........................................................................................................................5
IDENTIFICATION OF STRUCTURE FOR OWNERSHIP GOVERNANCE.............................................................5
MAJOR AND SUBSTANTIAL SHAREHOLDERS............................................................................................6
COMPOSITION OF GOVERNANCE............................................................................................................6
ACCOUNTING RATIOS AND ITS ANALYSIS....................................................................................................7
ANALYSIS OF SHARE PRICES.........................................................................................................................9
EVENT IMPACT ON THE SHARE PRICE..........................................................................................................9
CALACULATION OF BETA VALUES AND EXPECTED RATE OF RETURN..........................................................9
MAJOR ACCOUNTING RATIO – DEBT RATIO..............................................................................................11
DIVIDEND PAYMENT AND ITS POLICY ANALYSIS........................................................................................11
CONCLUSION.............................................................................................................................................11
RECOMMENDATION LETTER.....................................................................................................................12
REFERENCES..............................................................................................................................................12
EXECUTIVE SUMMARY
The company shall present its annual report in such a, manner that even the common lay man can
understand the financial position and the financial performance of the company and an take the

decision thereon. This report entails the details of the company not only the basis of the annual
report only but also have the historical data through which the worth of the company has been
analysed in detail. The report has been framed with the four major purposes. The first and main
purpose is to give the recommendation to the investors including the potential investors of the
company as to whether they should make the investment in the company or not. For the
achievement of the first purpose, the second purpose of the report has been laid down. It is to
analyze the financial statements of the company with the different accounting ratios as applicable
and interpreting the results thereon about the company. The third major aim of the report is to
consider the non financial facts so as to provide the detailed information to the investors. The
non financial fact includes the composition of the board and what types of the activities are being
carried out by the company. The last major purpose of this report analyze the dividend policy of
the company with regard to the financial performance of the company as to whether the company
is regular in paying the dividends and that too with the irrespective basis of the profits earned by
the company. The report containing the recommendation has thus been presented and has been
divided into different headings and sub headings so as to enable the investors to take useful and
meaningful decision.

INTRODUCTION
As the title of the report is Advice for wealthy investor, this report has been basically envisaged
for the investors of the company and that too includes the investors who are not the real investors
of the company as on date but will become in future and is known by the name of the potential
investors. For the purpose of the preparation of this report, the company that has been made
available is FAR Limited, an Australian registered company. The annual report for the financial
year ending 2017 and 2016 has been considered. The report has been started with the detail of
the description of the company including the history and its main activities. Along with the
description the owner ship and the structure of the governance has been described with respect to
the shareholders who are substantial and the composition of the governance of the company.
After that the detailed analysis has been made for the accounting ratios of the company and how
the same has helped in interpreting the results for the investors of the company. Then the factors
have been discussed with respect to the share price of the company and the same has been
presented in the excel sheet with the graphs. Also the calculations has been made of the
important factors which are relevant for determining the weighted average cost of capital which
is required for the next section. Apart from the accounting ratio, one ratio – debt ratio has been
analysed in detail with regard to whether the company is having the adequate capital structure or
any improvement is required. Thereafter the policy adopted by the company for the declaration
of dividend has been detailed. The report has then concluded and ended with the due and proper
recommendation to the investors.

COMPANY’S DESCRIPTION
The company – FAR Limited has been made available for the completion of the report. The
company has been founded in the year of nineteen hundred and eighty four with the name of
First Australian Resources NL and then the company became a listed entity in the year of
nineteen hundred and eight five and in the year of two thousand and ten, the company name has
been changed from the First Australian Resources NL to FAR Limited. Its headquarters are
based in the Melbourne, Australia. It is the listed company in the Australia Stock exchange. The
company’s operations are mainly focused in the area of Africa and are engaged in the activity of
exploration of oil and gas and develop the high value assets in West and East Africa. In the area
of West Africa, the company has the licenses and that too in good portfolio in Senegal and
Guinea Bissau. In the area of East Africa, the company has the province of gas in Kenya and has
the emerging oil acreage. The company has made two off shore discoveries commonly known as
FAN 1 and SNE 1 in Senegal and which in turn has led the wave of growth in the company and
on the other hand has lowered down the importance of the leases operating at the West Africa.
Out of the above two discoveries, SNE 1 has been regarded as the number one discovery of the
World in the year of two thousand and fourteen (FAR Limited, 2017).
The main mission of the company is to work in accordance with the requirements of the
stakeholders of the company so as to provide the growth to them. Along with the working, the
company also aims at providing the rewards to the stakeholders so as have the investment from
the stakeholders of the company including the potential investors (FAR Limited, 2017).
The picture of the company has been depicted from the very first instance when in the year of its
inception the name of the company has been the First Australian Resources NL and thus has
helped in analyzing the working of the company which has been related to the exploration of oil
and gas.
IDENTIFICATION OF STRUCTURE FOR OWNERSHIP GOVERNANCE
This part of the report deals with the structure of the organization with regards to the persons
who are concerned with the management of the overall functions of the company. Thus, the
ownership governance is the two words which are required to explain the composition and the

function of the persons who are charged with the governance of the company. The composition
of the governing members of the company shall be defined with the due care and the members
thereon shall be of specific ground and shall have the requisite experience in the particular fields.
Many companies in the last decade has been collapsed only because of the improper functioning
of the persons who are charged with the governance and has started taking out the benefits of the
company for their own instead of providing the benefits to the stakeholders of the company. It
includes Lehman Brothers and HIH Insurance and many others (Zimmerman, 2015). The
structure includes the shareholders of the company and majorly who have the shares in value of
more than twenty percent and the chairman and the other directors who have the specific place in
the governance of the company.
MAJOR AND SUBSTANTIAL SHAREHOLDERS
The shareholders of the company who owns the share in value of more than twenty percent are
declared as the substantial shareholders as they carry the substantial rights in the voting. These
rights entitle them to have the active involvement in the voting for passing of the resolution and
accordingly are of the high significance. Following are the shareholders which have been
categorized as the substantial:
 Meridian Asset Management
 Farjoy Pty Limited
 FIL Limited (FAR Limited, 2017)
On analyzing the shareholding pattern and the other details of the annual report it has been
observed that the company is purely a separate entity and distinct from its owners.
COMPOSITION OF GOVERNANCE
The composition of the governance has been mentioned in the following manner:
- Catherine Norman – Managing Director
- Peter Thiessen – Chief Financial Officer
- Benedict James Murrey Clube – Chief Operating Officer

- Michael Cowie – General Counsel
- Peter John Nicholas – Exploration Manager
The surnames of each of the member does not in any manner reconciles with the name of the
substantial shareholders of the company.
Also the shareholder having more than 5% shares is not involved in the governance team.
Therefore, the company selected is not the family member company.
ACCOUNTING RATIOS AND ITS ANALYSIS
The accountings ratios have been calculated in the separate sheet and the analysis have been
made as under (Horngren, 2012). The ratios for the past two years have been calculated ending
with 2017 and 2016.
- As the company is incurring the losses, the profitability ratios have served no purpose in
deciding the investment decision. It is because all the ratios are in negative.
- The short term solvency ratio is higher than the industry standard and is moving to the
tune of 5.44 in terms of the current ratio.
- As the company does not have any debts, the long term solvency are totally depends upon
the loss incurred by the company.
- Market value ratio is also negative in terms of earnings per share as there is the loss from
the continuing operations from the last three years.
ANALYSIS OF SHARE PRICES
The company’s share price has been one of the biggest factor through which each and every
investor is require to rely on the same. It is because it’s only the share price on the basis of which
the investors invest the amount in the company. As per the historical data for the last prices of
the share prices along with the graph thereon it has been observed that the share price has been
on the increasing stage but has not been increased in accordance with the industry increments.
The share price has been ranging from 0.02 to 0.09 and it has been checked that the share price
has been changed very frequently but on the lower pace due to which the investment in the
company is very less of the investors.

EVENT IMPACT ON THE SHARE PRICE
The loss that the company has been incurring over the last three years has created the significant
impact on the share price of the company. The company is the loss making company and has not
even declaring the dividend and therefore has not be in the position to have the various investors
for investment and thus is regarded as the significant event for the company (Premnath, 2012).
CALACULATION OF BETA VALUES AND EXPECTED RATE OF RETURN
The calculation of coefficient of Beta has been incorporated in the separate excel sheet and
accordingly the value has been 1.0004.
As per the CAPM Model,
Required Rate of Return = Rf + β (Rm – Rf) = 4% + 1.0004(6% - 4%) = 4% + 2.0008 =
6.0008%
No the selected company cannot be said to be the conservative investment. It is because the
investor has not been able to receive the dividend as the company is incurring losses and also the
company has disclosed that no divided has been declared and paid.
The weighted average cost of capital has been calculated below:
WACC = {Equity / Total value X Cost of Equity} + {Debt / Total value X Cost of Debt) X (1 –
Tax Rate)}
Cost of Equity = 171587571 /171587571 X 6.0008%= 6.0008 %
Cost of Debt = 0 /171587571 = NIL% and After tax Cost of Debt NIL.
Heads Amount W C WACC
Equity 171587571 1.00 6.0008% 6.0008

Debts 0 0.00 0.00% 0.00
Total 1410082 6.0008
WACC = 6.008% and hence the present value of the cash flows will be assessed using this cost
only.
As it is equal to the required rate of return, effect will be nil.
In case WACC is higher than the other related costs will also be covered and thus generates the
higher revenue.
MAJOR ACCOUNTING RATIO – DEBT RATIO
In accordance with the annual report of the company, the company does not have any borrowings
which are long term in nature and therefore under the head of the noncurrent liabilities only one
head is reflecting by the name of the provisions and accordingly the company has zero debt.
Debt ratio states that the higher the ratio, lower the company will have the chance in committing
the defaults in repayment. In this manner as the company does not have the debt the ability of the
company to have the loan and repay the same will be low and therefore the debt ratio interprets
that the company is not in a good position for running in future (Kaviyani, 2011). The company
will also not receive the loans and borrowings from the financial institutions and the banks and
accordingly the company shall change its strategy so as to have the better debt equity ratio.
DIVIDEND PAYMENT AND ITS POLICY ANALYSIS
As per the annual report of the company for the year ending two thousand and seventeen, the
company has not stated any policy for the dividend. Only under the dividend section of the
boards report, it has been mentioned that the company has neither paid any dividend during the
year nor have declared any dividend during the year. The main reason for such declaration is that

the company is having the losses since the year of 2013 and since then the company is not in the
position to pay the dividend and therefore has neither declared nor paid the same.
CONCLUSION
FAR limited is the company which can be said as the loss making company. The report has
provided all the details in relation to the financial statements of the company with respect to the
different ratios. These ratios has described the performance of the company and it declares that
the condition of the company is not good as per the current scenario and may be closed in any
day as the company is incurring losses and thereby affecting the earnings per share. Along with
the ratios and the description of the losses, the report has also thrown the light of governance
structure which has explained as to how the affairs and the functions of the company is being
managed and has provided the necessary calculations which have detailed the cost of capital in
weighted terms and the analysis thereon.
To conclude, the report has provided the actual position and performance and therefore the
investor should act rationally.
RECOMMENDATION LETTER
The analysis that has been included in the report has detailed the company’s operation level and
the management level to the great extent. The report has not only covered the analysis of the
financial figures as reported by the company in their financial statements but also have explained
as to how the company is functioning in terms of the description of the activities, policy of
dividend and etc.
It has been noticed that the company has incurring the losses from its continuing operations and
in total also from the last five years beginning from the year of 2013 and the revenue has been
seen fluctuating but has not been able to generate the revenue which can set off the expenditure
in future years rather the loss is being accumulated at the end of each year and thus in turn
depleting the equity of the company. Also the company has not been paying any dividend to their
present shareholders.
Therefore, having such situation of the company, it is not advisable to invest in the company in
the belief that there will be profits in future and thus there will be higher returns from the

investment. This advice shall be followed till the company does not implement the strategy to
improve the business so as to reduce the losses and convert the company into profit making
entity.
REFERENCES
Horngren, C. T, (2012), ”Introduction to Management Accounting”, Chapters 1-17. Prentice
Hall.
Kaviyani M, (2011), “A Theory to Analysis of Annual Report ”, Research Journal of Finance
and Accounting, Vol 10, No. 15, pg 192-202
Premnath S, (2012), “Analysis of the Financial Statements”, International Journal of
Accounting and Finance, Vol20, Issue 17, pp 24-42.
FAR Limited, (2017), “Annual Report 2017”, available on http://www.far.com.au/ accessed on
17-05-2018.
Zimmerman, (2015), “Accounting for Managers” Issues in Accounting Education, 35, 77-99.