MBS546 Business Finance: Cash Flow & Valuation of Domino's Pizza

This report provides a comprehensive financial analysis of Domino's Pizza Enterprises Ltd, focusing on its cash flow position, financial performance, and stock valuation. It evaluates the company's operating system, dividend valuation using the discounted dividend model (DDM), and changes in share prices relative to the AORD index. The analysis reveals significant growth in net profit, revenue, assets, and cash flow from operating, investing, and financing activities between 2006-07 and 2016-17. The report concludes with a recommendation based on the company's strong financial position and market performance. The DDM calculation suggests a fair stock price, and the cash flow analysis indicates a substantial increase in cash levels. The report also touches upon the demand and supply dynamics influencing Domino's Pizza's profitability.

Running Head: Business Finance
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Project Report: Business Finance

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Contents
Introduction.......................................................................................................................3
Company description........................................................................................................3
Purpose of Financial statement analysis...........................................................................3
Firm’s current operating system.......................................................................................4
Dividend valuation............................................................................................................6
Changes into share prices.................................................................................................8
Cash flow analysis............................................................................................................8
Investment and financial strategy for cash flow position.................................................9
Recommendation............................................................................................................10
References.......................................................................................................................11
Appendix.........................................................................................................................12

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Introduction:
This report has been prepared to evaluate the financial performance, cash flow
position, financial position, profitability, stock price etc of the company. Mainly this report
would offer a detail about the cash flow situation of the company and it would also provide
details about the betterment of cash flow position of the company. And it would also brief the
organization about the investment opportunity of the company.
For preparing this recommendation report about investment opportunity and cash flow
analysis of the company, financial statement of the company has been analyzed firstly. Then,
the study has been done on dividends of the company, operating system of the company etc
to evaluate the current market position and internal position of the company. In addition, the
study has been done on stock price of the company to evaluate the changes into the market
worth of the company and lastly, through evaluating the cash flow analysis of the company,
recommendation has been given.
Company description:
Domino’s Pizza Enterprises Ltd is one of the biggest pizza chains in the Australian
market in terms of largest franchise, network sales, network store numbers etc. the company
is working under food retail industry. It has been founded in 1983 at Springwood,
Queensland, Australia. The revenue of the company is Australian dollar 790.866 million in
2016-17. Currently, the company is operating its business in various countries such as France,
New Zealand, Australia, Japan, principality of Monaco1. Currently, 1900 stores are owned by
the company and 26000 people are employed by the company. According to a report, in May,
2005, Domino’s Pizza Enterprises Ltd was the first pizza company who has listed in the
Australian stock exchange2.
Purpose of Financial statement analysis:
1 Home, 2018, DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018,
https://www.dominos.com.au/
2 AFR, 2018, DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018,
http://www.afr.com/markets/australian-fund-managers-reveal-best-long-and-short-ideas-for-
2018-20180104-h0dl94

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Financial statements are prepared by the companies to offer the information about
operations reult, cash flow osition and financial position of the company. The information of
the financial statement is used to make decision about the position and the reallocation of the
resources of the company. Financial statement analysis is the procedure to evaluate and
analyze the financial statement of an organization3.
The main purpose of financial statement analysis is to evaluate the current and past
financial data of the company so that the financial position, cash flow position and
profitability level of the company could be evaluated easily and the potential risk of the
company could be estimated4. Further, the financial statement analysis could yield the
valuable information about relationship and trends, strength and weakness of financial
position, company’s earnings, quality of the company etc.
Mainly this process starts with establishing and managing the objectives of financial
analysis. Such as, is this analysis is conducted to evaluate the cash position and investment
opportunity of the company? After establishing the objectives, data of the financial statement
is accumulated from the annual reports or any other source. Further, the results of the
financial analysis is summarized, analyzed and interrupted. And thus, the conclusions could
be made by the financial analyst5.
In this report, the process of financial statement analysis is undertaken to evaluate
about the relationship and trends, supplies and demands, strength and weakness of financial
position, company’s earnings, dividends of the company, stock price of the company etc so
that a recommendation report could be prepared about the investment opportunity and cash
flow position of the company.
Firm’s current operating system:
3 Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-
Hill. Peirson,
4 Viney, C., 2009. McGrath’s Financial Institutions, Instruments and Markets, 6th edition,
McGrawHill, Australia.
5 Pike, R. And B. Neale, 2009, Corporate Finance and Investment: Decisions and Strategies,
6th edition, Financial Times Prentice Hall, Limited.

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The income statement, cash flow statement and the balance sheet are the main
statement of the company which explains about the financial performance and the position of
the company. The income statement of the company explains that the current net profit of the
company is $ 12,61,47,000 whereas the net profit of the company was $ 91,29,000 in 2006-
07. It explains that the total net profit of the company has been enhanced by 1281.83% which
explains that the company has achieved a great growth in last 11 years. The total revenue of
the company has also been enhanced by 368.15%. It explains that the profitability level of the
company is bit higher6.
Further, the balance sheet of the company has been evaluated. Balance sheet is a
Performa which explains about all the assets and liabilities of the company whether they are
current or noncurrent. The balance sheet of Domino’s Pizza Enterprises Ltd has been
evaluated and it has been found that the current assets of the company has been enhanced by
316.27 from 2006-07 to 2016-17. It explains that the company has achieved great increment.
Further. It has been found that the total assets of the company has been enhanced by 760.89%
from 2006-07 to 2016-17. On the other hand, it has been found that the total liabilities and
total stockholder’s equity of the company has been enhanced by 1013.97% and 518.08%
from 2006-07 to 2016-17. The above evaluation explains about the great performance and the
position of the company7. Further, it explains that the business and the operations of the
company have been enhanced and due to it, the company has enhanced the level of the
resources.
In addition, the cash flow statement of the company has been evaluated. Cash flow
statement is a Performa which explains about all the cash inflows and cash outflows of the
company whether they are operating cash flow, investing cash flow or financing cash flow.
The cash flow statement of Domino’s Pizza Enterprises Ltd has been evaluated and it has
been found that the cash flow from operating activities of the company has been enhanced by
1804.66% from 2006-07 to 2016-178. It explains that cash level of the company has been
6 Home, 2018. Australian Stock Exchange. viewed Feb 05, 2018, http://www.asx.com/
7 Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-
Hill. Peirson,
8 AFMA, 2018. AFMA Policy. viewed Feb 05, 2018, https://afma.com.au/

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increased a lot. Further, it has been found that the total cash flow from investing activities of
the company has been enhanced by 283.62% from 2006-07 to 2016-17. On the other hand, it
has been found that the total cash flow from financing activities and total cash flow of the
company has been enhanced by 1113.77% and 541.75% from 2006-07 to 2016-17. The above
evaluation explains about the great performance and the position of the company. Further, it
explains that the business and the operations of the company have been enhanced and due to
it, the company has enhanced the level of the cash to manage the activities and position of the
company.
Lastly, the demand and supply of the company has been evaluated to identify the
performance of the company. It has been evaluated that the demand of the company has been
enhanced and the company has tried to meet all the demand of the customers. The report
explains that the pizza demand has been increased on greater basis and Dominos has grabbed
this opportunity and thus the profit of the company has been enhanced9. Further, it has been
found that the price elasticity demand of the company is elastic as the sales of the company
have been enhanced by 45% but the price has been decreased only by 18%10.
Dividend valuation:
Dividend valuation is an important step to evaluate the performance and the position
of the company. For evaluating the dividend of the company, discounted dividend valuation
model has been used. This model takes the concern of dividend, growth, required rate of
return etc and assists the company to make a better decision about the performance of the
company. The dividend valuation model of the company briefs that the financial position and
the market position of the company is quite strong11. It is performing well in the market and
the current situation of the company explains that the value of the stock of the company
should be $ 71.49%. Following is the calculations of DDM of the company:
Currenc Franked Dividend Ex Books Close Pay Date Note Growth
9 ATO, 2018. Australian taxation office. viewed Feb 05, 2018, http://www.ato.go.au/
10 G., Brown, R., Easton, S., Howard, P., and S. Pinder. 2012. Business Finance, 12 th
edition. Mc-GrawHill, Australia.
11 Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-
Hill. Peirson,

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y % Date Date rate
AUD 50.00 21/08/2017 22/08/2017 06/09/201
7
-- 15.72%
AUD 50.00 21/02/2017 22/02/2017 09/03/201
7
--
AUD 70.00 22/08/2016 23/08/2016 07/09/201
6
-- 42.65%
AUD 70.00 25/02/2016 29/02/2016 15/03/201
6
--
AUD 100.00 21/08/2015 25/08/2015 11/09/201
5
-- 43.16%
AUD 100.00 19/02/2015 23/02/2015 10/03/201
5
--
AUD 100.00 22/08/2014 26/08/2014 12/09/201
4
-- 23.38%
AUD 100.00 18/02/2014 24/02/2014 11/03/201
4
--
AUD 100.00 21/08/2013 27/08/2013 13/09/201
3
-- -0.65%
AUD 0.00 03/06/2013 07/06/2013 21/06/201
3
--
AUD 100.00 19/02/2013 25/02/2013 12/03/201
3
-- 9.93%
AUD 0.00 03/12/2012 07/12/2012 21/12/201
2
--
AUD 100.00 22/08/2012 28/08/2012 14/09/201
2
-- 22.61%
AUD 100.00 21/02/2012 27/02/2012 12/03/201
2
--
AUD 100.00 24/08/2011 30/08/2011 15/09/201
1
-- -2.54%
AUD 100.00 22/02/2011 28/02/2011 14/03/201
1
--
AUD 100.00 24/08/2010 30/08/2010 15/09/201
0
-- 47.50%
AUD 100.00 23/02/2010 01/03/2010 15/03/201
0
--
AUD 100.00 01/09/2009 07/09/2009 21/09/200
9
-- 17.65%
AUD 100.00 24/02/2009 02/03/2009 20/03/200
9
--
AUD 100.00 02/09/2008 08/09/2008 26/09/200
8
-- 0.00%
AUD 100.00 26/02/2008 03/03/2008 28/03/200
8
--
AUD 100.00 04/09/2007 10/09/2007 28/09/200
7
-- 0.00%
AUD 100.00 27/02/2007 05/03/2007 23/03/200
7
--
AUD 100.00 05/09/2006 11/09/2006 29/09/200
6
-- 871.43%

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Calculation of cost of equity (CAPM)
RF 4.00%
RM 6.00%
Beta 0.928
Required rate of return 5.86%12
It explains that the current stock price of the company should be $ 79.16 which
explains that the performance of the company is good.
Changes into share prices:
Further, the changes into the stock price of the company has been evaluated on the
basis of stock price of AORD and it has been found that the position of the company is quite
different and stable than the stock price of AORD. Further, it has been found that the position
of the company and market capital of the company has not been fluctuated more in last 4
years. The correlation of the stock of both the companies is also lower and explains that the
stock price of DMP is not driven by the AORD.
Figure 1: stock price13
12 Index, 2018. NYSE. viewed Feb 05, 2018, https://www.nyse.com/index

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Cash flow analysis:
According to the above analysis on dividend, stock price and changes into the cash
flow of the company, it has been found that the cash flow position of the company has been
way better. The performance and the ratio analysis on cash flow statement explains that the
cash flow from operating activities of the company has been enhanced by 1804.66% from
2006-07 to 2016-17. It explains that cash level of the company has been increased a lot14.
Further, it has been found that the total cash flow from investing activities of the company
has been enhanced by 283.62% from 2006-07 to 2016-17. On the other hand, it has been
found that the total cash flow from financing activities and total cash flow of the company
has been enhanced by 1113.77% and 541.75% from 2006-07 to 2016-17. The above
evaluation explains about the great performance and the position of the company. Further, it
explains that the business and the operations of the company have been enhanced and due to
it, the company has enhanced the level of the cash to manage the activities and position of the
company15.
Investment and financial strategy for cash flow position:
Thus the above evaluation explains that the current position of the company is way
good in the industry. The financial performance, position, stock price, share valuation,
dividend valuation etc explains that the stock price of the company has been better. Further, it
explains that the company should invest its amount into diversification strategies so that the
more market and opportunities could be grabbed by the market and the financial performance
of the company could be better16.
13 ASIC, 2018. Australian securities and investment commission. viewed Feb 05, 2018,
http://www.asic.gov.au/
14 AFR, 2018, DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018, http://www.afr.com/markets/australian-
fund-managers-reveal-best-long-and-short-ideas-for-2018-20180104-h0dl94
15 ATO, 2018. Australian taxation office. viewed Feb 05, 2018, http://www.ato.go.au/
16 APRA, 2018. Australian Prudential Regulation Authority. viewed Feb 05, 2018,
http://www.apra.gov.au/Pages/default.aspx

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More, it explains that the company should evaluate the investment in the market and
must invest into these companies on the basis of its WACC. The current WACC of the
company is 4.85% which explains that the IRR of the project should be more than 4.85%.
Calculation of WACC
Price Cost Weight WACC
Debt 31,13,30,000 3.50% 0.428 0.015000881
Equity 41,50,64,000 5.86% 0.571 0.033461383
72,63,94,000 Kd 4.85%17
Calculation of cost of debt
Outstanding debt 31,13,30,000
interest rate 5.00%
Tax rate 30.0%18
Kd 3.50%
Calculation of cost of equity
(CAPM)
RF 4.00%
RM 6.00%
Beta 0.928
Required rate of
return 5.86%
Recommendation:
Lastly, the recommendation has been given to the shareholders of the company to
maximize the performance and the wealth. Through the analysis on the company, it is
recommended to the stockholder of the company that they would make an investment into the
current situation of the company. Currently, the stock of the company is undervalued and if
17 Pike, R. And B. Neale, 2009, Corporate Finance and Investment: Decisions and Strategies,
6th edition, Financial Times Prentice Hall, Limited.
18 AFMA, 2018. AFMA Policy. viewed Feb 05, 2018, https://afma.com.au/

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the investment is done right now than it would offer long term as well as short term profits to
the investors of the company.

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References:
AFMA, 2018. AFMA Policy. viewed Feb 05, 2018, https://afma.com.au/
AFR, 2018, DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018,
http://www.afr.com/markets/australian-fund-managers-reveal-best-long-and-short-ideas-for-
2018-20180104-h0dl94
APRA, 2018. Australian Prudential Regulation Authority. viewed Feb 05, 2018,
http://www.apra.gov.au/Pages/default.aspx
ASIC, 2018. Australian securities and investment commission. viewed Feb 05, 2018,
http://www.asic.gov.au/
ATO, 2018. Australian taxation office. viewed Feb 05, 2018, http://www.ato.go.au/
G., Brown, R., Easton, S., Howard, P., and S. Pinder. 2012. Business Finance, 12 th edition.
Mc-GrawHill, Australia.
Home, 2018, DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018,
https://www.dominos.com.au/
Home, 2018. Australian Stock Exchange. viewed Feb 05, 2018, http://www.asx.com/
Index, 2018. NYSE. viewed Feb 05, 2018, https://www.nyse.com/index
London stock exchange, 2018. DOMINO'S PIZZA GROUP PLC. viewed Feb 05, 2018,
http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/
company-summary/GB00BYN59130GBGBXSTMM.html?lang=en
Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-
Hill. Peirson,
Pike, R. And B. Neale, 2009, Corporate Finance and Investment: Decisions and Strategies,
6th edition, Financial Times Prentice Hall, Limited.
Viney, C., 2009. McGrath’s Financial Institutions, Instruments and Markets, 6th edition,
McGrawHill, Australia.