Strategic Financial Management Project Report and Analysis

This report provides a comprehensive analysis of strategic financial management, focusing on investment decisions for Investhical. It begins with a memo detailing a ratio analysis of five different stocks—Sonic Healthcare, Woolworths, BHP Billiton, Boral Limited, and National Takaful—across profitability, asset efficiency, liquidity, market position, and capital structure. The analysis recommends investing in Sonic Healthcare, BHP Billiton, and National Takaful. The report further explores funding sources, differentiating between short-term options like bank overdrafts, customer advances, and commercial paper, and long-term options such as bank loans and borrowings, ultimately suggesting that Investhical utilize long-term loans and borrowings due to their lower cost of capital.

Running Head: Strategic Financial Management
1
Project Report: Strategic Financial Management

Strategic Financial Management 2
Contents
Task 1: Memo...................................................................................................................3
Task 2................................................................................................................................7
Introduction...................................................................................................................7
Source of funding.........................................................................................................7
Recommendation and conclusion...............................................................................11
Task 3..............................................................................................................................14
References.......................................................................................................................26
Appendix.........................................................................................................................28

Strategic Financial Management 3
Task 1: Memo
To,
Investhical CEO
48, New South Wales,
Australia.
Dear Sir,
Hope you are doing well!
It is always important for a business to measure and evaluate the stock performance and
position of financial activities of an organization before making an investment into the
company. As Investhical is looking for 3 stocks from different sector to make an investment,
5 different stocks from 5 different sectors have been collected and compared to reach over
best 3 best stocks. Sonic healthcare, Woolworths, BHP Billiton, Boral limited and National
Takaful’s stock have been considered to evaluate the investment and return positions of the
stock. In order to make an investment decision, ratio analysis study has been conducted over
all the 5 stocks and different key financial position such as profitability, asset efficiency,
liquidity, market position and capital structure has been calculated to reach over conclusion
about investment.
The profitability ratio analysis study explains that performance of Sonic health care, BHP
Billiton and National Takaful is better than Woolworths and Boral limited.
Ratio Calculations Sonic
Healthcar
e
Woolwort
hs
BHP Billiton Boral
Limited
National
Takaful
Profitability Ratios: 2018 2018 2018 2018 2018
Return on Capital
employed
Operating profit / 660,251 -9,291,000 14,751,000 210 92,706
Capital employed
(total assets - current
liabilities)
4,776,41
2
14,362,00
0
98,004,000 8,515 262,112
Answer: % 13.82% -64.69% 15.05% 2.47% 35.37%

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Return on assets
Net profit / 475,606 1,724,000 3,705,000 441 12,343
Total assets 8,200,93
4
23,558,00
0
111,993,000 9,510 399,815
Answer: 5.8% 7.3% 3.3% 4.6% 3.1%
Net profit margin %
Net profit / 475,606 1,724,000 3,705,000 441 12,343
Sales Revenue % 5,476,175 56,726,000 43,638,000 5,731 201,564
Answer: 8.7% 3.0% 8.5% 7.7% 6.1%
(Annual report, 2018)
Further, the asset efficiency ratio study explains that performance of Sonic health
care, Boral Limited and National Takaful is better than Woolworths and BHP Billiton.
Ratio Calculations Sonic
Healthcare
Woolworths BHP
Billiton
Boral
Limited
National
Takaful
Asset Efficiency Ratios 2018 2018 2018 2018 2018
Creditors turnover
days
Accounts payable/ 207,024 5,316,000 5,977,000 752 137,703
Cost of sales 918,211 40,256,000 10,916,000 3,829 108,858
Answer: (note the
above needs to be x
365)
#
days
0.23 0.13 0.55 0.20 1.26
Debtors Turnover
(days)
Average trade debtors / 716,101 420,000 3,096,000 876 240,320
Sales revenue (note
used operating revenue)
#
days
5,476,175 56,726,000 43,638,00
0
5,73
1
201,56
4
Answer: (note the
above needs to be x 365)
0.13 0.01 0.07 0.15 1.19
(Annual report, 2018)
More to it, study has been done on liquidity position of the stocks and found that performance
of Sonic health care, Boral Limited and National Takaful is better than Woolworths and BHP
Billiton.
Ratio Calculations Sonic
Healthcare
Woolworths BHP
Billiton
Boral
Limited
National
Takaful
Liquidity Ratios 2018 2018 2018 2018 2018

Strategic Financial Management 5
Current Ratio
Current Assets / 1,231,709 7,181,000 35,130,000 1,738 159,495
Current liabilities 867,863 9,196,000 13,989,00
0
99
5
138,22
7
Answer: 1.42 0.78 2.51 1.75 1.15
Quick ratio
Current Assets -
Inventory /
1,124,929 2,948,000 31,366,000 1,124 159,495
Current Liabilities 867,863 9,196,000 13,989,00
0
99
5
138,22
7
Answer: 1.30 0.32 2.24 1.13 1.15
(Annual report, 2018)
Capital structure study has been conducted further in order to measure the management of
solvency level. Study defines that Sonic health care, Boral Limited and BHP Billiton is better
than Woolworths and National Takaful.
Ratio Calculations Sonic
Healthcare
Woolworths BHP
Billiton
Boral
Limited
National
Takaful
Capital Structure Ratios 2018 2018 2018 2018 2018
Debt equity ratio
Total liabilities / 4,023,527 13,077,000 56,401,000 3,780 303,950
Total equity 4,177,407 10,481,000 55,592,000 5,731 95,865
Answer: % 0.96 1.25 1.01 0.66 3.17
Debt ratio
Total debt / 4,023,527 13,077,000 56,401,000 3,780 303,950
Total assets 8,200,934 23,558,000 111,993,000 9,510 399,815
Answer: % 0.49 0.56 0.50 0.40 0.76
Interest Coverage Ratio
EBIT / 660,251 -9,291,000 14,751,000 210 92,706
Net Finance Costs (used
net interest expense)
78,444 154,000 1,029,000 106 12,481
Answer: times
p.a
8.42 -60.33 14.34 1.98 7.43
(Annual report, 2018)
Lastly, market value ratios define that earnings per share of Sonic health care, Woolworths
and BHP Billiton is better in the market.

Strategic Financial Management 6
Ratio Calculations Sonic
Healthcare
Woolworths BHP
Billiton
Boral
Limited
National
Takaful
Market value
Ratios
2018 2018 2018 2018 2018
Earnings per share
Net income 475,606 1,724,000 3,705,000 441 12,343
Weighted average
shares outstanding
422,212 1,300,500 2,661,500 1,172 150,000
Answer: 1.13 1.33 1.39 0.38 0.08
(Annual report, 2018)
Hence, the study recommends Investhical to invest in Sonic Healthcare, BHP Billiton and
National Takaful to reduce the financial risk and maintain the return level for a long time.

Strategic Financial Management 7
Task 2:
Introduction:
Funds management is one of the crucial works of financial manager of an
organization. It is important for the manager to set the solvency position and reduce the risk
through raising the fund in such a way that all the short term and long term funds could be
paid off easily with the help of available resources in the market. In order to raise the funds
for short term and long term, bank loan, creditors, overdrafts, equity, debentures etc are the
main source (Zimmerman and Yahya-Zadeh, 2011). The report focuses on 3 companies Sonic
Healthcare, BHP Billiton and National Takaful to make an investment. In order to make
investment in these companies, Investhical would require £ 3,000,000 which would be raised
through taking the help of short term and long term capital sources. The main focus of the
report is on various funds which could be raised for short term and long term to meet the
demand of the company and maintain the solvency, liquidity and profitability position of the
company.
Source of funding:
Funding is a process in which financial resources are provided to the company in form
of money or other financial resources in order to finance the need, proposal, project or any
program in an organization. Mainly the source of funding is divided into 2 categories i.e.
short term funds and long term funds. Those funds which are generated by the company for
short term projects such as working capital, operation etc is called short term funds. Further,
those funds which are generated by the company for long term projects such as new
investment, property, plant and equipment, new project etc is called long term funds (Weil,
Schipper and Francis, 2013). Short term funds are generated by the company for the projects
or operations which would take place in less than 1 year whereas all those funds which are
generated for more than 1 year is called long term funds.
Short term funds:
Basically, a firm is required to raise the funds through short term sources to manage
the daily activities of the company and maintain the working capital level. Short term
obligations are met by the company through generating the short term funds. Overall short
term activities such as management of liquidity level, production cycle, enough funds etc are
managed through short term funds only (Horngren, 2009). In the report, few methods of short

Strategic Financial Management 8
term have been studied which could be used by Investhical to manage the performance and
production cycle of the company:
Bank overdraft:
It is one of the common sources of short term funds. Company could raise the funds
till an overdraft limit from the bank for short term to manage the operations and needs of the
company. Bank overdraft is quite easier way to generate the funds. However, overdraft
interest rate is higher and user is obligated to pay the funds in shorter time (Deegan, 2013). In
terms of Invethical case, this is not a good idea as company wants to generate the fund for
longer period.
Advance from customers:
It is mostly used source of short term funds. Company could raise the funds through
taking the online payment from the customers of the company (Edwards, 2013). Advanced
from customers is quite easier way to generate the funds as well as company is not required
to do any documentation. However, there is a risk of goodwill as well as liquidity position of
the company. In terms of Investhical case, this is not a good idea as company wants to
generate the fund for longer period.
Overdraft agreement:
Overdraft agreement is a source of short term funds. Company could raise the funds
through selling some overdraft agreement in the market. It is not required for the company to
be checked and evaluated for overdraft agreement. However, there is a risk of cash flow
fluctuations and outflow limit (DRURY, 2013). In terms of Investhical case, this is not a
good idea as company wants to generate the fund for longer period.
Treasury bills:
T-Bills are a source of short term funds. Company could raise the funds through
selling some T bills in the market. It is quite simple to sell and generate the funds. However,
there is a risk of cash flow fluctuations and liquidity position of the company. In terms of
Investhical case, this is not a good idea as company wants to generate the fund for longer
period.
Commercial paper:
Commercial paper is a source of short term funds. Company could raise the funds
through selling some commercial paper in the market. It is quite simple to sell and generate

Strategic Financial Management 9
the funds. However, there is a risk of cash flow fluctuations and liquidity position of the
company. In terms of Investhical case, this is not a good idea as company wants to generate
the fund for longer period.
Long term funds:
Basically, a firm is required to raise the funds through long term sources to manage
the long term activities of the company and maintain the funds for long term projects. Long
term obligations are met by the company through generating the long term funds. Overall
long term activities such as investment into fixed assets, new projects etc are managed
through long term funds only (Deegna, 2012). In the report, few methods of long term have
been studied which could be used by Investhical to manage the funds for long term:
Long term loan:
It is one of the common sources of long term funds. Company could raise the funds
through raking long term loans from bank for long time to manage the various new long term
projects and long term sustainability of the business. Loan from bank is quite easier way to
generate the funds as only credit history and financial statement of the company are checked.
However, it is important for the company to repay the loans in the given time along with the
higher interest. In terms of Invethical case, this is a good idea as currently the cost of capital
of the bank loan of the company is 0.07%. It explains that the funds would be managed by
the company in lower cost.
Cost of bank loan:
Net finance cost 55.00
Less: Tax @35% 19.25
After tax cost of debt 35.75
Bank loan amount 1,585.00
After tax cost of bank loan
(%) 2.26%
(Deegan, 2012)
Borrowings:
It is one of the common sources of long term funds. Company could raise the funds
through taking borrowings from the market or any financial institution on the basis of credit
rating and fund payment system of the company. Borrowings are quite easier way to generate

Strategic Financial Management 10
the funds as only credit history and financial statement of the company are checked.
However, it is important for the company to repay the loans in the given time along with the
higher interest. In terms of Invethical case, this is a good idea as currently the cost of capital
of the borrowings of the company is 0.07% (Ward, 2012). It explains that the funds would be
managed by the company in lower cost.
Cost of borrowings:
Net finance cost 85.00
Less: Tax @35% 29.75
After tax cost of debt 55.25
Borrowings amount 2,125.00
After tax cost of borrowings
(%) 2.60%
Debts:
Debt is the most used and common source of long term funds. Company could raise
the funds through issuing the debentures in the market. Debentures are quite easier way to
generate the funds as only available resources and overall financial and credit position of the
company is checked by the agencies and capital market. However, it is important for the
company to repay the debt payment in the given time along with the higher interest. In terms
of Invethical case, this is a good idea as currently the cost of capital of the borrowings of the
company is 0.07% (Lord, 2007). It explains that the funds would be managed by the
company in lower cost.
Cost of debt:
Net finance cost 167.00
Less: Tax @35% 58.45
After tax cost of debt 108.55
Borrowings amount 165,723.00
After tax cost of debt (%) 0.07%
Equity and Retained earnings:

Strategic Financial Management 11
Lastly, owner’s equity, retained earnings and equity funds are the long term funds
which are managed by every organization. Company could raise the funds through issuing the
shares in the market, retain some amount from net profit generated and owners could invest
the fund for long term betterment of the company. Equity is quite easier way to generate the
funds as no tough documentation is required (Schwartz, 2017). However, it impacts over the
solvency and capital structure level of the company. In terms of Invethical case, this is a good
idea as currently the cost of equity of the company is 3.33%. It explains that the funds would
be managed by the company in lower cost.
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 8%
C. Beta 0.11
D. CAPM 3.33%
Recommendation and conclusion:
The overall study over Investhical explains that Investhical requires £ 3,000,000 to
make an investment in Sonic Healthcare, BHP Billiton and National Takaful. Currently,
company owns £ 2,000,000 and additional funds of £ 1,000,000 is required to make the
investment. Various available resources in the market for the company has been studied and
on the basis of study, it has been concluded that short tern funds are not feasible for this case
as it would raise the funds for short tern only and company requires fund for long term
project. Further, it has been identified that cost of debt, cost of borrowings, cost of bank loan
and cost of equity of the company is 0.07%, 2.60%, 2.26% and 3.33%.
Through the investigation, it has been concluded that it is best for the company to
raise £ 6,00,000 through equity and £ 4,00,000 through debt to manage the solvency level,
capital risk and other financial risk of the company. Through study, it has been recognized
that below are the market share, cost of debt, cost of equity and total cost of capital of the
company:
Book Value Weights
Debt Equity Total
Equity shares
£
600,000
Value of debt (short term £

Strategic Financial Management 12
borrowings+ long term
borrowings) 400,000
Total
£
400,000
£
600,000
£
1,000,000
D. Weights 40.00% 60.00%
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 8%
C. Beta 0.11
D. CAPM 3.33%
Cost of debt:
Net finance cost 167.00
Less: Tax @35% 58.45
After tax cost of debt 108.55
Borrowings amount 165,723.00
After tax cost of debt (%) 0.07%
Debt
Ordinary
Shares Total
Cost of
Finance 0.07% 3.33%
Market
Weights 0.40 0.60
WACC 0.03% 2.00% 2.02%
WACC of company is 2.02%. It explains that if the company invest into equity and
debt in the ratio of 60:40 then the total cost of the company would be 2.02% and more than
2.02% could be earn by the company easily through investing in the Sonic Healthcare, BHP
Billiton and National Takaful. The return from all the three companies is as follows:
Sonic Healthcare
Cost of Equity: CAPM model
A. Risk free rate 2.75%