Financial Analysis and Business Decision Making

Assignment overview You have been randomly assigned two ASX listed companies (Company A and Company B). [See the file “Companies allocated to students” under the Assessment tab on Blackboard to find your companies.] Obtain each of your company’s annual reports for the 2015 and 2016 financial years from the company’s website or www.asx.com.au. The annual reports contain the chairperson’s report, directors’ report and financial statements (Balance Sheet, Income Statement, Statement of Cash Flows and notes to the accounts) as well as a Corporate Governance Statement. The financial statements include comparative figures from the prior year therefore you will have data for three financial years: 2014 (except Orion Health Group (OHE)), 2015 and 2016. Research the financial press and other sources of available information to familiarise yourself with the industry in which your allocated companies operate and with company specific factors that may have or will effect either company’s performance. Two business scenarios for Company A and Company B are described below. Scenario 1 relates to Company A only and Scenario 2 involves Company B only. Knowledge of the industry, company specific context and certain financial data will be important inputs for your recommendation in Scenario 1 and your research on Corporate Governance plus a review of Company B will assist in the preparation of your business memorandum in Scenario 2. Scenario 1 Company A has submitted an application to the Bestfunds Bank for a loan. The amount of the loan is equal to 35% of total shareholders’ equity at the end of the 2016 financial year. The purpose of the loan is to fund expansion of Company A’s operating capacity. The loan term sought is 10 years and the loan would be secured against company property. Assume you are a branch lending officer for Bestfunds Bank who assesses loan applications. The lending officer must make a recommendation to the head office lending manager advising whether the loan application from Company A should be accepted or rejected. (Use a sensitivity rate of 9% in your recommendation) Scenario 2 Each ASX listed entity is required under Listing Rule 4.10.3 to include in its annual report either a corporate governance statement that meets the requirements of that rule, or the URL of the page on its website where such a statement is located. Company B considers the issue of Corporate Governance to be important. You are a consultant for Kinetic Management Pty Ltd and Company B have requested advice on their current corporate governance compliance with the model rules provided by the ASX. Assignment tasks Before commencing work on the tasks below refer to the marking rubric for the criteria and standards that will be applied in the assessment of your assignment. See Blackboard. Tasks 1.0 Company background research [12 marks] Review Company A’s and Company B’s annual reports, articles in the financial press and other sources of information. Write a short response to each item below to build background knowledge of each company and their industry. 1.1 Describe the operating activities of Company A and Company B. [4 marks] 1.2 Identify two economy wide factors, and two industry factors, that could impact on the financial performance and position of Company A and two specific factors only that could impact on the financial performance and position of Company B. [6 marks] 1.3 Explain any significant achievements or challenges that have affected the performance of Company A or Company B in the last two years. [2 marks] 2.0 Financial ratio analysis [4 marks] Calculate financial statement ratios for the 2016, 2015 and 2014 years (if available) for Company A. Use the Excel template provided on Blackboard under the Assessment tab to present the analysis in a table. Obtain data for the ratios from the financial statements and notes to the accounts. You may add to this template (calculate additional ratios). See further instruction in the template. 3.0. Lending decision [12 marks] Write a business memorandum to the Bestfunds Bank Head Office loan manager from the branch bank lending officer in Scenario 1. The memorandum must address the following points below. 3.1 Evaluate and discuss your assessment of the ability of Company A to repay the loan and interest (apply a sensitivity interest rate of 9%); [4 marks] 3.2 Briefly discuss Company A’s net cash flows from operating, investing and financing activities and the trends evident over the last three years. [2 marks] 3.3 Make a recommendation to accept or reject the loan application from Company A and justify that recommendation. This recommendation should include a reference to knowledge that you have acquired in your company research from Q1, refer to relevant ratios calculated in Q2 and relevant items from 3.1 and 3.2 above. [6 marks] 4.0 Corporate Governance Report [12 marks] 4.1 Write a business memorandum to the Board of Directors of Company B and include for the 2016 Financial year, a summary of the Company B’s compliance with the Corporate Governance Council recommendations. The summary should include both compliance and non-compliance (if any) with the Recommendations and Company B’s reasons for this non-compliance; [4 marks] 4.2 Research the issue of Corporate Governance and provide a brief summary of: 4.2.1 The development of the Corporate Governance Councils principles and recommendations (history, current version, rationale etc); [2 marks] 4.2.2 The definition and purpose of Corporate Governance; [2 marks] 4.3 Provide a summary of two (2) recent articles (within the last 3 years) on the likely effect of the Corporate Governance principles and recommendations on listed entities. (Please refer to the word count information for guidance) [4 marks]