Finance For Business For Operated Repairing Household Works
Financial Performance
Discuss about the Finance for Business for Operated Repairing Household Works.
A. Emu electronics is the electronic manufacturer previously operated repairing household works. Currently the business is expanded and now known to be a manufacturer of the speciality electronic items. The company is prime seller of smart phone. For the emerging demand of the variety of features of smart phones, Emu electronics spent more into the research and developmental works for upgrading the system and deliver more modified version to their customers. Based on the case scenario and the information, this report has addressed several questions in the first section of the assignment.
The calculation of NPV, payback period, profitability index has been done in the below mentioned table:
|
Year |
Sales (Unit) |
Unit price ($) |
Total sales ($) |
|
1 |
64000 |
485 |
31040000 |
|
2 |
106000 |
485 |
51410000 |
|
3 |
87000 |
485 |
42195000 |
|
4 |
78000 |
485 |
37830000 |
|
5 |
54000 |
485 |
26190000 |
Table 1: Total sales calculation
(Source: Created by author)
|
Calculation of Depreciation |
Value($) |
|
Cost of Manufacturing Equipments |
34500000 |
|
Depreciated over the 7 years life (Straight Line Method) |
4928571.429 |
Table 2: Per year depreciation calculation
(Source: Created by author)
|
Calculation of Net cash Flow |
|
|
|
|
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
|
Net Sales |
31040000 |
51410000 |
42195000 |
37830000 |
26190000 |
|
Fixed Costs |
-5100000 |
-5100000 |
-5100000 |
-5100000 |
-5100000 |
|
Variable Costs |
-13120000 |
-21730000 |
-17835000 |
-15990000 |
-11070000 |
|
Total costs |
-18220000 |
-26830000 |
-22935000 |
-21090000 |
-16170000 |
|
Profit |
12820000 |
24580000 |
19260000 |
16740000 |
10020000 |
|
Less: Depreciation |
-4928571 |
-4928571 |
-4928571 |
-4928571 |
-4928571 |
|
EBIT |
7891429 |
19651429 |
14331429 |
11811429 |
5091429 |
|
Corporate [email protected]% |
2367428.7 |
5895428.7 |
4299428.7 |
3543428.7 |
1527428.7 |
|
EAT |
5524000 |
13756000 |
10032000 |
8268000 |
3564000 |
|
Total cash flow (EAT+Dep) |
10452571 |
18684571 |
14960571 |
13196571 |
8492571 |
Table 3: Calculation of Net cash flow
(Source: Created by author)
|
Calculation of Net working capital |
6208000 |
10282000 |
8439000 |
7566000 |
5238000 |
|
Changes in Working capital |
4074000 |
-1843000 |
-873000 |
-2328000 |
Table 4: changes in working capital over the years
(Source: Created by author)
|
Year |
Cash Flow |
Changes in NWC |
Cumulative cash flow |
Discounted factor (@12%) |
Discounted Cash flow |
|
|
0 |
-35450000 |
0 |
-35450000 |
|||
|
1 |
10452571 |
10452571 |
-24997429 |
0.892857143 |
9332652.946 |
|
|
2 |
18684571 |
-4074000 |
14610571 |
-10386857 |
0.797193878 |
11647457.99 |
|
3 |
14960571 |
1843000 |
16803571 |
6416714 |
0.711780248 |
11960450.14 |
|
4 |
13196571 |
873000 |
14069571 |
20486285 |
0.635518078 |
8941466.917 |
|
5 |
8492571 |
2328000 |
10820571 |
31306857 |
0.567426856 |
6139882.75 |
|
48021910.74 |
||||||
|
Payback period |
|
2.61813392 |
||||
|
IRR |
|
25% |
||||
|
Profitability index |
|
1.354637821 |
||||
|
NPV |
|
12571910.74 |
Table 5: Calculation of NPV
(Source: Created by author)
|
Assessment of sensitivity in accordance NPV to changes in price |
|||
|
It has been assumed that the price of the smart phone has been reduced by 10 % |
|||
|
Year |
Sales (Unit) |
Unit price ($) |
Total sales ($) |
|
1 |
64000 |
436.5 |
27936000 |
|
2 |
106000 |
436.5 |
46269000 |
|
3 |
87000 |
436.5 |
37975500 |
|
4 |
78000 |
436.5 |
34047000 |
|
5 |
54000 |
436.5 |
23571000 |
Table 6 : Revised sales figure after price change
(Source: Created by author)
|
Calculation of Net cash Flow |
|
|
|
|
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
|
Net Sales |
27936000 |
46269000 |
37975500 |
34047000 |
23571000 |
|
Fixed Costs |
-5100000 |
-5100000 |
-5100000 |
-5100000 |
-5100000 |
|
Variable Costs |
-13120000 |
-21730000 |
-17835000 |
-15990000 |
-11070000 |
|
Total costs |
-18220000 |
-26830000 |
-22935000 |
-21090000 |
-16170000 |
|
Profit |
9716000 |
19439000 |
15040500 |
12957000 |
7401000 |
|
Less: Depreciation |
-4928571 |
-4928571 |
-4928571 |
-4928571 |
-4928571 |
|
EBIT |
4787429 |
14510429 |
10111929 |
8028429 |
2472429 |
|
Corporate [email protected]% |
1436228.7 |
4353128.7 |
3033578.7 |
2408528.7 |
741728.7 |
|
EAT |
3351200 |
10157300 |
7078350 |
5619900 |
1730700 |
|
Total cash flow (EAT+Dep) |
8279771 |
15085871 |
12006921 |
10548471 |
6659271 |
|
Calculation of Net working capital |
5587200 |
9253800 |
7595100 |
6809400 |
4714200 |
|
Changes in Working capital |
3666600 |
-1658700 |
-785700 |
-2095200 |
Table: Revised working capital change
(Source: Created by author)
|
Year |
Cash Flow |
Changes in NWC |
Cumulative cash flow |
Discounted factor (@12%) |
Discounted Cash flow |
|
|
0 |
-35450000 |
-35450000 |
||||
|
1 |
8279771 |
8279771 |
-27170228.7 |
0.892857143 |
7392653 |
|
|
2 |
15085871 |
-3666600 |
11419271 |
-15750957 |
0.797193878 |
9103373 |
|
3 |
12006921 |
1658700 |
13665621 |
-2085336 |
0.711780248 |
9726919 |
|
4 |
10548471 |
785700 |
11334171 |
9248835 |
0.635518078 |
7203071 |
|
5 |
6659271 |
2095200 |
8754471 |
18003307 |
0.567426856 |
4967522 |
|
38393538 |
||||||
|
Payback period |
3 |
|||||
|
IRR |
15% |
|||||
|
Profitability Index |
1.083033521 |
|||||
|
NPV |
2943538.316 |
Table 7: Changed NPV calculation considering the Price fluctuation
(Source: created by author)
In the above scenario, the NPV is calculated assuming the 10% reduction in price of the products of the Emu Electronics. In that case, per unit selling price has been changed to $485 to $436.5. Here the NPV is reduced from $12571910.74 to $2943538.316. This is quite evident that the price is highly sensitive. These changes also affect on the profitability index of the business. According to Galvez, Ordieres-Meré and Capuz-Rizo (2015), the sensitivity helps to make understand the overall changes to the assessment of the profitability of the business. In this case scenario, the price reduction has been considered and calculation has been done based on 10 percent price reduction consideration.
|
Assess sensitivity in accordance NPV to changes in sales |
||||
|
It has been assumed that the sales of the smart phone has been reduced by 16 % |
||||
|
Year |
Sales (Unit) |
Unit price ($) |
Total sales ($) |
|
|
1 |
53760 |
485 |
26073600 |
|
|
2 |
89040 |
485 |
43184400 |
|
|
3 |
73080 |
485 |
35443800 |
|
|
4 |
65520 |
485 |
31777200 |
|
|
5 |
45360 |
485 |
21999600 |
Table : Calculation of sales considering the sales reduction
(Source: created by author)
|
Calculation of Net working capital |
5214720 |
8636880 |
7088760 |
6355440 |
4399920 |
|
Changes in Working capital |
3422160 |
-1548120 |
-733320 |
-1955520 |
Table 8 : Changes in working capital
(Source: Created by author)
|
Year |
Cash Flow |
Changes in NWC |
Cumulative cash flow |
Discounted factor (@12%) |
Discounted Cash flow |
|
|
0 |
-35450000 |
-35450000 |
||||
|
1 |
6976091 |
6976091 |
-28473908.7 |
0.892857143 |
6228652.946 |
|
|
2 |
12926651 |
-3422160 |
9504491 |
-18969417 |
0.797193878 |
7576922.274 |
|
3 |
10234731 |
1548120 |
11782851 |
-7186566 |
0.711780248 |
8386800.818 |
|
4 |
8959611 |
733320 |
9692931 |
2506365 |
0.635518078 |
6160033.074 |
|
5 |
5559291 |
1955520 |
7514811 |
10021177 |
0.567426856 |
4264105.747 |
|
32616514.86 |
||||||
|
Payback period |
4 |
|||||
|
IRR |
9% |
|||||
|
Profitability Index |
0.920070941 |
|||||
|
NPV |
-2833485.141 |
Table 9: NPV calculation considering the sales fluctuation
(Source: created by author)
In the above scenario, the entire NPV calculation has been done based on the assumption of the reduction of sales volume by 16 percent. Under this condition, the sales units have been reduced and thus, the net sales amount is also being decreased. Based on the 12 percent discounting factor, the net present value, profitability index, payback period and IRR have been calculated. This is clearly indicated that the net present value of the business is least compared to other two options.
Based on the above three scenarios, this can be concluded that the original condition of the business is the most viable for production of smart phone. Under this scenario, the net present value of Emu Electronics is $12571910.74. On the other hand, the profitability index id the project appraisal technique which ensures the projects viability and the future cash outlay. Under this scenario, the profitability index is the highest i.e., 1.35. This means that the existing condition is the idea financial condition where the maximum return can be achieved by the company. In addition, the interest rate of return evaluates the desirability of the project. In the first scenario, the highest rate of return has been ascertained, thus the company should produce the new smart phone for generating more revenue in the future.
Calculation of Key Financial Metrics
If Emu Electronics losses sales on other models, that does not impacts on the new production of smart phones. Hence, any such variations will not impact on the new smart phone of Emu electronics. Therefore, the changes made in the oil handset do not impact on the net present value of the new production.
Ascertainment the book value of debt and equity for Harvey Norman and Interest rate risk management:
|
Total debt to equity |
2013 |
2014 |
2015 |
|
Total debt |
$820.28m |
$707.97m |
$698.44m |
|
Less: cash reserves |
-$161.66m |
-$144.96m |
-$185.84m |
|
Net Debt |
$658.62m |
$563.01m |
$512.60m |
|
Total equity |
$2.38bn |
$2.51bn |
$2.58bn |
|
Net debt to equity (%) |
27.69% |
22.40% |
19.88% |
Table 10: Ascertainment of book value of equity and debt of Harvey Norman
(Source: Harveynorman.com.au 2016)
In 2015, the total net debt of the Harvey Norman is $512.60m. On the other hand, the total equity of the company in that year is $2.58bn. The total book value of the debt is considered both short term and long term debt of the company while calculating the total debt. On the contrary, the total value of equity has been derived after deducting the preferred equity shares. The book value of debt is useful for determination of the book ratio of the business. However, several researchers have been criticised that it is very difficult to value the debt because this has been varied at times with the figure of the balance sheet. However this above figure gives the clear idea about the company’s net exposure and the overall interest rate over the years.
- Estimation of cost of equity of Harvey Norman:
Consideration of the current price of stock of Harvey Norman:
At present the stock price of the company is $5.34 which is specified in the company website.
- Consideration of the market value of equity and market capitalisation of Harvey and Norman:
The figure of $5.94 is the overall market capitalization of the company.
- Computation of the outstanding shares of Harvey Norman:
Presently, the company has approximately $11126.56 million of shares as outstanding in the capital market.
- Assessment of the current annual dividend paid by Harvey Norman:
The net amount of dividend paid in the present year is $0.17. This reflects the overall “rate of return” which is of 5.65 percent.
- The yield value of government debt in Australia:
This has been evident that the overall risk free government debt is ascertained as 3.25 percent and the value of the yield of the government debt is 1.49 percent
- Computation of the Cost of equity of Harvey Norman by using the model of CAPM:
The above mentioned data attained for the yield of the market for the determination of the cost of capital of Harvey Norman. The below information are as follows:
|
Risk free rate |
3.25% |
|
Market return rate |
6.60% |
|
Market value of risk premium |
3.35% |
|
Variance |
0.000109918 |
|
Beta |
0.199367955 |
|
Covariance between stock and market |
2.19142E-05 |
|
SD of market |
0.010484185 |
|
Cost of Equity |
3.92% |
Table 11: The cost of equity of Harvey Norman
(Source: Created by author)
To ascertain the “weighted average costs of capital” of the company, it is necessary to ascertain the costs of debt. The cost of debt as computed is the book value of the stock, i.e. 11.91 percent. Here the present interest rate is also being considered which is charged at 5.60 percent from Westpac. To take the appropriate decision, the investors need to assess the weighted average costs of capital.
|
Cost of Equity |
3.92% |
|
Interest expenses |
32.0822 |
|
Book value of Debt |
269.459 |
|
Market value of cost of debt |
5.60% |
|
Book value of Cost of debt |
11.91% |
|
Equity |
4490.27 |
|
Total Capital |
4759.729 |
|
Debt |
269.459 |
|
Tax rate |
28.88% |
|
WACC on the basis of Book value |
4.18% |
|
WACC on the basis of Market value |
3.92% |
Table 12 : The Weighted Average Cost of Capital of Harvey Norman
(Source: Created by author)
The pure play method is not efficient for the assessment of the costs of capital because it does not provide the overall costs of capital for HCL. On the other hand, HCL Company does not have the exposure of the diverse business operations which is unlike from Harvey Norman. Hence, the costs of capital may not give any benefit for the computation of the overall “weighted average costs of capital”.
References:
Galvez, E.A., Ordieres-Meré, J. and Capuz-Rizo, S.F., 2015. Analysis of project duration uncertainty using global sensitivity analysis. The Journal of Modern Project Management, 2(3).
Harveynorman.com.au. (2016). Harvey Norman | Shop Online for Computers, Electrical, Furniture, Bedding, Bathrooms & Flooring | Harvey Norman Australia. [online] Available at: https://Harveynorman.com.au [Accessed 26 Sep. 2016].
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