Task:
The Board of Ethical Trading Group has asked you to prepare a report on current economic trends and evaluate the impact of these on their proposed plan to move into small scale sustainable manufacturing. To achieve this, they need to raise around $22,500,000 in capital and they anticipate this will return them an average of $5,750,000 in additional net revenue (after tax and before financing costs).
As the company wants to identify the best option regarding capital raising, so they want you to provide a detailed analysis of their options regarding capital raising:
They need an understanding of several types of debt and their working, the way they are valued and rated. Moreover, they want to know whether considering short or long-term debt will be beneficial for the company.
Considering the option of shareholder’s equity, they need to know:
The type of shares that can be issued.
The implications for company if they issue different shares.
The risks that the company might face if they raise capital via equity.
Moreover, the company also needs to know the implications that capital structure decision will have.
To do so, you need to consider current company information and the current economic climate.
Current company information is attached to this unit in a separate folder named “Additional resources” that includes company’s:
After analysing the information given in the additional resources listed above and evaluating the current economic trends, the company wants you to explain to them the best option (stakeholder equity, debt financing or mix of both) to raise capital considering current conditions and forecast of the economy. In your report the company wants you to explain them the reason for selecting one option over others, the implications that the company might have on their decision once made, considering the changes to the economy in future.
The report must also include a detailed analysis of the mean and standard deviation of costs of debt and equity based on an analysis of the company information, and debt and equity market history.
When writing the report, you must follow the report writing guidelines given in the “Employee Guidance Materials”. This file is available in the Additional files folder for this unit.
When preparing your written report, you must make sure that you incorporate the following points in the report:
RP1. Conducted a research on current economic theories and identified impact in financial service industry.
economic growth outlook
interest rate outlook
unemployment outlook
and inflationary outlook
Use the theories of Keynesian Economics. Learners are to identify at least two Australian-based sources.
RP2. Outlined key features of common economic theories that relate to the decisions being made in your report.
RP3. Outlined key features of microeconomic principles and how they relate to debt and equity markets and organisational practices for companies.
RP4. Explained and applied two key mathematical principles and two statistical methods.
RP5. Described a range of statistical ratios and analysis tools relevant to the financial services industry and indicated what they are.
RP6. Outlined two sources of relevant financial services information and their relevance to your report.
RP7. Explained the principles of statistical standards and sampling techniques that you used to gather valid data.
RP8. Applied relevant financial modelling techniques to economic data to inform your decision regarding the funding method. Modelling techniques should include the Payback Period before financing, yield curves, rate of return. Explain the types of graphs, charts, diagrams and tables used in your statistical modelling and reporting and why you used them.
RP9. Showed evidence that you have analysed documentation from a variety of sources and consolidated that information to assist in justifying your recommendations.
RP10. Applied asset and debt pricing models and explained the theories behind the models to show how they have influenced your decision. You should include valuing debt, valuing equity and leverage ratio. You should also calculate WACC before and after your recommendation, and the leverage ratio before and after. To calculate the WACC, use the value of interest bearing finance as the debt level, and assume that the finance expenses are the interest being paid on these loans, dividends paid are the cost of equity. Lastly you can assume that the value of shareholder equity is the value of contributed equity for ordinary shareholders. For the leverage ratio, you can use the book value of total liabilities less cash as a proxy for market value of debt.
RP11. Demonstrated that you have used realistic rates of return for debt and equity based on an analysis of the company data provided, for example the current cost of debt and equity, and a prediction of the future costs of both based on the increased risk after the financing decision is made and the type of debt used if any, the share price movements over time and a comparison with current ASX market returns as evidenced by data collected over a period of time (for example RBA, ABS and ASX data for debt and equity returns).
RP12. The company have also asked you to assess the likelihood that the new initiative will generate them the $5,000,000 in income that they have estimated based on a significance level of 0.05. They have acquired data for the last 5 years from the existing manufacturing business that shows on average the net revenue has been $4,950,000 with a standard deviation of 15%. You should use hypothesis testing with a one tailed test and an appropriate to test value. Determine if the hypothesis is correct or not and explain your findings in line with the company requirements in your report.
RP13. Determine if there is any correlation between the company share price and the ASX All Ordinaries (using the Product Moment Correlation Co-Efficient, and x" as Ethical Trading Group share prices and "y" as the ASX All Ordinaries values) and provide your opinion as to whether there is any strong correlation that could be used to help predict movements in the value of the company. Show your calculations and check and validate them. As part of the validation, explain why you have only used a sample of the ASX rather than the entire population, and explain why you believe the sample is or is not a valid representation of the population. Validation should also include an explanation of the method you used to check for accuracy in entering data for both Ethical Trading Group and the ASX, and the ways that you checked that your formulae are correct.
RP14. Calculate the Dividend yield each year based on an annual average share price and the dividends paid, and then prepare a graph that enables the company to identify any trend in the dividend yield over the last 5 years. Cleary explain and interpret the trend shown in the graph for the company and include this in your conclusions and recommendations in your report.
RP15. Legislation, statutory requirements and industry codes of practice will each have an impact on your report. Describe two key features of each of these.
RP16. Considering this change, review the Ethical Trading Group’s policy and procedures given in the folder “Additional resources” and identify:
RP17. To conclude your written report, write a short reflection, of no more than 300 words, describing how the knowledge and skills gained from compiling this report would enhance your ability to undertake similar tasks for the Ethical Trading Group Board.