Accounting

Introduction to Accounting and Finance

(I) Debt valuation

1. Short Term And Long Term Debt Used By Firms

In the business environment, a company needs  finance to operate its business activity effectively. In this way, company  generate the finance from the different sources such as debt and equity. Debt of the company can be divided into two categories such as short term debt and long term debt.

In the context of the MYOB Limited, it is found that company is using both kind of debt. The below table shows that short term and long term debt used by the company from different source:

In Millions of AUD
2016201520142013
Short term debt61.2253.0441.2443.84
Long term debt434.31432.7111311092.43

 

The above table depicts that company uses both sources of debt. In the context of short term debt, it uses customer advance, bank overdraft and account receivable. On the other hand, in the context of the long term debt, MYOB uses bank loan, term loan, debenture and Venture Funding (Brown et. al. 2011).

2. Company’s Debt Structure Consistent with Industry

Debt structure of the company shows actual debt position of the company. In order analyze the MYO’s debt structure consistent with industry, debt is equity ratio is helpful. In the same concern of this, it is identified that MYOB’s debt to equity ratio is 51.23% and while industry debt to equity ratio is 30.96%.

It shows that debt structure of the both company and industry is not good because both are more depended on the equity finance. However, it situation is good both company and industry because company has to pay less interest on debt and their profitability remains high (Anandarajan et. al. 2012).

3. Industry operates in influence the proportion of short-term to long-term debts of MYOB

As earlier determined that MYOB is operating in the industry of the information technology. In the current business environment, it is one of the best growing industry. Along with this, IT industry is one of the largest profitable industries at the current time.

The good performance of the IT industry encourage MYOB to raise the maximum debt to achieve the financial goal and objectives. At the same time, it is also evaluated that affect the ability of the company to raise the short term and long term debt (Tucker, 2011).

Because a good performance of industry help to raise more debt and an inverse performance not allow the companies to raise more fund. It is because it can affect the ability of pay debt.

4. Cost of Debt of the Company

In the term of finance, the cost of the debt of the company is known as the interest is paid against the debt. Indeed, the interest paid by the company in the financial year is cost of the capital. In the reference of MYON, it found that in the financial year 2016 and 2015, the cost of the debt of the company were $6.95AUD million and $9.26AUD million.

It shows that the company has been successful to decline its cost of the capital that is good indicator of increasing the profitability (Ahmed and Duellman, 2011).

2. Share Valuation

1. MYOB’s Cost of Equity

 The cost of the equity refers to the dividend paid to the shareholder of the company in the particular financial period. In the regard of this, it is found that MYOB paid 62,189 ($000) dividend in the financial year 2016. In this, it is also identified that company paid this dividend by 5.75% rate on the ordinary share.

2. Evaluate and discuss MYOB’s revenue, earnings, EPS, dividends and growth expectations

The annual report of the company depicts that 85% business revenue of the SME solution. At the same time, it has expectation that this growth will be continue in future for the company. The company has also expectation that it EBITDA margin will remain 45-50% in the financial year 2017. In the financial year 2016, EPS is 16.5 cent that is expected to increase by 18 cent in 2017. At the same time, company is expecting to provide 6% dividend in the 2017 and 2018 (Corrado, 2011). MYOB has overall growth 10-15% in the coming financial year.

3. Value MYOB’s stock using comparables approach (ie. P/E) and constant dividend growth rate model

In the financial accounting, there are two main comparable approaches. In this, the first approach looks the market comparables for an organization and its peers. In this approach, price to earnings is major technique to valuation of the stock.

Under this, in order to calculate the value of the stock, market value of per share is divided by the earning per share. The current price of MYOB share is 3.56AUD and earning per share is 0.14. Therefore, the value of the stock will be 5.56/.14 =  39.71.

according to constant dividend growth rate model, the value of the stock is below

P= D/k-g

where

p = Security value =

D = Dividend = 5.75%

K =  Required rate of return = 2.75

G = Expected growth rate = 5%

value = 0.0575/(0.0275-0.05)

= 2.56

4. Most reasonable value compared to the market price of MYOB’s stock

On the basis of the above calculation, it is found that most reasonable value of the stock is $2.56AUD that is found by using the constant dividend growth rate model.

5. Additional data and information

In order to measure the value of the company stock, the additionally information were required rate of return and expected growth rate.

(III) Cost of capital

1. Weighted average cost of capital (WACC)

WACC is calculated to find out average cost of the capital. It is calculated through the below formula:

WACC =  x Re +  x Rd x (1 – Tc) (Brief and Peasnell, 2013)

Where

Re = cost of equity =  5.75%

Rd = cost of debt = 1.31%

E = market value of the firm’s equity = 854.54

D = market value of the firm’s debt = 532.27

V = E + D

E/V = percentage of financing that is equity = 61.62%

D/V = percentage of financing that is debt = 38.38%

Tc = Tax rate = 30%

WACC = 61.62% (5.75%) + 38.38% (1.31%) (1-30%)

= 3.86%

2. Explain the company’s tax rate in the calculation of WACC

MYOB is operating business in Australia that is why company concern of the Australian corporate tax rate. In the current time, Australian corporate tax rate is 30% that is also concerned in the calculation of WACC.

3. Why is there a difference in the cost of debt and the cost of equity

Cost of debt and cost of equity are both different sources of the financial for a company. The nature of the both debt and equity is deferent in the business. The cost of the debt and Equity is calculated on the basis of paid interest against the debt and dividend for raised equity. In addition, there are different term of condition of debt and equity. Due to this, cost of the debt and equity are different (Loughran and McDonald, 2016).

4. Should current liabilities be included in the cost of capital calculation and pros or cons

In a business, the current liability is the part of cost of capital because some time it is possible that firm has to pay interest on the short term debt and bank overdraft. The main advantage of including the current liabilities in the cost of capital is that it provides the accurate results. On the other hand, cons of this is that it increases the cost of the capital and reduce the profit (Anandarajan, et. al. 2012)

5. What is the major value of the WACC calculation for MYOB

Above, it is calculated that the value of WACC is 3.86%. It means that company pays its investors an AVERAGE $0.038 in the return of $1AUD. WACC of MYOB is fine that is not high or not low. However, a high WACC is risky for the company.

6.  Two projects recently undertaken by MYOB

ProjectX, International Limited and Kounta Holdings Pty Limited are two major projects of the company that are undertaken  by the company in recently.  In these both investments,  the company has used the WACC to making the investment.

7. Define and explain capital structure of MYOB

During the calculation of the WACC, it is found that in the capital structure of MYOB, 61.62% are equity and 38.38% debt. It means that company focuses on the equity finance as compared to debt finance. It is inverse of the industry because there industry is based on the debt finance (DRURY, 2013).

8. Optimal Capital Structure and Economic Circumstances

It has been found that the optimal capital structure ratio of MYOB is 0.62. It means that company has more equity. But, at the same time, it can be said that economic situation can be change if company will not pay its dividend at the time.

(IV). Market analysis

1. Comment on your chosen company’s financial performance relative to its industry

The above figure shows that financial performance of MYOB is constant to the industry performance because net profit margin is approx similar 14.2% and 14.16% for the company and industry. However, Gross profit margin of MYOB is more compared to industry. It shows that company performance is good compared to industry.

2. Literature on company financial performance

In the views of Ahmed and Duellman (2011), the debt equity ratio of a company should approx one because it shows that balance between the debt and equity. A ratio more than one  shows that there is high debt and less than one shows there is high equity. In the context of MYOB it is 0.62 that mean equity is high.

3. Comment on any other item that is important or different about your company

There is not any kind of other item.

References

Ahmed, A.S. and Duellman, S. (2011) Evidence on the role of accounting conservatism in monitoring managers’ investment decisions. Accounting & Finance, 51(3), pp.609-633.

Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds. (2012) Business intelligence techniques: a perspective from accounting and finance. Germany: Springer Science & Business Media.

Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds. (2012) Business intelligence techniques: a perspective from accounting and finance. Germany:Springer Science & Business Media.

Brief, R.P. and Peasnell, K.V. eds. (2013) Clean surplus: A link between accounting and finance. USA: Routledge.

Brown, P., Beekes, W. and Verhoeven, P. (2011) Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), pp.96-172.

Corrado, C.J. (2011) Event studies: A methodology review. Accounting & Finance, 51(1), pp.207-234.

DRURY, C.M., (2013) Management and cost accounting. Germany: Springer.

Loughran, T. and McDonald, B. (2016) Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.

Tucker, J.W. (2011) Selection bias and econometric remedies in accounting and finance research.

 

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