Fin5Fma Financial Management Assignment For Assessment Answers

Answer:

An optimal capital structure is a financial measurement which is used by the firm to determine the best available combination of debt and equity to use for the operations and expansions. This structure is helpful in reducing the cost of capital so the company is not dependent on the creditor and is able to generate finances through equity (Graham, Leary and Roberts, 2015). The calculation of cost of equity and cost of debt is required to calculate the WACC. Companies can raise capital with either debt or equity. Each strategy has its own benefits and limitations. The debt is usually cheap in comparison to the cost of equity.

Working Capital Management Policies

Working capital is a financial measure which determines the availability of the operating liquid assets for the business, organisation or any entity. The working capital is considered as a part of the operating capital. The formula of calculating the working capital is the current assets minus current liabilities (Gitman, Juchau and Flanagan, 2015). The relationship between the working capital and the profitability and the liquidity is core and critical (Hope, Thomas and Vyas, 2017). Various measures have been adopted by the managers of the companies to make sure that proper cash is available or relevant marketable securities are there to meet the meet the obligations of the payments when they are about to be paid. If the working capital ratio of the company is higher it will eventually reflect the flexibility of the finances. The liquidity is relatively higher and the risk is lower.

Policies of Investments

For some investors the company’s performance is evaluated on the basis of the assets owned by the organisation. The profitability and the liquidity of the company will be accumulated to a limited extent and they are not easily converted into cash. This kind of decision becomes a mark and there is a constant fear of losing out of current assets and the fear of reduced profit margins (Magni, 2016).

Majorly there are lot of policies yet the Fortescue metal Groups Limited adopts the policy which is kind of a liberal one. It is also known as fat cat policy. In comparison to its competitors Fortescue metal Groups Limited is generally maintain the ample amount of current assets for its own operational reasons. This goal can be achieved by holding ample amount of cash, inventories, credit policy which is highly liberal also the customers and debtors who can pay within the period of 90 days (Daraban, 2017)..

Debt to Equity Ratio

The debt to equity ratio is a financial ratio indicating which indicates the proportion of the shareholders in association with the debt component used to finance the assets of the company. This ratio is also known as risk, gearing ratio. From the above table it can be observed that the debt to equity ratio of Fortescue metal Groups Limited 0.42 as compared to the previous year which was 0.75(Mazzi, André, Dionysiou and Tsalavoutas, 2017).

Profitability ratios

The ratios of the profitability are the financial ratios which are used to measure and evaluate the capacity of the company to generate the profits related to the revenue, cost of operations, assets in the balance sheet and shareholder’s equity as well (McKay and Haque, 2016). The net profit of the company in the table below is 25% of the turnover which is pretty low as compared to the previous years.

Return on Equity is the amount of net income which is generally returned as a percentage of shareholder’s. Return on equity measures the profit of the corporation profitability by revealing how much profit a company is making. The return of equity is 0.11 in the year 2017 whereas it was 0.49 in the year 2016. The trend states that the return on equity has increased from the past years on an average.

Distribution Policy

Financial Management that dividend policy represents the financial decision making of the enterprise. There a robust relationship between the dividends of the company, financing and the investment decisions that the managers have to take care of (Christensen, Nikolaev and Wittenberg?moerman, R.E.G.I.N.A. 2016). To exercise the obligation of the dividend a firm can take the benefits of many dividend policies. The policy can have smoothened dividend or the stable dividend. One of the types of the policy is residual dividend policy where the consideration of dividend takes place after making the investment decision. The major feature of this policy is that under this policy the dividends will be abandoned and the investments need the level of earnings. The second kind of the policy is the smoothened policy where the long terms residuals are taken on the basis of the formal application. The last policy is the stable policy where the dividend increases based on long term earning.

The corporation of FMG was that the company was not paying any dividends until the year 2008. The negative net income after tax is the reason. In the year 2014 the dividend pay-out ratio of the company was 1 %. In the year 2010 corporation made plans for around $8.5 billion expansion of its Pilabara iron ore operations to increase the production level from $120 million to $155 billion (Billett, Hribar and Liu, 2015). Therefore, it is very likely that the Fortescue Limited has adopted the residual policy of the dividend policy.

Trends Dividend Share

Dividend equation tax system in Australia

Taxations of dividends are differently and the same is depending on the residency of the shareholder, whether they are residence or non-residence of Australia. Profits paid to investors by Australian resident organizations are saddled under a framework known as 'imputation (Andrade, Bernile and Hood III, 2014). It is called an imputation framework in light of the fact that the duty paid by a business firm might be ascribed or credited to the shareholders. The expense paid by the organization is designated to shareholders by method for franking credits joined to the profits they get. The premise of the framework is that if an organization pays or acknowledges the profits which have been franked, an individual might be qualified for a franking charge balance for the duty the organization has paid on its salary. The franking charge balance will cover or incompletely cover the duty payable on the profits. The Fortescue Metal Group Limited investors’ can directly receive cash on some of the shares to reinvest in the money (McKinney, 2015).

Franked dividends

A resident’s business corporation, or a New Zealand franking organization that has chosen to join the Australian imputation system, may pay or acknowledge you for a franked profit. Profits can be completely franked (implying that the entire measure of the profit conveys a franking credit) or somewhat franked (implying that the profit has a franked sum and an un-franked sum). The profit articulation or circulation explanation you get from the organization paying the franked profit must express the measure of the franking credit and the measures of the franked and un-franked parts of the profit (Morningstar, 2018).

Un-franked dividends

A resident’s business firm may pay or acknowledge you for an un-franked profit. There is no franking credit connected to these profits (Nguyen and Tran, 2016). In the event that you get an un-franked profit announced to be channel outside wage on your profit proclamation or appropriation explanation, incorporate that sum as an un-franked profit on your government form (Scott, 2015).  

Dividend Reinvestment Plan

The amount of the dividend was announced by the company

From the last year it can be observed Money related administration arrangements can influence the organization’s performance either exclusively or interactively. The results and the outcomes are represented in the accounting as well as the net income as well as the stock price. For example, capital structure policies which include the current price of the stock. Fortescue Metals’ price earnings ratio is 0.87 as compared to the previous year which was 0.40. Thus means that the company was earning sufficient this year to provide the share to the shareholders (Yarram and Dollery, 2015). The market price of the company shrinks according to the dividend distributed by the company. The annual dividend rate is 11.33% and the market share is 4.54 with the beta value of 1.50. The other corporate policies have been adopted by the management in order to ensure efficiency and effectiveness.

It is clear from the above graph that the trend of cash flow policy of the Fortescue Metal Groups Limited. The cash flows have been negative in the year 2012 and the year 2013 and after that the cash flows have been converted into positive figures.

References

Andrade, S.C., Bernile, G. and Hood III, F.M. (2014) SOX, corporate transparency, and the cost of debt. Journal of Banking & Finance, 38, pp.145-165.

Billett, M.T., Hribar, P. and Liu, Y. (2015) Shareholder-manager alignment and the cost of debt.

Christensen, H.B., Nikolaev, V.V. and Wittenberg?moerman, R.E.G.I.N.A. (2016) Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.

Daraban, M.C. (2017) Accounting as a 21st century business value driver. In CBU International Conference Proceedings... (Vol. 5, p. 99). Central Bohemia University.

Geske, R., Subrahmanyam, A. and Zhou, Y. (2016) Capital structure effects on the prices of equity call options. Journal of Financial Economics, 121(2), pp.231-253.

Gitman, L.J., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance. Pearson Higher Education AU.

Graham, J.R., Leary, M.T. and Roberts, M.R. (2015) A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.

Hope, O.K., Thomas, W.B. and Vyas, D. (2017) Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), pp.1-13.

Magni, C.A. (2016) An average-based accounting approach to capital asset investments: The case of project finance. European Accounting Review, 25(2), pp.275-286.

Mazzi, F., André, P., Dionysiou, D. and Tsalavoutas, I. (2017) Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital. Accounting and Business Research, 47(3), pp.268-312.

McKay, W. and Haque, T. (2016) A study of industry cost of equity in Australia using the Fama and French 5 Factor model and the Capital Asset Pricing Model (CAPM): A pitch. Journal of Accounting and Management Information Systems, 15(3), pp.618-623.

McKinney, J.B. (2015) Effective financial management in public and nonprofit agencies. ABC-CLIO.

Morningstar, (2018) Fortescue Metals Group Ltd, [Online].  Available at: https://www.morningstar.com/stocks/XASX/FMG/quote.html. [Assessed on 26th May 2018].

Nguyen, X.M. and Tran, Q.T. (2016) Dividend Smoothing and Signaling Under the Impact of the Global Financial Crisis: A Comparison of US and Southeast Asian Markets. International Journal of Economics and Finance, 8(11), p.118.

Scott, W.R. (2015) Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Yarram, S.R. and Dollery, B. (2015) Corporate governance and financial policies: Influence of board characteristics on the dividend policy of Australian firms. Managerial Finance, 41(3), pp.267-285.