Posted: October 6th, 2022

Bathurst and Wodonga

Bathurst and Wodonga
Part 1
Section 1
1. After tax cash flows = net income + depreciation + amortization + other non-cash charges
Costs for Bathurst = $(27.5 + 0.25 + 8 + 2.5) = $38.25 million, total revenues in 25 years = sales, $40(1 + 0.1) ^25 = $433.39million + refund = 500000*25 = $12.5million = $445.89 million as for Wodonga = $(27.5 + 0.25) = $27.75 million, total revenues in 10years = sales, $40(1 + 0.1) ^10 = $103.75million
Bathurst depreciation = 25/100*2 = 0.5*38.25 = $19.125 million, net income = $million (433.39 – 38.25) = $395.14 million, tax is 395.14*30% = 118.54 – 12.5 = 106.04
Wodonga depreciation = 10/100*2 = 0.2*27.75 = $5.55 million, net income = $million (103.75 – 27.75) = $76 million, tax = 76*30% = 22.8
Therefore, after tax cash flows =395.14 + 19.125 – 106.04 = $308.23 million for Bathurst and for Wodonga = 103.75 + 5.55 – 22.8 = $86.5 million
2. Payback periods = amount invested/the net cash flow
For Bathurst = 12.84/308.23 = 0.042 and Wodonga = 2.17/86.5 = 0.025
3. Net present values = cash flow per period*((1 – (1 + R) ^-T)/R) – initial investment
Bathurst = 308.23/25*((1 – (1 + 0.1) ^-25)/10) – $12.84 = -$0.62 million
Wodonga = 86.5/10*((1 – (1 + 0.1) ^-10)/10) – $2.17 = $6.14 million
4. Profitability index =1 + (NPV/Amount invested)
Bathurst = 1 + (-0.62/12.84) = 1.0483 and Wodonga = 1 + (6.14/2.17) = 3.8295

Section 2 of Part 1.
(a) I will recommend that the project being carried out in Bathurst to have a shorter time in construction and calculation of profits. This will provide a shorter time that will help in analyzing the impacts of the project. In the first instant, I will recommend the project at Wodonga commences. This is because it has lower costs of construction and takes a short time to put up but is the one with a higher profitability index. Also, information on the production rates of the two projects is needed before a final decision is made on which to settle on. In addition, there should be analyzing on what might be causing the increased costs of production in Bathurst and reduced costs of production in Wodonga. This may include the study of the technology that is used in the two projects and the number of the machines and the experts handling them.
(b) Product cannibalization is basically the negative impact imposed on the existing products when a new product is introduced into the market. Therefore, when budgeting the capital of the firm, it is good that the amount to be invested in producing the already existing product be measured. The new product may lead to decreased sales of the present product and this means that overproduction of the product existing may lead to less revenues and thus a lot of costs incurred in stocking costs.
(c) It is highly true that Saturn sales estimations are too high. In any case, production is always directly proportionate to the sales made. Increased production characterized by increased costs; is mostly likely to lead to increased sales which are not the case with Saturn. This should consider applying a traditional capital budgeting. Here, they have a chance to review their strategies as they respond to the changes in the market structure and the technological advancements that change the cash flow.
(d) It will be necessary if the original value of the Wodonga factory is included in the financial statements of the company. This will help to calculate the real financial statements taking into account all the expenses and incomes and thus deriving the profits made. This assumption will enable the company to assume that if it were to be demolished or relocated, it will approximate the amounts needed to continue.
Part 2
1. Summary
ARB Corporation is one of the companies that have great influence in the transport industry. This is the core reason why the discussion focuses on its capital structure. This is meant to help the company manage its operations effectively with the aim pf expanding its market share by maintaining the current customers and acquisition of others as well
2. Introduction
The data discussed below is acquired of the annual reports that it releases and post them on their official websites. However, we cannot focus on all the data. We will specifically look at the 2017 annual reports and the get to know the figures posted in the various financial statements.
3. Body
i. Capital Structure Categorization
As of 2017, ARB had the following as capital which is classified into; debt that consists of; current assets sub-categorized to; payables of $35279, derivative financial instruments of 1, zero borrowings, current tax liabilities 2810, provisions of 11695 and long term liabilities sub-categorized into; provisions of 1117 and the second form of capital was equity categorized into; contributed equity of 107221, reserves of 8006 and retained earnings of 157114.
ARB’S after tax weighted average cost of capital will be; E/V*Re + D/V*Rd*(1 – tc) = (272341) + 50902* (1-0.0854) = $295638.05. In calculating the expected rate of return of an asset using the capital asset pricing model we use; = risk free rate + beta (expected market return – risk free rate) = 2.72 + 0.89(8.54 – 2.72) = 7.9%. Given its risk, the firm is slightly lower in expected return which is 7.9% compared to the market return of 8.54%, (Reuters, 2018)
ii. ARB vs. Ford Motors
If ARB is compared to Ford Motors, the capital structure for Ford is higher. It is made up of equity of diluted shares outstanding of $4.055 billion and a debt capitalization of $119 billion that was made up of; $39 billion short term liabilities, $16 billion revolving loans, $7 billion in term loans and $85 million bonds.
iii. ARB Financial Ratios
Here is analyzing of ARB’s key financial ratios as of 2017. The working capital was AUD119 million and this is a fair ratio. It shows that the company’s capability to convert the assets into cash is high and thus it’s able to meet its financial obligations. An increased amount of asset also contributes to the high levels of this ratio. Earnings per share were AUD0.62 million. This lowers than the expected market earnings per share. This therefore means that the company’s future earnings on stock were less and this may discourage investors from coming in and thus net income is reduced. The return on equity ratio was 18.83%. This is fair. It shows the company’s profits are growing as the company grows each day. Therefore, this will great attract investors and thus growing the company’s capital thus growth. The return on asset was 15.98. Again this is fair as it shows growth in the efficiency in which the company is utilizing its assets to generate its earnings. The net margin was 12.85. it is also good. This illustrates that the company is profitable. This is an indication that the net income after removal of expenses is fair to the company and the financial leverage was 1.19. This is a higher leverage and it indicates that the company is utilizing its debt and liabilities to fund it assets and thus making it more risk, (ASX, 2018)
iv. Changes in the Capital Structure
The change in the company’s capital structure has been increasing at an increasing rate. Though the rate changes are not that huge; the company has shown positive change in its capital structure. For instance, over the last three years, in 2015 there was a change of 12000 in ordinary share from 2014; this change was transferred to 2016 where the change was 16000 ordinary shares and further to 2017 where 20000 ordinary shares change was recorded. In the years 2016 – 2017, the following changes were recorded: total liabilities changed from 42 200 dollars to 50902 dollars and the total equity experienced a change of 249 508 dollars in 2016 to 272 341 dollars in 2017. Therefore, we can conclude that the firm is really expanding and profitable and it is thus able to attract more investors, (NASDAQ, 2018)
v. Wealth Maximization and Alternative Capital Structure
From the change of capital seen above; we can clearly calculate the percentage in which the firm has utilized the stakeholder’s equity as capital. The 2015/2016 ordinary shares change can be given as; (16000 – 12000)/12000*100 = 33.33%, the 2016/2017 ordinary shares percentage change will be; (20000 – 16000)/16000*100 = 25%. The 2016/2017 percentage change in equity will be; (272341 – 249508)/249508 = 9.15%. These are great percentages in shareholder’s wealth utilization
There are lot of benefits in maintaining a lower cost of capital. One, it increases the effectiveness of investment. if the current assets are in excess of the current liabilities this will act as a long term capital for investment and it will be kept away from the short term uses and thus ensuring effectiveness in a company’s investments. Secondly, it improves the operating efficiency. If a company is able to quickly turn its inventory or assets, then it will require less capital in its operations and this increases its efficiency. Too much idling capital may make the company not to realize its operating efficiency. Less capital keeps them on check and they will avoid wastage in order to maximize profits. It also shortens the cash cycle. If accounts receivable are quickly converted into cash, then it automatically means that less working capital is needed. Inventories may lengthen the cash conversion cycle and the same case with products that take long to be sold. So as to avoid the need for huge capital, the company should sell its products as soon as they are produced so as to enhance quick conversion in the cash cycles. On demand operations are enhanced by less working capital. Having little or no funds at all parked on the potential illiquid assets and company is able to reduce its working capital. This is achievable if the company can work with the raw materials suppliers in the supply chain and the sales distributors in the distributor chain. In this case, funds that are meant to be the working capital will be put into more product use.
vi. Conclusion
In conclusion, working capital is essential in operations but it does not grant profitability and revenue generation. In fact, increased cost of capital will just make the company to perform below average with a lot of liabilities that may be hard for them to pay. This reason explains why less working capital will be important, (Jay, 2015) the discussion above illustrates both the advantages of lower cost of capital and at the same time it illustrates on alternatives to reducing costs of capital.

References
ARB 4*4 Accessories annual reports, https://www.arb.com.au
ASX 2018, May 2, ARP CORP stock values, https://www.asx.com.au
Jay W. 2015, October 30, maintaining lower working capital, https://www.investopedia.com
Nasdaq 2018, stock values, https://www.finance.yahoo.com
Reuters 2018, financial ratios, https://www.reuters.com/market

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