Question 2
1.In reference to the last five years performace and business propect I have decided to recommend the stock of Quantas Airlines. Performance of Quantas Airlines in last five years along with its analysis is presented as under:
Figure: 1.a.
(Source:http://www.asx.com.au/prices/charting/?code=QAN&compareCode=&chartType=line&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=Bar&volumeMovingAverage=&timeframe=Daily)
Assessment of the Stock:
– In April 2013, Qantas announced to issue the unsecured medium fixed rate term notes to re-finance the term loan, this clearly states that the company was in severe need of fund to manage its cash flow. This announcement has impacted the share price; resulting in the downward trend till start of 2014.
– In start of 2014, Qantas issued a statement notifying the company strategy to accept foreign investment. In October 2014 Westpac banking Corporation became a substantial shareholder of the company. This interest from the big corporation has boosted the share price and trading volume of the Qantas. Share price was recorded increasing at the increasing rate. Share price of Qantas is recorded to be almost double in March 2016 than the price at November of 2014.
– In April 2016, company decided to buy back the stock from the market this has pushed the seller side of the market, resulting in the downward trend in the market.
– In the mid of 2016, with substantial interest from the big corporate houses like CBA, Westpac group and others demand for the share has substantially risen. Similarly, company also performing adequately which can be depicted through latest PE ratio, EPS and dividend yield of the company.
In reference to all the historical data, goodwill of the company, its financial performance I am recommending buy and hold strategy for my aunt.
2) Answer:
Price at August 2016: AUD 3.36.
Price at August 2017: AUD 6.02.
Dividend per share: 0.14. (Assuming Dividend is not re-invested)
Number of Stock Purchased: 100.
Unit Price of Stock: AUD 1.
Now,
Annual Holding Period Return = (Ending Price –Beginning Price + Dividends)/ Beginning Price.
= (6.02 – 3.36 + 0.14)/ 3.36
= 2.8/3.36
= 83.33%.
Holding period return is also known yield return.
Calculation of expected dividend yield of Company.
Expected Dividend per share= 0.20 (Say).
Now Expected Dividend Yield = (Expected dividend per share/ Current Stock Price) X 100
= (0.20/6.02) X 100 % = 3.32%.
Answer to Question 3)
Market Capitalization
Market Capitalization means the total current value of outstanding shares in the market. It is the value that is derived by multiplying the current stock price with the total stock in circulation in the market or in other words it is also known as ‘total number of issued shares’. In our study the total market capitalization of Qantas as of 29/09/2017 is 10.43 billion (source: http://www.marketindex.com.au/asx/qan#). It is important to note that the market capitalization is different from equity value presented in the balance sheet. Balance sheet item is represented in terms of par value/ price at initial offering whereas market capitalization is the value each issued share in terms current trading price. It is said that market capitalization is the actual measure of company worth.
(Source: https://www.ruleoneinvesting.com/blog/financial-control/market-capitalization-meaning-why-price-doesnt-always-equal-value/)
Gearing Ratio:
Gearing is related to the leverage of the company. Gearing ratio compares the loan/ borrowed fund of the company with its equity (also known as shareholders fund). Gearing ratios are known as Capital Structure ratios, which refer to the way company finances its assets using the combination of debt and equity. Some of the types of gearing ratios are as under:
– Debt Ratio.
– Interest Coverage Ratio.
– Times interest earn Ratio.
– Debt- Equity Ratio
Gearing ratio is one of most important tool for comparison. Higher the gearing ratio higher is the utilization of borrowed fund by the company. (Source: Investopedia.com)
Beta for the Share:
Beta is the measure of volatility of the share in relation to the market. Beta of the market is considered to be 1. The beta greater than 1 means share of the stock is very volatile which tends to go up and down with the market. Beta less than 1 means stock is less volatile than the market. Beta measures the systematic risk (diversifiable) of the stock. The beta coefficient is calculated by dividing the covariance of stock return versus the market return by the variance of the market.
CAPM Model:
Beta of the Stock: 1.02 (Source: https://www.reuters.com/finance/stocks/overview/QAN.AX)
Average Market Return/ Premium: 8% (Given; i.e. Expected Return – Risk Free Rate).
Risk Free Rate: 2% (approx., for the 90 days Bill Yield).
Now,
Using the CAPM model Expected rate of return= risk free rate + Beta (Expected market return – Risk free rate)
Here,
Average market return/ premium= Expected market return – Risk free rate
Therefore, expected return of Stock = 2% + 1.02 X 8%
= 10.16%
Since, the beta of the stock is more than 1; stock of the Qantas considered to be volatile, which means it moves more than the overall market. Higher beta also indicates the riskiness of stock as its movement is more than the market; this also triggers the probability of the higher return for the stock.
Answer to Question 4
The aim of working capital management is the efficient use of short-term assets and short term liabilities resulting in the positive cash flow for the company. There are two parts in the working capital management. They are: Current Assets and Current Liabilities.
In reference to the annual report of the company for the fiscal year 2017 (Source: https://newswire.iguana2.com/af5f4d73c1a54a33/qan.asx/2A1036461/QAN_Annual_Report_to_shareholders), result of the cash flow statement is listed as under:
Operating Cash Flow: 2,704 M.
Investing Cash Flow: (1,395 M).
Financing Cash Flow : (854 M).
Cash at the end: 1, 775 M.
The above figures depicts that there is a positive cash flow after operation of the company, this means company is able to adequately generating the income to finance its operating expenses. Similarly, Company is also able to generate the fund to meet its investing and financing needs. This is clearly shown by the cash at the end figure of the cash flow statement.
Current Ratio: Current ratio measures the ability of the company to cover it short term debts with cash or equivalent assets (Liquid). Formula of the current ratio is:
Current Ratio= Current Assets/ Current Liabilities.
Details as on 30 June 2017.
Total Current Assets= 3,119 M.
Total Current Liabilities= 7, 095 M.
Therefore, the current ratio= 3119/7095 = 0.44 times.
In general, current ratio of 2 times is considered to be best for the company. At glance, current ratio of the Qantas seems to be quite low, which hints a probability that the company might feel immediate cash shortage in case of need. Current liabilities section balance sheet includes the figure of 3685 M called Revenue received in advance, this figure will be converted into revenue in due course. Thus, in my understanding we can exclude this figure to find actual current ratio of the company, which will be 0.91 times, despite this current ratio of the company, is still in lower side in general perception but in reference to the industry standard it is considered to be healthy.
In conclusion, company is adequately managing its working capital, with positive cash flow after investing and financing activities and with the current ratio that is adequate according to the industry standard.
Answer to Question 5
Dividend payment history of the Company:
Year
Dividend
Amount Per Share
Franking
2016/17
Final
Interim
7 cents
7 cents
0%
50%
2015/16
Final
Interim
7 cents
0 cents
100%
0%
2014/15
Final
Interim
0 cents
0 cents
0%
0%
2013/14
Final
Interim
0 cents
0 cents
0%
0%
2012/13
Final
Interim
0 cents
0 cents
0%
0%
(Source: http://investor.qantas.com/investors/?page=capital-management)
In five years, company has paid dividend only in last 2 fiscal years, where it has paid the dividend of 7 cents per share with franking credit of 100% in fiscal year 2015/16 and it has paid the dividend of 14 cents per share with the franking credit of 50% in the fiscal year 2016/17. Considering the current financial health and goodwill of the company, I expect company do well in the future as well. As history suggests company is extending its shareholder return policy and providing adequate level of franking credit to the customers. Considering this facts I would suggest Aunt Helen to hold share at least for the next fiscal year, where we shall conduct company performance review again.
Answer to Question 6
Diversification is basically an idea of investing in different assets classes of different companies so as to hedge the risk of overall investment in intent to avoid damaging investment by investing in single security. It is the way allocating capital in a way that reduces the exposure to any one particular assets or risk. Aunty Helen can diversify her investment by investing in different assets classes from different industry. In this way she can reduces industry specific external environment risk.
Answer to Question 7
Systematic Risk
Systematic risk are the risk that can’t be diversified, it is inherent to the entire market and market segment. It is also known as market risk. Factors like inflation and interest rate change are the example of systematic risk because it affects the entire business segment.
Example of systematic risk for Qantas is:
– Change in the cash rate by the central bank.
– Effect in the business due to the natural calamities.
Unsystematic Risk
Unsystematic risks are the risk that can be diversified. It is also known as specific risk or residual risk. Examples of the unsystematic risk are: arrival of new competitor in the market and change in the regulatory system.
Example unsystematic risk for Qantas is:
– Ceasing of substantial holder.
– Company CEO/ Management level employee appointment.