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BUS1AFB Principles of Accounting and Finance Assignment - Dollars and Sense, La Trobe University, Australia

Case Study 1 -

 Date Adjusted Historical Prices (AUD) Domino's Retail Food 28th June, 2013 (since 30th was a Sunday) 9.78 3.95 30th June, 2014 19.66 3.83 30th June, 2015 33.17 4.76 30th June, 2016 64.10 5.10 30th June, 2017 49.69 4.54 29th June, 2018 (since 30th was a Saturday) 51.00 0.54

 Date Dividend per share (AUD) Domino's Retail Food 21st Aug, 2013 0.154 9th Sep, 2013 0.1025 18th Feb, 2014 0.177 17th Mar, 2014 0.1075 22nd Aug, 2014 0.19 11th Sep, 2014 0.1125 19th Feb, 2015 0.246 18th Mar, 2015 0.115 21st Aug, 2015 0.272 10th Sep, 2015 0.1175 25th Feb, 2016 0.347 17th Mar, 2016 0.13 22nd Aug, 2016 0.38826 9th Sep, 2016 0.145 21st Feb, 2017 0.484 17th Mar, 2017 0.1475 21st Aug, 2017 0.449 11th Sep, 2017 0.15 20th Feb, 2018 0.581 Total Dividends 3.28826 1.1275

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Q1. Calculate the Holding Period Return for each company for each year from 30 June 2013 to 30 June 2018.

Holding Period Return (Jun 2013-Jun 2018): (Closing Price+Dividends-Opening price)/Opening price

 2013-14 2014-15 2015-16 2016-17 2017-18 Domino's (21.46+0.154+0.177-10.90)/10.90 = 99.92% (35.69+0.19+0.246-21.46)/21.46 = 68.34% (68.13+0.272+0.347-35.69)/35.69 = 92.63% (52.08+0.38826+0.484-68.13)/68.13 = -22.28% (52.22+0.449+0.581-52.08)/52.08 = 2.25% Retail Food (4.54+0.1025+0.1075-3.95)/3.95 = 20.25% (5.43+0.1125+0.115-4.54)/4.54 = 24.61% (5.53+0.1175+0.13-5.43)/5.43 = 6.40% (4.7+0.145+0.1475-5.53)/5.53 = -9.72% (0.54+0.15-4.7)/4.7 = -85.32%

Q2. Estimate the Expected Return of each company based on your five-year historical sample of returns.

Expected return = D1/P0 +g. (g is taken to be Australian GDP for years 2013 to 2017)

 2013-14 2014-15 2015-16 2016-17 2017-18 Domino's (0.154+0.177)/10.90+0.0264= 5.68% (0.19+0.246)/21.46+0.0256 = 4.59% (0.272+0.347)/35.69+0.0235 = 4.08% (0.38826+0.484)/68.13+0.0283= 4.11% (0.449+0.581)/52.08+0.0196= 3.94% Retail Food (0.1025+0.1075)/3.95+0.0264 = 7.95% (0.1125+0.115)/4.54+0.0256 = 7.57% (0.1175+0.13)/5.43+0.0235 = 6.91% (0.145+0.1475)/5.53+0.0283 = 8.12% 0.15/4.7+0.0196 = 5.15%

Q3. Calculate the Total Return to Shareholders of each company over the five-year period from 30 June 2013 to 30 June 2018.

Total Return:

Domino's= [(52.22+3.28826) /10.90] ^0.2 - 1 = 38.48%

Retail Foods = [(0.54+1.1275)/3.95] ^0.2 - 1 = -15.84%

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Q4. Compare and contrast the performance of each company over the past five years, based on the change in share prices.

The share prices of Domino's have risen at a CAGR of 36.80% over the past 5 years, while that of Reality Foods have declined at a CAGR of 32.83%. Thus, the two shares have gone in opposite directions over the past 5 years (from June 2013- June 2018).

Q5. Based on the information contained in the following tables and the 2018 Annual Reports, calculate for each company the annual growth in Earnings per Share; Net Profit Margin; Asset Turnover Ratio; Leverage Ratio; Return on Equity; Quick Ratio and Net Debt to Equity Ratio for the 2017/18 financial year.

 Domino's Enterprises 2014 2015 2016 2017 2018 Growth in EPS 29% 46% 27% 24% 21% Net Profit Margin 10% 13% 12% 13% 15% Asset Turnover Ratio 121% 91% 80% 70% 61% Leverage Ratio 2.07 2.11 2.51 2.79 1.95 Return on Equity 25% 24% 25% 26% 34% Quick Ratio 81% 80% 63% 72% 47% Net Debt to Equity Ratio 30% 27% 66% 67% 170%

 Retail Food 2014 2015 2016 2017 2018 Growth in EPS 2% -17% 46% 3% -575% Net Profit Margin 66% 28% 32% 25% -103% Asset Turnover Ratio 15% 21% 22% 29% 50% Leverage Ratio 1.40 1.72 2.05 2.00 1.67 Return on Equity 13% 10% 15% 15% -98% Quick Ratio 213% 75% 157% 117% 11% Net Debt to Equity Ratio 19% 54% 50% 52% 157%

Q6. Compare and contrast the performance of the two companies over the past five years by examining the following ratios.

a. Profitability (Growth in EPS and Net Profit Margin)

Domino's has been recording a consistent growth in revenue and earnings throughout 2013-2018, while Retail food has been recording an erratic trend in revenues and earnings, thereby suffering significant losses in 2018 (while Domino's recorded healthy profits).

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b. Efficiency (Asset Turnover Ratio)

Both the companies have a low Asset turnover ratio, which indicates that they are not utilising their assets properly in order to earn greater revenues, Comparison wise, Domino's has had a slightly better Asset turnover ratio than Retail food.

c. Liquidity (Quick Ratio)

Quick Ratio explains the immediate financial liquidity a company has at its disposal to meet its current liabilities. In the given case, Retail Food has a very low Quick ratio of 11% (as compared to Domino's 47%), which shows that the liquidity position of the company is very poor and has to raise funds consistently in order to operate its business.

d. Solvency (Leverage Ratio and Net Debt to Equity Ratio)

Both the companies have a very high Net Debt to Equity Ratio, which indicates that both companies are highly levered. Although Domino's earnings are growing consistently y/y, Retail Food's shareholders has to take note of its debt and thereby make sound investment decisions.

Case Study 2 -

Q1. What is the contribution margin?

Contribution margin is the per unit variable income, also known as Profit-Volume Ratio. In the given case, the contribution is:

Contribution = Sales Price-Variable costs

Variable costs (VC) = Direct Material Costs + Direct Labour Costs + Other direct expenses

1st year:

VC = 0.38 + (16+17)*1.095*8*252/70000 + (3*0.08) + (3*0.05)

VC = 0.38 + (72848.16/70000) + 0.24 + 0.15 = 1.811

Therefore, Contribution = \$ (3 - 1.811) = \$ 1.189

Therefore, Contribution Margin = (Contribution / Sales) *100 = 1.189 / 3 *100 = 39.63%

2nd year:

VC = 0.38 + (16+17)*1.095*8*252/80000 + (3*0.08) + (3*0.05)

VC = 0.38 + (72848.16/80000) + 0.24 + 0.15 = 1.681

Therefore, Contribution = \$ (3 - 1.681) = \$ 1.319

Therefore, Contribution Margin = (Contribution / Sales) *100 = 1.319 / 3 *100 = 43.97%

3rd year:

VC = 0.38 + (16+17)*1.095*8*252/90000 + (3*0.08) + (3*0.05)

VC = 0.38 + (72848.16/90000) + 0.24 + 0.15 = 1.579

Therefore, Contribution = \$ (3 - 1.579) = \$ 1.421

Therefore, Contribution Margin = (Contribution / Sales) *100 = 1.421 / 3 *100 = 47.37%

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Q2. How many cupcakes must Jane sell in a year in order to break even?

Break- even point (BEP) of sales implies the number of units that must be sold by a company so that its revenues match up to the total costs (fixed + variable). Hence, Contribution should equal fixed costs to achieve break even. In the given case, the BEP for Jane will be:

Contribution per unit* #units = Fixed costs

1st year:

1.189*n = (350*52) + 3500 = 21700

N = 21700/1.189 = 18250.6 = 18251 (approx)

2nd year:

1.319*n = (350*52) + 3500 = 21700

N = 21700/1.319 = 16451.8 = 16452 (approx)

3rd year:

1.421*n = (350*52) + 3500 = 21700

N = 21700/1.421 = 15270.9 = 15271 (approx)

Q3. If Janet can sell all the cakes the baker can produce in an eight-hour shift (that is, 144 cupcakes) each day for 252 days of the year, what will be the annual profit before tax?

Annual Profit before Tax:

 1st Year 2nd Year 3rd Year Production (144*252) 36,288 36,288 36,288 Contribution p.u. (\$) 1.189 1.319 1.421 Total Contribution (\$) 36,288*1.189 = 43,146.32 36,288*1.319 = 47,863.87 36,288*1.421 = 51,565.25 Fixed Costs (\$) 21,700 21,700 21,700 Annual Profit before tax (\$) 21,446.32 26,163.87 29,865.25

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Q4. Calculate the Net Profit per year, assuming that Janet is able to sell 70,000 cakes in the first year, 80,000 in the second year and 90,000 in the third year.

Net profit

 1st Year 2nd Year 3rd Year Sales (units) 70,000 80,000 90,000 Contribution p.u. (\$) 1.189 1.319 1.421 Total Contribution (\$) 70,000*1.189 = 83,230 80,000*1.319 = 105,520 90,000*1.421 = 127,890 Fixed Costs (\$) 21,700 21,700 21,700 Annual Profit before tax (\$) 61,530 83,820 106,190 Tax @ 30% (\$) 18,459 25,146 31,857 Annual Profit after tax (\$) (FCF) 43,071 58,674 74,333

Q5. Calculate the Net Present Value of the business, assuming the business is sold at the end of the third year for \$150,000. In this Case Study, assume that Net Profit is equivalent to Free Cash Flow.

Assuming sales estimates of Jane to hold, Net profit after tax shall be considered as free cash flow at each year end.

Initial Investment = \$200,000

Kc = 16%

Therefore, NPV = PV of inflows - PV of outflows

NPV = (43,071/1.16) + (58,674/1.162) + [(74,333+150,000)/1.163] - 200,000

NPV = 37,130.17 + 43,604.34 + 143,720.66 - 200,000 = 224,455.17 - 200,000

NPV = 24,455.17

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Q6. Calculate the Profitability Index, assuming the business is sold at the end of the third year for \$150,000.

Profitability Index = PV of Inflows / PV of outflows = 224455.17/200000 = 1.12

Q7. Based on the NPV you have calculated for the investment, would you recommend to Janet that the investment is financially viable? Justify your recommendation.

Since the investment is earning a positive net present value of \$24,455.17 at her desired rate of return, Janet shall accept the project as it is financially viable.

Q8. Consider the risks of establishing a cupcake business as described in What advice might you offer Janet to modify her business plan to reduce its exposure to such risks?

There are several risks associated with a cupcake business. The risks, along with measures to curtail/overcome them, are listed below:

a. Low cost of entry: With this comes the risk of increasing competition. Janet shall make sure that her cupcakes have a unique identity of their own so as to be differentiated from its competitors.

b. Low differentiating factor: Baking is something anyone who has an idea can do. With such ease of access to baking classes, everyone is aware of the basic techniques to make cupcakes. Hence, Janet shall continuously bring innovation into her cupcakes so as to stay relevant in the market and overcome its competition.

c. Healthy eating: With the trend for healthy eating being at an all-time high, cupcakes' demand might slow down. Hence, Janet shall also incorporate cupcakes made of healthy ingredients into her product portfolio so as to please the health-conscious customers.

d. Premium pricing: As cupcakes are highly priced, Janet shall make use of ideas such as discounts so as to stay in demand.

e. No exclusivity: With increasing innovation in products comes the risk of cupcakes being copied by other competitors. Janet shall not worry about competitors copying her cupcakes, as no item can be copied as a whole.

f. Market Saturation: With everyone selling bakery items from home, Janet shall try to bring innovation into her cupcakes and keep her cupcakes relevant in the market.

g. Over exposure: With bakery shops, once a customer tries its items, their satiety levels are reached and they hardly come back on a frequent basis. Janet can foray into cupcakes made of seasonal produce so as to keep bringing customers to her shop.

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