Sample BMG704 International Finance

BMG704 International Finance Assignment Sample

Assignment Brief

Aim & Learning Outcomes
Module Rationale

Businesses now operate in a highly globalized and competitive market where access to, and control of, finances are necessary for survival. This module focuses on the international financial management techniques essential throughout the business life cycle. The module provides a broad overview of international financial management theory and practices which are imperative to creating and sustaining a successful international business venture. The module probes the financial landscape in which modern day international businesses operate.

Overall Aim of the Module

The module provides students with and introduction to financial management theory and techniques required for entrepreneurship and managerial decision-making within an international business context.

Learning Outcomes

Successful participants will be able to:

Learning Outcome 1

Demonstrate a comprehensive knowledge and critical appreciation of the key concepts and topical issues of International Finance.

Learning Outcome 2

Act autonomously in the analysis of new and/or abstract data using a range of techniques appropriate to the discipline of International Finance, synthesizing evidence and critically evaluating complex problems in International Finance.

Learning Outcome 3

Be proactive in leadership, work effectively within a team or group as appropriate, make and sustain arguments/alternative points of view related to the discipline of International Finance.

Learning Outcome 4

Demonstrate confidence and flexibility in critically evaluating complex problems and the application of appropriate knowledge, tools or methods to their solutions in the context of International Finance. Be confident in the application of their own judgement.

Coursework 1

Assessment Task

Choose a Multinational Enterprise (MNE) listed on an internationally recognized Stock Exchange (including for example, London, Dublin, New York or Paris).
You are required to:

a. Critically discuss two recent developments in the international financial environment which appear to have impacted on your chosen company’s recent performance and development. Analyze how these two developments are likely to impact on the company in the near future. (14 marks)

b. Discuss the following key elements of the MNE’s international financial and/or risk management strategy (and how they appear to have affected the financial performance of your chosen company):

• Sources of finance
• Dividend policy (14 marks)

c. With reference to your chosen Multinational Enterprise (and using the most recent annual report published), analyses the financial performance (in terms of profitability, liquidity, efficiency and investment) of the company in the two most recent consecutive financial periods (e.g. 2018/19 or 2019/20,) using 8 different accounting ratios (prior year comparative figures will be available in the annual report).

Notes:

(i) You must advise your tutor of your chosen multinational enterprise to ensure suitability for use and avoid duplication;

What you need to do to demonstrate achievement of learning.

(ii) It is advisable to choose your multinational enterprise and download the most recent annual report by the end of week 1 – this will facilitate your preparation and allow you to effectively participate in weekly class activities;

Assessment Guidelines

1) Detailed guidance will be given in the tutorials in weeks 1 and 6 to explore the factors for your chosen case study and provide advice on the use of mediums/technologies for this assessment exercise.

2) This element of coursework accounts for 60% of the overall assessment. Students should refer to the marking criteria attached to provide them with fuller details of marking criteria a for each classification band.

3) Completed assignments must be submitted via Turnitin by 12.00 noon on Sunday of week 9 in semester 1. This date and time is final, and a late submission will be penalized by the deduction of marks.

4) All submitted assignments should have the file name:
BMG704 (86968) Student B00xxxxxx

6) View additional ‘Standard Assessment Guidance,’ for further guidance applicable to all
coursework elements.

Coursework 1 FEEDBACK for assignment help

Feedback on the assessment will be provided via Blackboard within three weeks of the submission date.

Solution

Introduction

Woolworths is a multinational supermarket and grocery stores having headquarters in New South Wales, Australia. Company is specialised in selling groceries such as packaged foods, meat, vegetables and fruit and also sell beauty products, stationery, magazines, DVD’s, baby supplies and health products. Company is listed on Australia stock exchange currently trading at the rate of $39.20AUD. Company generated revenue of $42.151 billion in 2020. This report aims to discuss the recent development and risk management strategy in the international financial environment and its impact on Woolworths. Furthermore, the report will also conduct an analysis of financial performance with the help of accounting ratios for the most recent consecutive years (2019/2020).

Two recent financial developments of Woolworths

According to annual report of the Woolworths (2020), Company has issued Australian Medium term notes amounted to $1.0 billion which include tranche of $400 million maturing in May, 2025 and other tranche of $600 million maturing in the month of May, 2030 (Woolworths Group, 2020). The purpose of issuing medium term notes is to refinance the group senior US notes which were maturing in month of September, 2020 and also for European medium term notes maturing in November, 2020. The aim of the Company is to lower the effective interest rates and lengthening the weighted average maturity of the period of the notes.

According to annual report of Woolworths (2020), Woolworths launched 131 products in the range of fresh made easy range, to offer more comfortable alternatives to shelves as more customers are demanding for delicious and fresh meals. Company also opened new distribution centres to increase its supply chain network and provide a semi-automated national distribution for growth and increasing efficiencies and deliver better experiences to customers.

Impact of financial developments on Woolworths

The debt refinancing is a decision of Companies to retire their existing debts, reduce coupon rate reflecting the market rate of interest and is a part of renegotiation of debt obligations. Debt refinancing will create a cash inflow and enhance credit rating of Woolworths (Woolworths Group, 2020). However, if a Woolworths get the best rate on the refinancing of medium term notes then it will increase the cash flow which can be reinvested in equipment, new locations, inventory, and meeting other monthly payments to especially fight with this pandemic condition which will further help in maintaining better performance and increasing profitability (Robinson, 2020). Refinancing debt may dissuade the potential investors and also acquirers.

The second financial development is increase in product range and supply chain network which will increase sale and thus the profitability of the Company. Opening of new distribution centres will increase the cash flow for the Company and improve the liquidity. There will be increment in the stock options and Company could meet the excessive demand of customers through better supply chain. There will be increase in competitiveness in the market which will further increase the value of share in the market. However, Woolworths will suffer shortage of cash at initial stage which may also lead to need of borrowing more cash from the market (Moyer, et al. 2014). There will be need of more workforce, more equipment and facilities and therefore, more capital needs. Company will have to manage the cost of business and finance in such a way that it can retained some profits for future uncertainties such as pandemic situation, expansion of business or setting off debts also distribute some profits to shareholders which can appear as finance distress for Company in future.

Source of finance and dividend as key elements of international finance and/or risk management strategy

Multinational Companies arrange finance mostly from raising from issue of shares, debentures or bonds or approaching to banks, retained earnings and financial institution to meet its long term obligations. Short term source of finance is obtained through commercial banks as working capital, trade credit and receiving of advance. When capital is altered then there is impact on net income of the Company, cost of capital, leverage ratio and also the liabilities. Equity financing dilutes the existing shareholding. However, Company’s cash flow from financing activity becomes positive due to increase in funds with the Company from issue of shares or bonds (Jacque, 2014). Debt financing of the Company increases the liabilities of Company and also cash flow from financing activity. Debt financing increase the finance cost as Company is required to pay regular interest and repay the principal amount on future date to bondholder or lender. However, debt financing does not dilute the ownership. There is decrease in net income for shareholders and debt holders hold senior position at the time liquidation of Company. Company gets tax benefit through lower rate of tax.

During the financial year 2020, the unprecedented pandemic due to Coronavirus has impacted Woolworths both positively and negatively. Company dedicated to invest in safety and addressed risks out of pandemic. Company increased its distribution centres to meet the demand of daily needs by customer, employed many new workers to response to the changing customer behaviour (Lumby and Jones, 2015). For the purpose of above initiatives, Company raised borrowings which are doubled from prior year and increased cash flow. Company has refinanced its existing loan and also paying $700 as interest on lease which is a regular financial burden on Company.

Woolworths Company might face liquidity problems due to constant receiving of capital from borrowings in order to pay debts and invest in operations. Company is required to be more cautious for its excessive debts at constant rate which is giving profits in short run but can create great financial trouble in long run. Company has incurred another long term obligation by Dividend policy.

Dividend is the distribution of proportion of profits to shareholders after tax from surplus remained. Company either choose to use the profits to reinvest in the business or disseminate to shareholders in form of dividend. Dividend policy of any Company creates positive impact on performance of Company (Moyer, et al. 2014). There is improvement in return on equity and also enhance the corporate image in the market. Woolworths have been constantly paying dividend to its shareholders. In the year 2020, Company declared the dividend of 48 cents per share which is around $606 million (Woolworths Group, 2020). Company also give option to shareholders to convert their dividend into shares under dividend reinvestment plan which will provide better rate of return to shareholders and increased the number of outstanding shares for Company. The payment of dividend has decreased the retained earnings of the Company and resulted in negative cash flow from financing activities and the cash decreased from hands of Company.

Woolworths might approach for no dividend payment policy for one year to manage its liquidity positions which seems to be delicate and can invest that amount in widening its range of products, renew of its existing process of supply of goods or repay its long term obligations (Hill, 2017). This will automatically improve the profitability, leverage position and shareholder value of the Company.

Analysis of financial performance of Woolworths

Liquidity Ratio

Liquidity ratio is financial metrics which help in ascertaining to pay current debts without going for external capital. Current and quick ratio gives an idea on ability of Company to meet its short term liabilities which fall due in coming 12 months from its short term assets (Palepu et al. 2020). The ideal current ratio is 2:1 and quick ratio is 1:1.
Current ratio
Current ratio = Current assets/Current liabilities

Quick ratio
Quick ratio = Quick assets/current liabilities
Quick Assets = Current Assets-Inventory

Analysis

The current ratio of Woolworths is less than 2 in 2019 and 2020 which is reflecting that Company might face difficulty to set off its current obligations when it will become due. Quick assets are highly liquid assets excluding inventory (Easton, et al. 2018). The quick ratio of Company from previous year is implying that Company is short of liquid assets to pay current liabilities and also current assets are dependent on inventories. Moreover, current ratio also gives a sign of effective operating cycle of Company to convert its product into cash. It is ascertain that Woolworths have trouble in receiving its debtor payment timely which can result in liquidity problems.

Profitability Ratio

Profitability ratio ascertains the ability of a Company to earn profit out of operational costs and revenue and also related to shareholder equity and balance sheet assets.

Return on Assets

Return on Assets = Net income/Average total assets
Total assets for 2020= $38472m
Total assets for 2019= $23916m
Total assets for 2018= $23391m

Analysis

Return on assets ratio present the Company’s earning of Company on asset. Higher return on assets will signify that the Company is efficiently using its assets. Company return on assets has been decreasing from prior year which is depicting the inefficient of management of Woolworths to manage its assets and generate earnings from its assets on balance sheet (Alexander and Britton, 2017). In other words, Company is unable to generate more profits per dollar of its assets in 2020.

Return on Equity

Return on Equity = Net income/ Shareholder Equity (Total Equity)

Analysis

Return on equity is a generation of return on the money invested by shareholders. High return on equity denotes the ability of management to utilise the capital invested by shareholders in an efficient manner (Easton et al. 2018). Return on equity of Woolworths is decreased from the previous year which is signifying that management is not utilising the equity finance efficiently.

Gross Profit Margin

= Revenue-Cost of goods sold/Revenue

Analysis

Gross profit margin is to measure the profitability and financial health of Company by calculating the left over money from sale of product after deducting cost. The gross profit margin of Woolworths has been stable which is implying that Company needs to be more efficient in generating profit by considering the costs involved in selling goods.

Debt to Equity

= Total liabilities (Current liabilities + long term liabilities)/Total Shareholders’ equity

Analysis

Debt to equity evaluates the financial leverage of Company and help in measuring the ratio of wholly owned funds versus outside funds. This shows that how much does a Company is using leverage and also reflects the shareholder equity in terms of covering the outstanding debts if business slumps (Bekaert and Hodrick, 2014). The debt to equity ratio of Woolworths has spiked with double rate from 2019 which is demonstrating the aggressive nature in financing the growth of Company with debt and has resulted in excessive finance cost in terms of interest expenses.

Cash flow margin
= Cash flow from operating activities/Sales

Analysis

Cash flow margin is a profitability ratio measure the earning quality of Company and efficiency. There is increase in cash flow margin from prior year which is showing that Company is able to convert sales into cash better from 2019.

Efficiency ratio

The ratio measures the ability of Company to use assets efficiently which can generate more income (Jacque, 2014). The ratio looks at the time to convert stock into cash and collect cash from customers etc.

Asset turnover ratio

=Total sales/Beginning assets (assets at start of year) + Ending assets (assets at end of year)/2

Analysis

The ratio ascertains the effectiveness of Companies to utilise assets and generate sales. Company is performing better if the ratio is high and vice versa (Alexander and Nobes, 2016). Asset turnover ratio of Woolworths has been reduced from previous year which implying that the Company is generating less revenue on assets or assets are not being utilised up to its capacity.

Inventory turnover ratio

=Cost of Goods sold/opening stock (inventory at start of year) + closing stock (inventory at end of year)/2

Analysis

Inventory turnover ratio indicates the number of times Company turn over its stock or inventory during a year. In other words, it measures the number of times the inventory is used or sold in a time period such as for one year (Eiteman, 2016). There is improvement in the ratio from previous year and now Company now replace its stock for 10 times in a year which shows the demand of goods of Company.

Day Sales outstanding

= Accounts receivable/Revenue* Days in period

Analysis

Days Company required collecting the revenue from sales of goods on credit. The ratio shows the capability of Company to manage accounts receivables. There is increase in average number of days from previous year which indicates that Company takes long time to collect its outstanding receivables.

Investment ratio

Investment ratio helps in assessing the performance of shares of Company such as price earnings ratio and earning per share (A trill and Mc Laney, 2017). Investment ratio is more beneficial for investors in addition to the interest of ordinary shareholders.

Earnings per share

= Net income- dividend on preference shares/Weighted Average common shares outstanding
= 1165-0/1257.9 = 0.92

Analysis

Earnings per share indicate the amount of money earned by Company for each share. According to annual report of Woolworths (2020), the earnings per share of Company are decreased from previous year which was 2.06. This reflects that there is less profit or money earned on each share of Woolworths during 2020. High EPS is also good for Company as investors will show interest in investing in the Company.

Price earnings ratio

= Market price per share/ Earnings per share
Market price per share= $39.20AUD
Earnings per share = $0.92 AUD
=39.20/0.92=$42.60

Analysis

Price earnings ratio ascertains the relative value of shares value in the market. The ratio assesses the current value of share with the earnings per share (Alexander and Nobes, 2016). A share having high PE ratio is more attractive to investors and helps in valuing the value of share.

Conclusion

It can be concluded, that Woolworths is required to become more efficient by improving its ability to use the assets up to its capacity, reduce the burden of debts, find out the ways to control its cost to generate more profits. Company is also insufficient in managing its cost of sales which has decreased the revenue and degraded the performance of Company from last year. Company has adopted various plans to face the pandemic in opportunistic manner but Company capacity to meet out its short term obligations is shrinking which may downturn the financial position of business. Company is required to increase its inventory turnover and decrease its credit sales to manage the liquidity position. Furthermore, Company is cautiously required to focus on its investments and utilise the capital obtained either from borrowings or issue of shares efficiently.

References

Alexander, D. and Britton, A. 2017. International financial reporting and analysis. 7th ed. London: Cengage.

Alexander, D., and Nobes, C. 2016. Financial accounting –an international introduction. 6th edition. Harlow: Pearson Education.

Atrill, P., and Mc Laney E. 2017. Accounting and finance for non-specialists. 10th Edition.
Eiteman, D.K. 2016. Multinational Business Finance, 14th Ed., Pearson.

Bekaert, G. J., and Hodrick, R.J., 2014. International Financial Management, 2nd Ed., Pearson.

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Hill, C. W. L. 2017. International business. 11th ed. New York: Pearson.

Jacque, L. 2014. International corporate finance. London: Wiley.

Lumby, S. and Jones, C. 2015. Corporate finance: theory and practice. 9th ed., London: Cengage

Moyer, R.C., McGoogan, J.R. and Rao, R.P., 2014. Contemporary financial management. Cengage Learning.

Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU.

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Watson, D. and Head, A. 2016. Corporate finance 7th ed. New York: Pearson.

Woolworths Group, 2019. Annual Report. Available at https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf. Accessed on 18.07.2021

Woolworths Group, 2020. Annual report. Available at https://www.woolworthsgroup.com.au/icms_docs/195794_annual-report-2020.pdf. Accessed on 18.07.2020