Compute and interpret financial ratios evaluate investment


In this assignment, you are expected to:

  • Compute and interpret financial ratios
  • Evaluate investment proposals
  • Apply knowledge to decide appropriate financing plan and dividend policy

You are analyzing Good Landscaping Private Limited and you have collected the following information. 

Good Landscaping operates 7 nurseries and provides landscaping services to the condominiums in Singapore. It started in the year 2000 and its revenues have grown at a compounded rate of about 12% a year. Its financial details for the past 3 years are shown below:

Income Statement

 

FY2014

FY2013

FY2012

 

$'000

$'000

$'000

 

 

 

 

Revenue

9,600

9,200

8,700

Cost of goods sold

-5,376

-5,152

-4,872

Gross profit

4,224

4,048

3,828

Operating expenses

-845

-729

-612

Net operating profit

3,379

3,319

3,216

Interest expense

-82

-65

-42

Income before tax

3,297

3,254

3,174

Income tax

-659.44

-650.87

634.8

Net income

2,638

2,603

2,539

Balance Sheet

 

FY2014

FY2013

FY2012

 

$'000

$'000

$'000

Current assets:

 

 

 

Cash and bank

650

765

640

Inventory

1200

920

725

Trade receivables

480

368

300

Total Current assets

2,330

2,053

1,665

Non-current assets:

 

 

 

Property, plant and equipment

2,400

2,100

1,900

Other non-current assets

250

140

175

Total Non-current assets

2,650

2,240

2,075

 

 

 

 

Total assets

4,980

4,293

3,740

Current liabilities

 

 

 

Trade payables

269

234

203

Short-term loans

300

175

230

Other current liabilities

75

26

38

Total Current Liabilities

644

435

471

Non-current liabilities

 

 

 

Borrowings

610

610

410

Other non-current liabilities

18

15

16

Total Non-current Liabilities

628

625

426

Equity

 

 

 

Share capital

2,700

2,300

2,000

Reserves

1008

933

843

Total Equity

3,708

3,233

2,843

 Number of shares outstanding

2700000

2300000

3000000

Total liabilities and equity

4,980

4,293

3,740

5-year EPS and DPS

 

2014

2013

2012

2011

2010

EPS

0.98

1.13

0.85

1.34

1.28

DPS

0.95

1.09

0.82

1.22

1.08

On July 1, 2015, Good Landscaping plans to open another 3 nurseries.  The initial capital expenditure required for this expansion is estimated to be $3 million, which is to be depreciated equally over three years to zero net book value. No salvage value is expected.

Based on a market feasibility study which cost $100,000 to undertake, it anticipates that sales will be $300,000, $500,000 and $650,000 for the first three years. Thereafter, it will grow at 2% per year indefinitely. 

Gross profit will be 50% of sales. Fixed overheads in the first three years is estimated to be $75,000 per year and this will increase to $125,000 from year four onwards. Net working capital is estimated to be 12% of sales, which is required at the start of the year. As the firm expects to fully implement a just-in-time inventory system, the net working capital will be fully recovered at the end of year three. 

For the purpose of investment appraisal, the company uses a market risk premium of 5% and risk-free rate of 3%. Its historical beta is 0.8 and marginal tax rate is 20%. Good Landscaping has a target debt ratio of 16%. 

It issued bonds on July 1, 2013 for $200,000 with a par value of $100 and coupon rate of 8%.

The maturity of the bonds in on June 30, 2020. The bonds will pay coupon semi-annually.  The market value of bonds is $108.53. Its shares are selling at $1.20. 

Question 1:

Compute the accounting ratios for FY 2012 to 2014 and evaluate Good Landscaping's  liquidity, profitability, asset utilisation and financial leverage.

Question 2:

Calculate Good Landscaping's cost of equity, cost of debt and weighted average cost of capital (WACC). 

Question 3:

Calculate the net present value (NPV) and appraise whether Good Landscaping should proceed with this growth strategy.

Question 4:

Analyse and comment on the dividend policy over the last 5 years. 

Question 5:

In order to finance the expansion plan, the Board is considering several options such as issue shares for $ 9 million, borrow funds for $9 million and reduce dividend payout to 40%.

Examine the implications of various options and recommend an appropriate financing alternative.

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Finance Basics: Compute and interpret financial ratios evaluate investment
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