Financial Management Assignment
Your current role is the Manager of the Finance Division of Fortescue Metals Group Limited, and you report directly to the Chief Financial Officer (CFO) of the company. The CFO has requested you to attend a strategic retreat being held by the company to present to the Senior Leadership Group, including the Chief Executive Officer (CEO) and the Board of Directors, on the current financial policy platform of the company, the nature of the linkage or association between these policies adopted by the company, and how they integrate to influence the operating and share performance outcomes for Fortescue Metals Group Limited.
Fortescue Metals Group Limited (FMG) is a leading iron ore production and exploration company which operates in the Pilbara region of northern Western Australia. The company is the fourth-largest listed resources company in Australia, behind BHP Billiton Limited, Rio Tinto Limited and Woodside Petroleum Limited, and the largest pure-play iron ore mining company listed in Australia. The company currently has two primary production sites in operation, namely the Chichester Hub located in the Chichester Ranges in the Pilbara region comprising the Cloudbreak and Christmas Creek mining projects, and the Solomon Hub, which is located 120 kilometres west of the Chichester Hub and comprises the Firetail and Kings Valley mines. The company's current operational objective is to achieve iron ore production of at least 155 million tonnes per annum (Mtpa), and it has undertaken an aggressive expansion program in the last decade in pursuit of this objective. The iron ore produced by the company's mining operations is transported to their port facilities at Port Hedland and is shipped for spot market or futures contract trading in a number of overseas locations, but predominantly China.
Further detailed overall summary, structure, financing and performance information can be obtained from the 2017 Annual Report document for Fortescue Metals Group Limited, which is available from the subject LMS site. Prior year annual report documents and other filings and announcement information relating to the company can be obtained from the Fortescue Metals Group Limited web-site (www.fmgl.com.au) or from the DatAnalysis Premium database available through the Databases link on the University Library web-site.
The follow table provides a summary of financial and structural information for Fortescue Metals Group Limited for their recent June 30th year ends:
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06/13
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06/14
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06/15
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06/16
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06/17
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Key indicators
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|
|
|
|
|
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No. of issued shares
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3,113,798,151
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3,113,798,151
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3,113,798,151
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3,113,435,477
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3,111,339,230
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Share price ($)
|
3.04
|
4.35
|
1.91
|
3.50
|
5.22
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Market capitalisation
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9,465,946,379
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13,545,021,956
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5,947,354,468
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10,897,024,169
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16,241,190,780
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Earnings per share ($)
|
60.43
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93.26
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13.23
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42.55
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87.10
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Price/Earnings ratio (times)
|
5.70
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4.66
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14.44
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8.22
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5.99
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Dividends per share ($)
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10.00
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20.00
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5.00
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15.00
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45.00
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Dividend payout ratio (%)
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18.76
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21.45
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37.79
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35.23
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51.66
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Trading Information
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Iron ore processed (wet metric
tonnes)
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76.1
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126
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153.6
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167.6
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172.20
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Iron ore shipped (wet metric
tonnes)
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80.9
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124.2
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165.4
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169.4
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170.40
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Iron ore price (US$ per Mt)
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114.82
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96.26
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61.84
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52.34
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71.76
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Total revenue
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8,754,716,981
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12,476,645,435
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11,164,062,499
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9,538,109,345
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10,981,539,261
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Operating expenses
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-5,536,388,140
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-6,667,728,237
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-8,069,010,416
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-5,428,225,154
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-4,898,595,943
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Earnings before interest and
taxes (EBIT)
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3,032,884,097
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4,918,259,023
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1,365,885,416
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2,702,666,307
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4,485,179,407
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Profit before tax
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1,660,377,358
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2,908,704,883
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411,458,333
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1,326,420,684
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2,721,008,840
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Net profit after tax before
abnormals
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1,882,479,784
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2,908,704,883
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411,458,333
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1,326,420,684
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2,721,008,840
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Net interest expense
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-631,805,929
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-786,624,203
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-838,541,666
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-908,968,489
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-652,626,105
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Income tax expense
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-776,280,323
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-1,245,222,929
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-135,416,666
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-496,902,774
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-1,136,245,449
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Net operating cash flows
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3,238,814,016
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6,632,696,390
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2,652,343,750
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4,070,832,211
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5,533,021,320
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Return on total assets (%)
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29.14
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36.07
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4.21
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11.73
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21.53
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Return on equity (%)
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9.35
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14.32
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3.60
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7.54
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12.80
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Structural information
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Cash and cash equivalents
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2,326,684,636
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2,545,647,558
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3,100,260,416
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2,131,699,434
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2,389,495,579
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Current assets
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3,948,247,978
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4,752,653,927
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4,595,052,083
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3,262,860,220
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3,386,635,465
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Property,plant&equipment
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18,215,633,423
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18,747,346,072
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22,084,635,416
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21,673,848,639
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20,384,815,392
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Total assets
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22,498,113,207
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24,091,295,116
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27,812,500,000
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26,039,590,627
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24,850,494,019
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Current liabilities
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1,524,528,301
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3,471,337,579
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2,197,916,666
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2,200,377,053
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2,862,714,508
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Long-term debt
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13,461,994,609
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9,981,953,290
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12,257,812,500
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8,992,728,252
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5,655,226,209
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Total liabilities
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16,795,687,331
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16,041,401,273
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17,998,697,916
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14,719,903,043
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12,195,787,831
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Share capital
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1,391,913,746
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1,368,365,180
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1,684,895,833
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1,751,952,598
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1,675,767,030
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Retained earnings
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4,359,029,649
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6,593,418,259
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8,052,083,333
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9,504,443,845
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10,910,036,401
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Total shareholders' equity
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5,702,425,876
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8,049,893,842
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9,813,802,083
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11,319,687,584
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12,654,706,188
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Long-term debt to Total assets
(%)
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59.8%
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41.4%
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44.1%
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34.5%
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22.8%
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Total liabilities to shareholders'
equity (%)
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294.5%
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199.3%
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183.4%
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130.0%
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96.4%
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On Feb 22, 2018, Fortescue Metals (FMG) has seen its interim net profit slump by almost half because of weaker prices and less demand from China for its lower-quality iron ore. Is share price fell significantly on the day after investors saw their interim dividend payout cut by $0.09 to $0.11 a share fully franked, which was lower than expected by analysts.
Relevant information relating to Fortescue Metals Group Limited or the wider corporate sector is as follows:
- Assume this analysis is being undertaken as at Monday 26th Feb 2018.
- Fortescue Metals Group Limited's share price on Monday 10th July 2017 is $5.21 per share, and there are 3,113.798 million issued ordinary shares on this date.
- Fortescue Metals Group Limited is part of the Materials Sector based on the Global Industry Classification Standards (GICS), and its GICS Industry is Metals and Mining.
- Fortescue Metals Group Limited's beta coefficient on is 0.90, compared to the beta coefficient for the overall industry of 0.98.
- The 5-year and 10-year Australian Government Bond yields are 2.39% and 2.75%, respectively, on Feb 26th 2018.
- The S&P/ASX 200 Accumulation Index, including dividend and franking credit components, has provided an average annual return of 10.160% over the most-recent five- year calendar period to Feb 26th 2018.
- The Australian dollar to US dollar (AUD/USD) exchange rates on Feb 26th 2018 were 0.7823, respectively.
- Fortescue Metals Group Limited is subject to a corporate tax rate of 30%.
Required:
The CFO has requested you to submit a Background Analytical Report providing supporting calculation and analysis information. The presentation, prepared employing information from the annual report documentation and any other documentation or sources of information considered relevant, is required to identify and outline the following aspects of Fortescue Metals Group Limited's current policy platform and operational activities and performance:
- The determination of the costs of the various sources of costly or interest-bearing financing employed by the firm and, from this, the firm's overall weighted average cost of capital (WACC).
- The nature of the firm's capital structure determination policy, including identification of specific policy adoption or usage if relevant, whether the firm appears to have target or optimal capital structure ratios, and the determinants of the firm's capital structure choice.
- The nature of the firm's earnings distribution policy, including the type of dividend policy employed if relevant, whether the firm has a target dividend policy or payout ratio, and the influence of taxation or other relevant elements associated with the firm's overall earnings management and distribution practices.
- Link to the recent dividend announcement and market share price response to the dividend, discuss the association or relationship between dividend and other various corporate financing policies employed by the firm, and how this may relate to Fortescue Metals Group Limited's share and/or accounting performance outcomes, and any other key drivers of the firm's performance outcomes.
The CFO has requested you to submit two documents in preparation for the strategic retreat -
1) a PowerPoint presentation that will be presented at the retreat
2) a Background Analytical Report providing supporting calculation and analysis information.
The hard copies of both the PowerPoint presentation and the Background Analytical Report should be submitted to the CFO (your lecturer) in the class by 9 pm on Thursday May 24th 2018 (Week 11). Note you also need to submit the two documents online via the FIN5FMA subject LMS site by 6 pm May 24th 2018. This case study will represent 15% of the final assessment for this subject. This case study can be submitted in a group with three or four members. The maximum word limit, excluding any figures and calculations is the equivalent of 500 words per team member, so a case study completed by a team of 4 should be a maximum of 2,000 words. The PowerPoint presentation and background documents should be prepared in a professional manner, be informative and interpretable by an audience with reasonable general finance knowledge, and reflect creativity and thought about the most appropriate way to present the information. The PowerPoint presentation should be clear and concise with a maximum of 15 slides. The Background Report should provide supporting calculation and analytical information, including any assumptions made, to expand on the information and conclusions provided in the presentation.