FINANCIAL MANAGEMENT ASSIGNMENT
Research on Austrlian finance option
Financial ratio analysis
Real estate development involves the advancement of capital assets and could predict the positiveness of cash flow to retain the value. The project could subject to financial analysis. Discount cash flow is a financial tool that helps in analyzing whether a project will generate profit and adjust to risks. More features are concentration on potential assets, risk nature, cash flow, etc. Discounted cash flow is a framework for housing development projects. It has advantages over conventional methods like cap rate analysis and front and back door analysis etc. Different rents and leases will create changes in cash flow. Leases are considered as variables that could change the gross income. Indexed leases could constitute operating expenses, trigger changes, net final value, and other charges.
DCF Input Assumptions : -
Some assumptions vary on a project to projects. Others include the mortgage payment, equity return, market conditions, investor requirements, etc. Some of the equity factor assumptions are items related to equity discount rate, marginal tax rate, reinvestment rate, etc.(Lanier et.al,2008). Some of them include periodic tax shelter, terminal value, etc. The income tax rate which is assumed by the investor. The assumed rate of return after a certain period.it is also important to distinguish between the land and building improvement that affects the income tax of the property. The implicit value of the land may be considered and the total cost allocated including the soft cost of ancillary structures which could be depreciated.
Two feasibility models are taken into consideration here
1.Graphical unelevaraged DCF model
Here net income level is likely to change and the rate of return is simplified here. A pattern of NI is studied in which it projects experience and uneven expenses on operation items for annual receipts. Here the calculation of lumpsum activities is done first and the present value is estimated. A positive lump sum is a major factor in which an investor is benefitted. It often leads to Tax net reversion or Net reversion which is calculated by net income capitalization. The investor is likely to pay the expected money at any point in time. The exit cap rate is also considered here which draws to sales expenses and capital gains. Lump-sum receipt in the future is returned and aggregated with present value. This model is also known as an equity justified model.
Fig 1 : Graphical unelevaraged DCF model
2.Graphical leveraged DCF model
A DCF model adds a main layer of precision to the analysis including features of income tax returns to arrive at a more crucial view from an investor's point of view. Tax deductions contribute to the reduction of NI to taxable amount allowing various tax benefits and associated charges.
Income tax estimated are converted to after-tax cash flow which covers allowances and nondeductible charges. Here as leverage is included, net reversion is computed as total sales price minus expenses, outstanding principal balance, and mortgages, etc. (Blocket.al,2000).
Fig 2 : Graphical levaraged DCF model
I)100 % equity case : -
Sensitivity and scenario analysis
ii)Borrowing 80 % total cost for site and development
Sensitivity and scenario analysis : -
Iii) Borrowing 80 % total cost for site and 60 % for development
Sensitivity and scenario analysis : -
Assessment 2a - Research on Australian finance markets
Australian finance options
Real estate investment Trust : -
RIET has strong notions in the financial crisis. Changing the market environment and its effects are to be evolving in the market to produce returns for investors. No specific rules have been insisted by RIET in Australia. From the point of view of income tax petitioners the system is classified as managed investment trusts.
RIET’S FINANCIAL CAPITAL STRUCTURE
For RIET ASX requirements shall meet. A foreign investor should not hold more than 10 % interest. A RIET could be listed or unlisted.
There are four example of evaluation of financial data
Some of them includes
LTM EARNINGS PER SHARE
BOOK VALUE PER SHARE
CORE EARNINGS PER SHARE
1. REIT DIVIDENDS: - This is one of the finest methods in evaluating real estate investments in Australia. The companies and industries shall distribute over more than 90 percent of taxable gain as dividends.RIET ‘s should not be cross-checked if it's considered as a crucial strategy in evaluating the investments.
2. LTM Earning per share: - As the name indicates LTM refers to the last twelve-month share. It's a tool that is considered to measure the performance of the company. twelve months is more than enough to analyze the market impacts, price, and other seasonal changes. It is useful for annual reporting.
3. Book value per share: book value indicates the measurement of assets by deducting liabilities. Year to year evaluation finds trends over multi-year.
4. Core earning per share: - Accounting of core earnings is necessary to provide investors a measure of operating performances. Revenue produced by the company and deduction of expenses and activities is entertained. It provides a clear vision to investors and management related to core business on an ongoing basis.(Lau et.al,2010).
This method could not be used when high precision is required. So the comparison between the different companies is not possible. The inflation case is not considered. Economical and other conditions cant be adequately analyzed.
Equity and mortgage REIT: -
Here revenue generated through income, rents on real estate holdings are considered.
Equity REITs could be sensitive to recessions. It can lead to less income and large vacancies.
Low-interest rates lead to huge borrowers
Mortgage REIT is subjected to high credit risk on investments.
Financial ratio Analysis
Financial Analysis database was used for the period from 2003-2208. Thirty-four real estate firms were included in the study. The list of financial records was done after 2020. Different ratio analyses were used to compute leverage. Most popular was related to assets, debt, and equity. The probability of repayment of debts is a useful concern to be raised. Book value data plays a crucial role as it enables managers to decide dept or capital structure is considered based on data of book value. Leverage measurement was based on interest ratio, long term, and short term debt assets.RIET and its advancements were responsible for internationalization to improve diversification. In international expansion pay and repay of debts play a crucial role. In international RIET has an excellent level of 50 % in comparison with the average debt level. Listed property company and leverage have direct relationships. Growth opportunity and risk in operations has an inverse relationship with leverage.International operations have convenient negativity with low levels.
Fig 3 : RIET Equity capital raising
Table 1 : RIET Bond insurance
Table 2 : RIET Seasoned equity issues
Fig 4 : RIET seasoned equity issues
Table 3 : RIET Seasoned equity issues
Table 4 :expected sign of leverage determinants
Table 5 :Descriptive statistics
Table 6 :Correlation coefficients
Table 7 :LSDV Regression results
The Major factor that was assessed was the leverage that whether it was short or long term. The difference in cost between long term and short term in debts is a major element in growth in assets, interest, and other size variables. Short term debts could reduce repayment problems and risks caused due to insolvency. Asset tangibility appears to be of long term debt. It reverses the relation between growth in assets on leverage. In the case of high liquidity, it was noticed that short term debt is highly prioritized across the sample period
Financing strategy : Quarry land - Brief Analysis
Moorebank quarry sells around 60 percent of products are sold external and provides products to the council and infrastructure. The numerous borrow pits that are operated across the Central Highlands region, which
provide product exclusively to Council for its infrastructure activities.
Table : Actual financial performance of quarry land
As per the 2018 -2019 financial reports, the operating expense was negatively beneath $ 420000. If these movements were reconsidered, then net earnings could be in a gain of $ 300,000. Net earnings were estimated at $ 130,000 which compares to the budgeted net earning which was negative of $550000. In the coming year, the higher officials shall realize profitable objectives a pressure for product prices across the region. Statements for operating and expenses are produced at quarter intervals for the quarry. Presently there is no inclusion of tax payment, if quarry runs positive there should be a return in the capital which will be considered as a dividend. Statements shall be reconstructed by considering the effects as follows.
The balance sheet should contain all relevant information regarding capital structure, equity, debt, depreciation, and financial costs. All information regarding inflows and outflows is only understood with the help of proper datasheets.Depreciation expenses shall be analyzed properly to maintain positive operating results. depreciation factors should be estimated with the utmost care and these shall be determined and proper factors shall be reviewed.
• Initial accounting recognition;
• Valuation or re-valuation of the site improvement asset class. It is recommended that
The business unit shall consider a five-year cycle for the revaluation of the assets. Costs to undertake revaluation and establish stability in assets and depreciation expenses year by year. The business units shall consider for the decisions in annual valuation and aligns with the policy of the council which supports the annual indexation of valuation.
• Useful life/remaining useful life estimates. Consider undertaking a benchmarking
exercise on the useful lives of assets of a similar nature and revising the policy accordingly.
Also check the approach for remaining useful life assessment, taking into consideration
renewal, improvement and upgrade expenditure; and
• Capitalisation threshold. Review the “site improvements” financial asset class and
Assets which are beyond the threshold is identified
Long Term Financial Planning
Year financial plan is considered and it plays a major role in improving the financial stability of business units and suggests correct strategies and implement it.
long-term financial plans for the business units so they can be readily updated and kept current
in the face of any material changes in business dynamics or assumptions. This enables the business unit managers and Council to be making real-time decisions relating to commercial performance.Central Highlands Regional Council 45 Quarry Business Plan Such plans should:
They shall be properly structured to financial statements.
Proper financial models could be established
Focus on forecasting capital profits and costs
The minimum period of quarry shall be five years
Worst case scenario option
Break-even option .
Revenue stretch option shall be studied.
The financial model could be used for investment planning and earning purposes.
The modeling can be used for investment planning on new revenue-earning opportunities for the Quarry.
From the quarry’s perspective, it's necessary to establish some policies for financial sustainability which includes
Clear definition of commercial outcomes
Clearly defining all expenses, additional costs and planned value for
Robustness of financial policies
Clear service potential to assets may be established
Any additional cost of potential and cost of depreciation
Ensuring financial stability for service potential assets
Procurement of funds for financial stability
The commercial expectation of quarry
Correct competition policy that is addressed for accounting
Corporate overheads shall be assessed with a proper tactical approach
Review of commercial policies for financial stability at year-end.
Presentation including risk analysis
Fig 5 : operating performance
Fig 6 - Operating performance
Fig 7 - Fiscal flexibility
Fig 8 - Fiscal flexibility
Fig 9 - Asset sustainability
Fig 10 - Debt measures
Fig 11-control panel
Calculation of weighted Average
Weighted average cost capital calculation
Risk free rate represented on 20 year bond was 3.3% , beta value - 0.51, average annual total return over 90 years is 9.8 % , From balance sheet 2019 total shareholder equity was $ 77.87 billion. Long term debt $ 36.83 billion
Sensitivity and scenario analysis
Fig 12 - Sensitivity and scenario analysis
Fig 13 - Sensitivity and scenario analysis
Discounted cash flow model
Fig 14 - DCF
Fig 15 - DCF CNTD
REFERENCES : -
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