ACCT5910 – Business Analysis and Valuation Final Examination

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ACCT5910 – Business Analysis and Valuation

Term 1, 2024

Final Examination

Question 1: Business Strategy Analysis

a.

Reject shop is working in the retailing industry.

Using the porter five, we can see firstly Rivalry among existing firms is harsh , there are many local famous brands working in this field, also many foreign brands want to share the market.

And for Threat of new entrants, it’s not very easy also not very difficult to get into this industry, we can say this part is medium level, because the company need to have certain resources and funding to enter into this field, but there are not too much high expertise or technology involved for entering the industry.

Threat of substitute products would be medium, because while a company grow like Reject shop in retail industry, it would have their own logistic chain and named products. Which is difficult for others to copy in this part.

Bargaining power of buyers would be high, unavoidable, this industry usually will involve cost problems, for customers, they can have a lot of choice, they tend to pick up the goods with good quality but low price.

The bargaining power of supplier would be relatively low. As a big customers to the suppliers. The company can have many choice to argue about the costs and payment term.

b.

The current economic situation is not very good, firstly, just after covid-19, many companies suffered bad past several years and need to recover from the impact.

Also the general economy is not good, with the rising costs for all the materials, transportation, which will increase a company’s operation expenses and cut down their profit.

The competition is harsh for this industry, there are many competitors in this industry and fighting for the market shares,

So for Reject shop Ltd, controlling the expense maintaining reasonable profitability and keep the current market share to keep the company have reasonable sales revenue would be top priority and the key risky area. Also  keep good cash flow management and logistic management would also be one of the key areas.

c.

There are many competitors for reject shop LTD, the main competitors would be

Kmart Australia, Coles, Woolworths Supermarkets, Dimmeys Stores, etc. And we comparing with all other companies, the reject shop has the following competitive advantages.

1. Famous brand, although all other competitors are also with good reputation, but every brand has it’s unique place and with their own loyalty customers. Also occupy certain market shares.

2. Reject shop has new and updated strategy which make their brand pop out from the competitors by using lower price products at first (which would be very useful under the current macroeconomic situation. So cost leadership would be one of the big competitive advantages

3. The products are provided with a lot of selection and choices, which is one of the big point for the company. Which will attract customers who like new goods with selection.

4 seasoning offering is also good, which is with low price also give a good choice for the customers. Which means the company have very creative strategy which make it unique in the market.

5 good and experienced management team would be also very important for the company to gain the competitive advantage among the competitors.

Question 2: Financial Analysis

a.

b.

c.

Reject shop’s operating efficiency from year 2021 to year 2023 is improving in terms of working capital management, the working capital is increasing relative to it’s sales revenue from year 2021 to year 2023.

But for the general efficiency, it’s get worse , firstly the inventory holding time is longer than bigger, (inventory turnover getting lower from year 2021 to year 2023), and the account payable turnover is getting lower, which means it’s paying the supplier longer than before.

And after all the adjustment for posting the payment to supplier, the general cash cycle time is still longer than before, which means the company is holoding more inventory in year 2023 than year 2021.

d.

The company is taking new strategy to provide a variety goods to the customers for choice, which somehow will make the inventory turnover to be lower than before. Because they have to stock enough goods,

And the purpose of doing it is trying to enhance the sales, also possibily the profitability, because the new variety of goods might can gain better profit than general goods.

So the profit margin is getting higher from year 2021 to year 2023, but the company also invest more thus the asset turnover is getting lower than before despite the increased sales revenue and profitability.

Also it will tie up the company’s cash flow, which makes the leverage ratio is getting higher from year 2021 to year 2023.

Question 3: Forecasting

a.

In general, sales forecast would based on market demand, and the past performance , and other factors, we can generally taking an average increase rate to apply by using historical data.

And in a long term the growth rate would stay slower and more stable.

We take year 2004 to year 2023’s sales data , then the growth rate would be as below,

we can see it grow fast in earlier years, and get much slower from year 2015, also almost no increase or negative increase from year 2017, and the company is getting improved from year 2022, which should be influence of the new strategy, so might can expect 3% for the next two years as the sales growth rate .

And for the profit margin, in general, after the new strategy implemented, we will expect a growth , which we also can see from year 2023’s figure, the profit margin is 1.26% comparing with 1% in year 2022. thus we can expect 10% increase rate for the next two years.

And for the asset turnover ratio, in general, we assume the assets will grow at the same rate as sales growth, thus there is no change for the asset turnover rate , the rate in year 2022 to year 2023 also almost remain the same, the year 2021 is the period impacted by COVID-19, thus we can take it out.

And after the new strategy implemented, the leverage ratio should also relatively remain the same, there should be no big change unless the operation has big improve or deterioration, thus i also consider it would remain unchange,

b.

in general, we consider asset turnover and liquidity ratio is quite stable , and for Reject shop’s problem is firstly the financial situation is somehow under a distress or not good situation, which make the prediction to be harder.

The COVID-19 influence in the past years. Which will make everthing to be irregular. Also the company is taking some new strategy , which might give an impact to the company’s data. But in general, the asset turnover and liquidity ratio remain stable for the past two years.

Thus we can still expect it to be stable, the difficult part is the prediction for the profit margin, in the long term, the profit margin will still remain stable. But after long time establishment, the profit margin for Reject shop is getting much lower. But due to the new strategy implemented, it did have some effect in terms of sales growth, also we see the profit margin growth in year 2023, thus somehow we make an estimation based on the past 2 year’s performance to take 10% increase for the profit margin, but in reality , it would be not easy.

Question 4: Valuation:

a.

Residual Income = net income – shareholder’s equity*cost of equity,

so assuming profit margin is growing at 10% for year 2024 and year  2025, which means 1.26%*1.1=1.39% and 1.26%*1.1^2=1.52%

b.

The value per share can be using the enterprise value/share no. Assuming the share no will not change since year 2023, the beginning book equity=181935000

So the ending equity value(enterprise value)= 181935000-3293903/1.08-2262711/(0.08-0.04)=122,317,315,And the price per share would be 122317315/37776075=$3.24/share.

c.

The current market share is higher than our calculated figure, thus we will consider the company’s share is not worth buying, if the investor hold the share, may suggest to sell it.

The market price might be different from the theoritical figure firstly the market might have the market efficiency problem, the actual stock market price can’t reveal all the information and real performance of the company on time especially if the market is not efficient enough.

In reality , it’s difficult to face the semi-strong form or strong form of market.

And the residual income is also based on some estimation , which might not be interpreted by the market.