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Financial Management assignment: Ethical Aspects of Business

Question

Tasks:
This assessment consists of four questions each of which is designed to assess a learning outcome on a real business setting.

Question one is related to alleged unethical business practices of AMP Limited. Students are required to research and evaluate those practices from the point of view of prevailing codes of conduct and ethical rules, corporate objectives and common good.

Question two requires determination and critical analysis of Flight Centre’s weighted cost of capital and financial leverage and impact of capital raisings on their capital structure, risk profile and share value. Question three is built on their prior knowledge of the company of their choice and extends it to comprehensive evaluation of associated systematic and unsystematic risks and examination of investment in their ordinary shares. Question four requires students to research and critically evaluate vacuum cleaner manufacturer Dyson’s strategic decision to enter into the automotive market in 2017 and scrapping their plans within three years to completely scrap their automobile plans.

1
QUESTION 1 (LO1)

It is alleged that thousands of AMP customers have been charged for financial advice services they have never received. Furthermore, AMP admitted to the Financial Services Royal Commission that it misled the corporate regulator Australian Securities and Insurance Commission (ASIC) over AMPS’s practice of charging fees for no service. AMP also admitted to the Royal Commission that it knowingly charged $1,300,000 in premiums for life insurance to more than 4600 superannuation customers who were deceased. Australian Financial Review (AFR) (17thApril 2018) reported that AMP had admitted to the Royal Commission that they had paid and received commissions which were prohibited under Future of Financial Advice which became effective on 4thApril 2018. AFR further alleged that AMP provided incentives for commission-based sales for their financial planners. The Royal Commission also alleged that the Chair of AMP had interfered with a report by law firm Clayton Utz that was commissioned by AMP after self-reporting fee for no service breaches to ASIC. It is argued that AMP had misled ASSIC twenty times about the independence of the Clayton Utz report into AMP’s fee for no service scandal. Royal Commission further referred AMP to the Australian Prudential Regulatory Authority for not acting in superannuation members’ best interest.

Required:
1. Analysetheunderlyingreasonsbehindtheallegedunethicalpracticesperpetrated by AMP. Identify and evaluate the relevant ethical codes of conduct and ethical principles breached. Critically analyse the role of AMP’s management in alleged unethical and unlawful practices

2. As a public company what is AMP’s goal and how alleged unethical business practices (some of which detailed above) aligned with the goal?

3. Should AMP have aimed to generate common good in their operations? Why or why not? Discuss.

2
QUESTION 2 (LO2)

In April 2020, Flight Centre has secured a total of $700 million through a mix of capital raising and new debt facilities to bolster its balance sheet and liquidity position.

1. Compute debt-to-equity, financial leverage (net debt/market capitalisation of equity, earnings per share, return on equity for years 2015-2019. Comment on the likely causes of significant changes in calculated metrics. How does Flight Centre compare to the industry? Comment.

2. Calculate the weighted average cost of capital (WACC) of Flight Centre for fiscal year 2019. Why might Flight Centre want to determine their WACC?

3. Identify and analyse the key issues facing Flight Centre in seeking new capital and evaluate the impact of capital raisings on its capital structure, risk profile and per-share price.

4. In the light of measures obtained in a above, write a report on the strengths and weaknesses of Flight Centre’s capital structure in the period 2015-2019.

QUESTION 3 (LO3)
For this question choose one of the following two companies: Funtastic Limited (ASX Code: FUN), Sigma Healthcare Limited (ASX Code: SIG) or Treasure Wine Estate (ASX Code; TWE).
In Assessment Two you calculated the beta coefficient for market risk.

A. B.
C.

Compareyourresulttobetayouwillfindonfinance.yahoo.comorReuters.com. Are they similar? Why might they be different? Discuss. Within the Capital Asset Pricing Model what should cause beta for the company of your choice (Funtastic or Sigma) to change? Would financial leverage cause a change? Explain.

In Assessment Two you identified unsystematic risks for the company of your choosing. How would you revise the unsystematic risks as of today? Suppose you have $100,000 cash for investment. In consideration of risks and returns involved, why or why not would you invest in Funtastic/Sigma shares?

3 QUESTION 4 (LO 4)
Dyson is a prominent manufacturer of vacuum cleaners which was founded in 1978. In 2016, I launched an ambition with a projected cost of Pounds Sterling 2 billion to design and manufacture an electric car in the U.K and develop battery technology. Sir James Dyson said the company had developed a fantastic electric car. In 2018, the company decided to relocate the electric car manufacturing venture to Singapore with the first cars to be rolled in 2021. Then in October 2019, Dyson announced that the electric car they developed was not commercially viable and therefore they decided to shut down their automotive division.

If you were one of the decision makers employed by Dyson describe how would you decide to launch the project and make it a success. In your discussion, you are expected to include all steps from the generation of idea to start operations in the UK and subsequently in Singapore. Carry out an analysis that looks into economic, political factors, competition, cash flow projections, costs which are included and excluded (giving relevant examples). From capital budgeting point of view, research and comment on what went wrong in Dyson’s strategic shift and how you would approach differently.

The assignment must be submitted in a report format which contains table of contents, introduction, body of the report with each question answered separately and conclusion.

Answer

Introduction This report on financial management assignment aims at bringing out the discussion on various aspects of financial management including ethical aspects of the business. The discussion has been carried out the through four questions out of which the first question deals with ethical aspects of the business. The next question touches upon the aspects of capital structure and weighted average cost of capital for the selected company. Further, the question 3 of financial management assignment carries out discussion on the systematic risk and unsystematic risk. Lastly, the fourth question comes up with discussion on strategic decision making.

Question 1
AMP Limited has been a part of various unethical practices according to the customers’ complaints and a report released by Financial Services Royal Commission. AMP charged fee from thousands of customers in the name of financial services, however, no such service was actually rendered to any of the customer. Furthermore, during the investigation, AMP admitted that they did not follow the guidelines issued by corporate regulator Australian Securities and Insurance Commission (ASIC). The organization cheated customers on various occasions just to increase its revenue and profitability. One of the incidents presented in this section of financial management assignment admitted by the organizational management to the Royal Commission is – they intentionally charged $1,300,000 as premium from more than 4600 customers who were already deceased. Moreover, the organization also paid as well as received commission for practices which were prohibited under Future of Financial Advice.

According to the unethical practices executed by AMP Limited, the organization breached code of conduct as well as ethical principles. The organization is victim of breaking integrity, confidentiality, professional behavior and sundry other ethical principles. It is observed in the financial management assignment that the management of AMP Limited is at fault because it is the management who design policies, strategies and take decisions for performing organizational activities (McKinney, Emerson &Neubert, 2010). AMP Limited offered higher commission to its financial partners to increase sales unethically which eventually resulted in defaming the organization. Another incident that prove that the management of AMP Limited is at fault is the chairperson of the organization interfered with some unethical practices and facts to save the organization from allegations. Hence, Royal Commission referred the case of AMP Limited to the Australian Prudential Regulatory Authority for not performing in the customers’ best interest and for charging fee for no service scandal.

When a new organization enters in the market, the primary objective of that organization is to sustain in the market for a longer period of time followed by increasing profitability, revenue, brand image, customer base, etc. According to the allegations made on the AMP Limited, it is clear that the organization was only focused towards making high profits without following ethics, code of conduct and principles of business. The organization charged premium of $1,300,000 from almost 4600 customers who were already deceased. Also, the fee charged for financial advice which was never rendered to any of the customer was another major unethical practice done by AMP Limited that prove that the organization was purely working towards making high profits.

Yes, in regards to the case scenario of financial management assignment, AMP Limited should have aimed to generate common good in their operations through fair business practices and following the ethics, code of conduct and business principles. According to the Royal Commission’s report, it is clear that the organization was not at all working for the customers’ best interest. They were just using the customers’ faith for increasing their profitability by performing all unethical business practices. Regardless of the profitability, every organization should adopt the ethical ways to perform business because unethical ways only lead to affect the organizational goodwill and market position (Vanclay, Baines & Taylor, 2013). AMP Limited made huge profits by following some unethical practices; however, eventually it all leads them towards the closure and losing the goodwill.

Question 2
Requirement-1

The calculation of ratios for Flight Center is given as below within this financial management assignment:

Ratio

Formula

2015

2016

2017

2018

2019

Debt-to-equity

Total liabilities/ Shareholder's equity

 1.20

 1.23

 1.24

 1.19

 1.39

Financial leverage

Net debt/market capitalization of equity-note-1

 0.01

 0.03

 0.01

 0.01

 0.04

Earnings per share

Net profit for equity/ No of shares

 2.55

 2.18

 2.06

 2.35

 2.35

Return on equity

Net profit for equity/ Shareholder's equity

20%

18%

16%

17%

18%

Note-1:

Current debt

 32,806.00

 76,845.00

 55,866.00

 34,846.00

 84,710.00

Long-term debt

 -  

 -  

 -  

 652.00

 100,375.00

Total debt

 32,806.00

 76,845.00

 55,866.00

 35,498.00

 185,085.00

 

 

 

 

 

 

No of shares

100609

112182

112026

111885

112266

Per share price Dec 31

28.94

22.35

45.44

39.34

37.72

market capitalization

2911624.46

2507267.7

5090461.44

4401555.9

4234673.52

The debt to equity ratio identified in the financial management assignment has changed from 1.20 times in 2015 to 1.39 in 2019 and the financial leverage ratio has also increased from 0.01 times to 0.04 times over the period of 5 years. This shows that the portion of debt in the total capital of the company has increased over the 5 years. Further, regarding the earning per share, it has been noticed herein financial management assignment that the EPS has reduced from $2.55 to $2.35 in the past five years. The return on equity has gone down from 20% to 18%. Thus, the evaluation of the data in the matrix above shows that profitability of the company is going down and debt has increase. In regards to industry average, it has been found that industry average debt to equity ratio is 3.26 times while the company has debt to equity ratio of 1.39 times. This implies that although debt has increased but the company still has lower debt to equity ratio as compared to the industry average. Further, implying that the company has capacity to raise more funds through debt (Mari and Marra, 2019).

Requirement-2
The calculation of weighted average cost of capital for the company is given below within this financial management assignment:

Cost of debt:

 

Interest expense

25592

Borrowings

185085

Interest rate

14%

Tax rate

30%

After tax cost of debt

10%

 

 

Cost of Equity:

 

Beta

0.41

Risk free rate

3.25%

Market risk premium

5.75%

Cost of equity

5.61%

 

 

 

 

Debt %

4%

Equity %

96%

 

 

WACC

6%

From the analysis done in financial management assignment, the WACC of Flight Center is 6%. The WACC depicts the overall cost that a company incurs on the use of its funds which includes debt as well as equity. The WACC plays a key role in determining the theoretical price of the shares and it is also used in evaluating the financial worth of the project.

Requirement-3
Flight center is considering raising money through secured loan for a sum of $700 million. This fund rising would have impact on the capital structure of the company. In the current year 2019, the company has debt to the tune of $185 million and market capitalization of equity is $4,235 million. In this financial management assignment, with this equation, the debt is 4% of the total capital. Further, the debt to total capital ratio on the basis of book values is 0.11 times. The industry average ratio is 3.26 times. This implies that the company has capacity to raise more debt. The capital structure of the company before and after raising finance would be as under:

Capital Structure:

 

 

 

Before

After

Total debt

185085

885085

Shareholder's equity

1462040

1462040

Total

1647125

2347125

Debt %

 0.11

 0.38

Equity %

 0.89

 0.62

It could be seen that debt is 0.11 times before the additional finance of $700 million is raised and after raising the finance, the debt increases to 0.38 times. The additional borrowings would lead to increase in the interest expense which would further lead to reduction in the profit available to the shareholders. Due to decrease in the profits, the EPS would also fall slightly. The impact on EPS is demonstrated as below within this financial management assignment:

Impact on EPS:

 

 

 

Before

After

Profit for equity

263825

263825

Less: interest expense net of tax

 

70

(700000*10%)

 

 

Net profit

263825

263755

No of Shares

112266

112266

EPS

 2.35

 2.35

It could be seen in the financial management assignment that the EPS is almost the same before and after the fund raising. As there is no impact on the EPS thus, earnings are not affected by the new fund raising. Further, it is expected that the new fund rising would make the capital structure optimal and the company would be benefited.

Requirement-4
The capital structure should be balanced to achieve optimal results. The balanced/optimal capital structure means, it the company should be have adequate amount of debt and equity in its balance sheet. If the debt is less than the company’s ability to take debt, it would result in losing leverage which implies tax benefit on the interest paid on debt funds. Further, if the company has got more debt than its ability, then it would give rise to risk in terms of solvency of the business. In the case of Flight Center, it has been found in the context of financial management assignment that the company had very low debt with the debt equity ratio being 1.20 times in 2015. The debt to equity ratio increased in the year 2019 to 1.39 times. However, debt to equity ratio of the company is still lower than the industry average of 3.26 times. Thus, the strength of capital structure of the company is that it has higher equity which creates more room for sourcing more debt. Further, it also reduces the risk of solvency as well. However, the weakness is that the company is losing leverage advantage due to low debt and the same is reducing profitability of the firm (YapaAbeywardhana, 2017).

Question 3
Requirement-1

The beta as calculated in financial management assignment for Treasure Wine Estate is 0.82 times which is different from that found on the yahoo finance. The beta on yahoo finance for the company has been noticed to be 0.46 times.

Treasury wine Estates Limited in Financial Management assignment

The beta calculated on yahoo finance is based on the overall data of the company while the beta calculated in assessment 2 is based on the specific data. Thus, the difference between the two is bound to happen.

Requirement-2
Beta plays a critical role in CAPM model. The calculation of CAPM return is based around the beta calculation. Beta represents systematic risk and it changes from company to company basis the risk profile. The Treasure Wine Estate is a low beta company which implies that it is the low risk profile company. The financial leverage is directly concerned with the risk profile of the firm and hence if the financial leverage changes, it will change the beta too.

Question 4
Dyson, which is a UK based company, launched a project to manufacture electric cars in Singapore. However, this project examined in the financial management assignment could not be implemented successfully. The company realized that the project was not financially viable and due to this reason, the company announced plant shut down (BBC News, 2020). The company made error in estimating the cost and later on it was found that the product is not able to recover the cost. In order to launch an overseas project, it is important that the project risk and opportunities are identified and evaluated deeply. There are many aspects from the macro as well as micro viewpoints which needs attention. The major factors to be analyzed in such a scenario are economic and political conditions of the country. Further, assessment of competition is also a crucial aspect as it provides insight into the position of competitors and helps the company to make strategy to place itself in the market (Doktoralina and Apollo, 2019). In the case of Singapore, the economic, political, and competing conditions should have been evaluated as below:

Economic Factors
The economic conditions of a country are displayed by two essential macro-economic factors such as GDP growth and inflation. Singapore has high GDP growth rate and the country is assessed as one of the highest income earning countries in the world. Thus, from the economic view point, the choice of location (Singapore) is fine (Rastogi and Trivedi, 2016).

Political Factors
There has been high level of trust and stability in the governance structure of Singapore. Thus, the political risk in Singapore is negligible. The politics in Singapore is based around the democratic environment.

Competition
There is no direct competitor for electric cars as it was the new product brought in by Dyson only. However, the indirect competitors are many. There are companies such as Volkswagen, Ford, and Tesla that gives tough competition in the Automotive market (Andrew.cmu, 2020).

Cash Flows and Cost Estimates
Further, after conducting macro analysis within this financial management assignment, the project evaluation process expands on micro level analysis which involves assessing the project’s financial viability. This is the area where Dyson could not assess properly. The company should have prepared estimate of the free cash flows basis the budgeted numbers of cost and revenues. Further, while assessing the cost, it should be on cards that the company takes into account all relevant costs of manufacture. The relevant cost of manufacture includes the variable cost as well as additional fixed costs and out of pocket expenses.

The decision whether to undertake the project or not would depend upon the fact that whether it is generating cash profits for the company or not. The company needs to go ahead with the project only when the project has capability to generate cash profits.

References
Andrew.cmu.2020. Electric Vehicle Competitive Analysis.[Online].Financial Management assignmentAvailable at: https://www.andrew.cmu.edu/user/ksegal/images/projects/6a.pdf [Accessed on: June 7, 2020]. BBC News. 2020. Dyson has scrapped its electric car project. [Online]. Available at:

Doktoralina, C. and Apollo, A., 2019. The contribution of strategic management accounting in supply chain outcomes and logistic firm profitability. Uncertain Supply Chain Management, 7(2), pp.145-156. https://www.bbc.com/news/business-50004184 [Accessed on: June 7, 2020]. https://www.macrotrends.net/stocks/charts/ATSG/air-transport-services/debt-equity-ratio [Accessed on: June 7, 2020].

Macrotrends.net. 2019.Air Transport Services Debt to Equity Ratio 2006-2020 | ATSG.[Online]. Available at:

Mari, C. and Marra, M., 2019. Valuing firm’s financial flexibility under default risk and bankruptcy costs: a WACC based approach. Financial Management assignmentInternational Journal of Managerial Finance.

McKinney, J.A., Emerson, T.L. and Neubert, M.J., 2010. The effects of ethical codes on ethical perceptions of actions toward stakeholders. Journal of Business Ethics, 97(4), pp.505-516.

Rastogi, N.I.T.A.N.K. and Trivedi, M.K., 2016. PESTLE technique–a tool to identify external risks in construction projects. International Research Journal of Engineering and Technology (IRJET), 3(1), pp.384-388.

Vanclay, F., Baines, J.T. and Taylor, C.N., 2013. Principles for ethical research involving humans: ethical professional practice in impact assessment Part I. Impact Assessment and Project Appraisal, 31(4), pp.243-253.

YapaAbeywardhana, D., 2017. Capital structure theory: An overview. Financial Management assignmentAccounting and finance research, 6(1).

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