Santos Financial Analysis and Capital Budgeting

Santos Capital Budgeting and Financial Analysis 2a) Company Perspective Working capital measures a company short-term financial health as well as a company's efficiency. To calculate a working capital ratio, the paper uses the following formula: "Working Capital Ratio= Current Assets / Current Liabilities" In other words, the working capital ratio measures a liquidity capability of a company that measures whether a company has enough working capital to settle its short-term liability.

A working capital below one indicates a negative working capital revealing that a company will face challenges in settling its short-term liability. On the other a working capital of 1.2 and 2.0 reveals that a company has enough liquidity to settle its short liability. However, working capital above 2 shows that a company is not embarking on an investing policy.

The paper uses the following financial tools to measure the working capital efficiency of Santos Company: Working Capital Ratio Inventory Turnover Ratio Santos Working Capital Efficiency ($Millions) Working Capital Ratio 2014 2013 Total Current Assets 2065 2078 Total Current Liabilities 1946 Working Capital Ratio 2065/1946 2078/1726 Working Capital Ratio 1.06 1.20 The results of the Santos working capital efficiency reveals that the company has ability to settle its short-term liability in both 2013 and 2014 fiscal year. However, the results of the working capital ratio for 2013 fiscal year is more satisfactory than 2014 working capital ratio.

The working capital ratio of 2013 fiscal year is 1.20, which is satisfactory compared to 2014 working capital ratio of 1.06 that is less satisfactory. Inventory Turnover Ratio Similarly, Santos inventory turnover ratio for the 2013 fiscal year is better than the inventory turnover ratio for the 2014 fiscal year. Santos Working Capital Efficiency ($Millions) Working Capital Ratio 2014 2013 Inventory Turnover Ratio Sales Cost of Sales Inventory Inventory Ratio 2889/443 2505/419 Inventory Ratio 6.52 5.97 The inventory turnover ratio reveals the number of Santos replaces and sells its inventory in a given period. The company inventory ratio is 6.52 in 2014 and 5.97 in 2013.

As being revealed in the calculation below, Santos sells its entire inventory within 52.36 days in 2013 fiscal year compared to 55.98 days for 2014 fiscal year. 2014= (1 + 6.52) x 365 = 55.98 days. 2013 =(1 + 6.97) x 365 = 52.36 days. The overall results reveals that Santos performs better in term of working capital efficiency in 2013 fiscal year than 2014 fiscal year. 2b) In 2014, the Santos financing technique is through long-term debt. In the 2014 fiscal year, Santos issued a long-term debt of $1.57 Billion, and Santos issued its debt directly into the financial market to source for fund to finance its long-term investment.

The company relies on direct borrowing to finance its large-scale project. In essence, Santos uses direct debt financing technique to predominantly finance its debt. Moreover, the company used $122 Million to finance its debts during 2014 fiscal year. The Australian dollar is the predominant currency that Santos used for borrowing. (Santos; 2014). 2c) The calculation starts in 2008 since the bond is purchased in 2008. The value of the yearly coupon of the bond is as follows: 2008= 0.040*1000= $40 2009= 0.040*1000= $40 2010= 0.040*1000= $40 2011= 0.040*1000= $40 2012= 0.040*1000= $40 2013= 0.040*1000= $40 2014= 0.040*1000= $40 2015= 0.050*1000= $50 The holding period returns for the Bond investment= $1,000+40+40+40+40+40+40+40+50= $1,330. The holding period returns for the Bond investment= $1,330. 3.

Capital Budgeting 3a) The paper uses the net income as free cash flow. However, the company free cash flow improves year after year as being revealed in the Excel workbook. b) The paper calculates the NPV of the LNG Santos Project using the following costs of capital a. A WACC of 5.94% b.

A WACC of 8% It is not recommended for Santos to continuing investing in the project because the NPVs of the project costs of capital are negative NPV at both WACC revealing that Santos future cash flow is not enough to cover its cost of capital. NPV of LNG Venture WACC 5,94% NPV -$6,500.14 WACC 8% NPV -$9,027.98 c) The paper presents the IRR and Discounted Payback Period in the Excel workbook. With Irregular Cash Flow Result The Investment will not pay back in 20 years.

Average payback is $1,304.96 per year in the first 20 years. If it continues, the payback period will be 14,559,889.038 years. With the discount rate of 5.40%, the Investment will not pay back in 20 years. An average discounted payback is $664.74 per year in the first 20 years. If it continues, the discounted payback period will be 28,582,526.416 years.

Return for the Cash Flow: -53.45% per year Cash Flow Net Cash Flow Discounted Cash Flow Net Discounted Cash Flow Year 0 $-19,000,000,000.00 $-19,000,000,000.00 $-19,000,000,000.00 $-19,000,000,000.00 Year 1 $184.72 $-18,999,999,815.28 $175.26 $-18,999,999,824.74 Year 2 $304.76 $-18,999,999,510.52 $274.33 $-18,999,999,550.41 Year 3 $424.13 $-18,999,999,086.39 $362.22 $-18,999,999,188.19 Year 4 $542.91 $-18,999,998,543.48 $439.91 $-18,999,998,748.28 Year 5 $661.16 $-18,999,997,882.32 $508.28 $-18,999,998,240.00 Year 6 $778.98 $-18,999,997,103.34 $568.18 $-18,999,997,671.82 Year 7 $896.42 $-18,999,996,206.92 $620.34 $-18,999,997,051.48 Year 8 $1,013.58 $-18,999,995,193.34 $665.48 $-18,999,996,386.01 Year 9 $1,130.52 $-18,999,994,062.82 $704.23 $-18,999,995,681.78 Year 10 $1,247.31 $-18,999,992,815.51 $737.17 $-18,999,994,944.61 Year 11 $1,364.02 $-18,999,991,451.49 $764.85 $-18,999,994,179.76 Year 12 $1,480.73 $-18,999,989,970.76 $787.75 $-18,999,993,392.01 Year 13 $1,597.51 $-18,999,988,373.25 $806.34 $-18,999,992,585.68 Year 14 $1,714.43 $-18,999,986,658.82 $821.02 $-18,999,991,764.66 Year 15 $1,831.54 $-18,999,984,827.28 $832.16 $-18,999,990,932.50 Year 16 $1,948.93 $-18,999,982,878.35 $840.13 $-18,999,990,092.37 Year 17 $2,066.67 $-18,999,980,811.68 $845.24 $-18,999,989,247.13 Year 18 $2,184.80 $-18,999,978,626.88 $847.78 $-18,999,988,399.35 Year 19 $2,303.41 $-18,999,976,323.47 $848.01 $-18,999,987,551.35 Year 20 $2,422.57 $-18,999,973,900.90 $846.18 $-18,999,986,705.16 However, the IRR = 2% revealing the expected return on $19 Billion LNG investment.