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Santos Capital Budgeting and Financial Analysis
2a) Company Perspective 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.
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
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…
Reference
Open University (2015). The financial markets context. United Kingdom.
Santos (2014). Santos Annual Returns. Australia.
Morning Star (2015). Rio Tinto plc (RIO). USA.
Malkiel, B.G. (2003). The Efficient Market Hypothesis and Its Critics. Princeton University
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