Corporate Finance and Financial Markets

• Profitability ratios: Those types of ratios by which the firm is able to analyse and derive its level of profit in the industry are known as profitability ratios. Higher the rate of profitability is more beneficial for the firm which lead to enhance its market share in overall industry as well (Fazzari and Papadimitriou, 2015). Different profitability ratios of EDP and GAPL are given as below:
• Gross profit ratio: GP ratio derived using mainly two components like as gross profit of the firm as well as total revenue at the end of accounting year. In the financial period 2015 GP ratio of EDP and GAPL are 35.15% and 9.71% respectively which shows that previous firm is able to manage its cost of goods sold. Afterwards, it increases in both the firm and reaches up to 39.03% and 11.04% in the year 2016 for EDP as well as GAPL respectively. Hence, it shows that growth rate of EDP firm is better in comparison to another company.
• Operating profit ratio: Another profitability ratio is operating which helps to know that firm is how much able to manage is operating expenses in the organisation (Philippon, 2015). In the year of 2015 and 2016 OP ratio of EDP is 10.28% and 12.42% respectively. Further ratio for another company is 2.40% and 2.79% which indicate that growth rate of EDP is better as well as overall performance of previous firm is better in the oil and gas sector.
• Net profit ratio: According to the NP ratio the EDP firm is unable to earn higher net profit in comparison to another one company. Ratio if GAPL is increases from 0.79% to 0.81% in the year 2016 while NP ratio of EDP is decreases from 5.88% to 5.46% in same accounting period. But overall performance in terms of earning net profit EDP organisation is well in comparison to GAPL entity. Hence, it can be said that to make investment EDP is more beneficial for the investors.
• Liquidity ratios: As per the respective ratios the company is able to know that it is how much able to recover and fulfil its short term obligations in an accounting year. Most widely used liquidity ratios are current as well as quick which are mentioned below for EDP and GAPL firm:
• Current ratio: It can be analysed from the current ratio that GALP energia is performing well and more able to pay its short term debt in comparison to another energy sector organisation (McCahery, Sautner and Starks, 2016). In the period of 2015 current ratio of EDP and GAPL are 0.72 and 2.02 which increases and decreases respectively in the next year. Further, in the year 2016 GAPL ratio decreases and reaches up to 0.63 which shows that it is not able earn sufficient profit that it can repay the debt amount. On the basis of standard current ratio which is 2:1 later firm (GAPL) is performing well in the overall energy sector compare than previous company.
• Quick ratio: Moreover, another liquidity ratio that is quick or acid test ratio not consider two items i.e. stock and prepaid expenses due to not having nature of easily cash convertible. In the accounting year of 2016 quick ratio of EDP and GAPL are 0.97 as well as 1.09 which are increases and decreases from the last financial year. Further, ideal ratio of quick is 1:1, as per this GAPL company is highly able to pay its amount of debt compare than Energlas de Portugal company.
• Debt to Equity ratio: The ratio which shows that the company is how much able to use debt capital which is taken from bank or commercial institutes and equity capital raise from shareholders (Richards, 2016). Ideal ratio of the debt equity is 0.5:1 which shows that company must have double amount of equity in its financial statements. From the above mentioned calculation it can be analysed that respective ratio of both the firms such as EDP and GAPL are increases and reaches up to 2.02 and 0.87 respectively in the financial year 2016. It indicates that both energy sector companies takes higher debt amount compare than accounting period 2015.
• Efficiency ratios: Another most widely used financial ratio is efficiency which shows that business entity is how much efficient in order to generate sales and revenue in an accounting period. Higher the efficiency lead to enhance sales as well as profitability in the industry (D'Aurizio, Oliviero and Romano, 2015). In the financial year 2016 EDP has higher stock turnover ratio compare than GAPL which are 43.12 and 14.07 respectively. Apart from this as per the fixed assets later energy firm is able to generate more revenue. Most of the investors consider stock ratio so, to make investment in EDP will be better for investors.
• Dividend payout ratio: It shows that the company up to which extent provide dividend to its potential shareholders in one accounting year. In the present case GAPL not give any dividend in the year 2015 while in same period EDP has 66% dividend payout ratio. Further, in the year 2016 GAPL and EDP has respective ratios are 220.5% and 84.10% respectively. As per this the shareholders should invest money in the GAPL which gives better return compare than previous enterprise.
• Return on invested capital: When the investor go for making investment any firm then he considers return on invested capital as well. From the above table it can be interpreted that EDP firm is highly better because it gives higher return compare than another company. In the year 2016 EDP and GAPL has respective return is 4.93% as well as 1.21%, hence previous organisation is better for investment.

Comparison between share prices of EDP and GAPL

In the present case there are two companies EDP and which are listed the stock market and has different different share prices. When the investor try make investment in the equity of shares then it considers various factors. One of them is share prices which are varied according to the index values. In the February 2015 share prices of EDP and GAPL increases with 8.03% and 23.59% respectively. Further, in the month of April 2015 share prices fluctuated by 1.77% and 18.70% for EDP and GAPL both (Davidson, Dey and Smith, 2015). While considering the share prices the investment will be beneficial when investor put money in the GAPL enterprise. In the September 2015 share prices are reduced due to decreasing index prices. Prices of shares of EDP as well as GAPL reduce with -9.49% and -27.19%, hence the investment will be beneficial in the previous business organisation. Afterwards in the month of July 2016 prices of sahres reduced by -6.41% of the EDP firm on the other side share prices increased of the GAPL by 35.65% which shows that later firm will be give more return compare than another business. In the recently in 10th January 2017 price of share of EDP and GAPL was 2.74 GBP and 14.07 GBP respectively. On the basis of above analysis it can be said that GAPL organisation is better to make an investment and it will give higher return in comparison to another mentioned firm.

Task B

Budget is process which helps to the management in order to determine future financial performance and data such as inflows, outflows, profit etc. Further, it is very helpful in order to know issues which are creating in the firm such as increasing cost, reason of reduce profit, unable to use effective business strategies etc. Better and effective business plans can be made when the firm has adequate financial resources which can be allocated with helps of proper budget. With helps to this the management able to meet with its different goals and objectives (Dietz and et.al., 2016). Apart from this each and every business organisation wants to maximize its level of profit whether it operates in oil and gas sector or any other industry. Controlling cost as well as making investment in better and benefited avenue lead to increase profitability ratio of the business. With help of budgeting process the organisation able to know that in which activity cost and expenses are increases and decrease. By which management of the firm can make strategies and tactics to control over the cost of production and achieve objective of profit maximization.

Moreover, in the financial markets there are different avenues in which the company can make investment and generate higher rate of return. Various criteria for making investment are such as equity, bank, commodity etc. In terms of the commodity numerous types of commodities available in the financial market where firm can invest which are like as Brent, Diesel, Gasoline, LPG, Benzine, different metals and many more etc. In order to take better decision to choose one avenue from two or more mutually exclusive commodities there are capital investment appraisal techniques are used by investor. These various tools and methods helps to the management that which one commodity will give better and higher return of the potential or initial investment. Further, which one avenue or criteria will give more return in which investment is to be made by the company (Acharya and Xu, 2016). With this the firm able to make effective budgeting plan as well as give motivation to the employees in terms of monetary. Higher the rewards and motivation given to organisational members will lead to become more efficient and productive. With this productivity of the enterprise will increase and helps to maximise level of profitability in the overall industry.

Hence, from the above analysis it can be said that budgets as well as different capital budgeting techniques linked with the goals and objectives of the firm. Further, it helps to choose the best commodity for making investment and achieve objective in proper manner.

Task C

The model which helps to the company as well as investors in order to determine required rate of return of the potential avenue in which it makes investment, known as capital asset pricing model (CAPM). Further, there are different types of assumptions of the CAPM are such as the investors must make investment at the risk free rate as well as there are not any type of market costs are considered (Chand, 2016). Main components of the CAPM are such as risk free rate of return, market return as well as systematic risk of the stock that is beta value. In order to calculate required rate of return with help of CAPM model respective formula is to be used:

CAPM = Rf + β (Rm – Rf)

Rate of return of EDP and GAPL company with help of capital asset pricing model is given is as follows:

From the above mentioned CAPM model it can be interpreted that both the companies are giving better rate of return when the investor make investment in such firms. In comparison to both the firms EDP is unable to give better return while GAPL provide higher expected rate of return. Further, with visualizing beta value it can be analysed that EDP has 0.96 and GAPL has 0.90 beta which shows that when the investor put investment in the later firm then he has not to bear more risk (Hoberg and Maksimovic, 2015). Higher the beta value of particular asset lead to reduce return of the investment and increase risk. In the present case required rate of return of EDP and GAPL is 3.55% and 3.48% respectively. Hence, the later company will give higher return and beneficial for the investors for invest money in that stock or shares.

Conclusion

It can be concluded from the above mentioned report of financial markets as well as corporate finance that respective market offers different investment avenues to investors such as commodities, shares, bonds, precious metals, crude oil etc. From the financial ratios it can analysed that the GAPL company is performing well in the energy sector in comparison to another firm that is EDP. On the basis of share prices it can be said that EDP gives lesser return in comparison to GAPL business entity. Further, budget as well as investment appraisal tools are helpful for management and related with firm's objectives for making investment and achieve goals and objectives. It can be summarised that as per the CAPM model the GAPL has lower beta value and higher rate of return in comparison to EDP firm. Hence, it can be analysed that GAPL is better to make an investment which gives higher return with lower risk.

Recommendations

It can be recommended on the basis of above analysis that the investors should make investment in the GAPL business organisation which has better financial performance in the energy sector in comparison to EDP firm. Hence, it will be able to give better return to them. Apart from this rate of return as well as risk of GAPL is higher and lowest compare than another firm so shareholders and investors needs to make investment in GAPL in order to get high return.

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References

Journals and Books

• Acharya, V. and Xu, Z., 2016. Financial dependence and innovation: The case of public versus private firms. Journal of Financial Economics.
• Andriosopoulos, D. and Lasfer, M., 2015. The market valuation of share repurchases in Europe. Journal of Banking & Finance. 55. pp. 327-339.
• Bacchetta, P. and Benhima, K., 2015. The demand for liquid assets, corporate saving, and international capital flows. Journal of the European Economic Association. 13(6). pp. 1101-1135.
• D'Aurizio, L., Oliviero, T. and Romano, L., 2015. Family firms, soft information and bank lending in a financial crisis. Journal of Corporate Finance. 33. pp. 279-292.
• Davidson, R., Dey, A. and Smith, A., 2015. Executives'“off-the-job” behavior, corporate culture, and financial reporting risk. Journal of Financial Economics. 117(1). pp. 5-28.
• Dietz, S. and et.al., 2016. /Climate value at risk/'of global financial assets. Nature Climate Change.
• Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage learning.
• Fazzari, S. M. and Papadimitriou, D. B., 2015. Financial conditions and macroeconomic performance: Essays in honor of Hyman P. Minsky. Routledge.