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Step 7 – Identification and Discussion of products and contribution marginsMy firm is Pacific Star Network. As stated in past steps, Pacific Star Network (PSN) is a broadcast media company that predominantly works in the radio industry. This makes identifying products or services that are sold difficult. After reading through the financial statements it was identified that PSN, through the AFL publishing company, produce the AFL record. The AFL record is a magazine made weekly for each round of football. It contains some news, game previews and all the team sheets for each team. The AFL Record is available for purchase in newsagencies and at each of the stadiums as you arrive.Having purchased many of these magazines in the past, I know that they sell for $5 each. Assuming they have a variable cost of $4, the contribution margin will be $5 -$4 = $1.I have been unable to identify any other goods or services that PSN currently sell so I am going to pretend that they did not dispose of Morrison Media in 2018. Morrison media are a publishing company that were owned by PSN. They published a different range of magazines. For the purpose of this assignment I will talk about Frankie magazine and Smith Journal.According the FrankiePress website, Frankie Magazine sells for $13.95 per issue. Assuming they have a variable cost the same as the AFL record of $4, the contribution margin will be $13.95 - $4 = $ 9.95According to the FrankiePress website, Smith Journal sells for $15.95 per issue. Assuming this Journal is produced in the same factory as Frankie and has the same variable cost of $4, the contribution margin will be $11.95, which is slightly better than that of Frankie Magazine. The above figures are summarised in Table 7.1 below.Table 7.1Variable CostSelling PriceContribution MarginAFL Record$4$5$1Frankie Magazine$4$13.95$9.95Smith Journal$4$15.95$11.95I assumed the magazines all had the same variable costs due to the fact that the products are similar in nature, require similar resources to produce and have similar fixed costs.The contribution margins for Frankie and Smith Journal are similar. This appears to be because they are (assumed to be) produced in the same factory and have the same variable costs. The other reason is that they have a similar selling price. The contribution margin for the AFL record is significantly smaller than that of Frankie and Smith journal. I would assume that this is because its selling price is much smaller. Given that Smith Journal has the highest positive contribution margin, you would think that Morrison Media would focus on it when looking at the product-mix. I would assume that given the resources needed to make all the above magazines would be similar i.e. paper, ink etc. It could be assumed that the reason for producing the different magazines would be to reach different crowds. The AFL record for footy fans, Frankie Magazine for the fashionistas and Smith Journal for the culture conscious. Although the AFL record only has a small contribution margin, I am going to assume that he volume of magazines sold would be greater than that of Frankie and Smith Journal.A constraint that I have identified is that of intended audience. All three magazines are intended for specific audiences. These being the AFL fan, people who like fashion and people who are into culture. Speaking from my own experience, out of the three magazines, I would only buy (and have bought) the AFL Record. I think the intended audiences for these magazines are so specialised that it would be difficult to market these products to people who have no interest on the specific topics. This constraint is very relevant when deciding how much of each magazine to produce and sell. At a guess, an average game of AFL played at the MCG gets anywhere between 50,000 – 60,000 people in attendance. I don’t know the sales numbers of Frankie and Smith Journal but given that PSN disposed of Morrison Media and replaced them with the AFL publishing Company, I’m going to assume that they aren’t great. I did a search for Morrison Media to see if they had their own financial statements after being let go by PSN, however, I was unable to locate any. That being said, it seems logical that you would produce more of the AFL record given the crowd that will likely purchase a copy as they are walking to the MCG or any other stadium. Up to round 10 of the 2019 AFL season, there has already been 3,316,111 people walk through the gates throughout the country. That’s an average of 331,611.1 people per week. That’s 3,316,111 x $5 = $16,580,555 of total revenue if every attendee purchases a copy. If, hypothetically, Frankie Magazine sold 200,000 copies every month, that is a total revenue of $2,790,000. In that same 10-week period, Frankie Magazine would have made total revenue of approximately $6,975,000. That is nearly $10,000,000 less than the AFL record.Step 8 - RatiosThe ratios were fairly simple to complete. I think the most challenging part for me is interpreting them. What does it all mean and how does it affect Pacific Star Network? Debt/Equity Ratio – Debt/Equity.When Maria was talking in the video about major events that might skew the figures, I immediately thought of the divesting of Morrison Media in 2018. It can be clearly seen that there is a significant difference in the 2017 figures than all the other years. After some further research in the annual reports, it seems that in 2017 PSN secured the AFL broadcasting rights for their radio station SEN from 2017-2022. It further appears that in 2017, PSN borrowed a significantly larger amount of money. This can be seen in the debt/equity section of 2017 sitting at 102%. I understand the debt/equity ratio to be the ratio per dollar invested into the firm by the firm itself against the dollar amount invested by outsiders e.g. banks. This loan also has the lowest borrowing cost compared to the other years at 4.62%. I would assume that this loan would be to cover the cost of securing the broadcasting rights for the AFL. Table 8.1 below shows the figures for the debt/equity ratio referred to above.Table 8.1Financial Structure Ratios?????Debt/Equity RatioDebt/equity48.6%102.2%61.2%70.5%Equity RatioEquity/total assets67.3%49.5%62.0%58.6%Debt RatioDebt/total assets32.7%50.5%38.0%41.4%Economic Profit – (RNOA – cost of capital) x net operating assetsThe only year that PSN made an economic profit is 2017. All the other years, PSN operated at an economic loss with the greatest loss coming in 2015. Economic profit is different to accounting profits in that it includes implicit costs or opportunity costs. The opportunity cost is the cost of the highest valued alternative to the decision that has been made. For example, If PSN decided to purchase the Melbourne United Basketball club (see capital investment section below) over updating and installing new equipment in its offices around the country, then the opportunity cost is the revenue that could have been made from having better quality equipment. The overall economic profit does not have a particular trend, with 2017 being the highest. Table 8.2 below shows the figures for economic profit.Table 8.2Economic profit (1,058.3)5,765.7(839.6)(2,061.1)InventoriesI was unable to calculate inventories, as PSN did not have any listed on their statement of financial position. I went back through my annual statements and used the search function to search for “inventories” however I was unsuccessful in locating any. I also searched for any costs of goods sold and was unable to locate those as well. Although PSN are mainly a broadcasting company, they do own the AFL publishing company so I would’ve assumed that they would have some sort of inventory in relation to that but it does not appear so. I searched for the AFL publishing company to see if they had their own annual reports however, they did not. The asset turnover appears to be at a fairly quick rate with 2017 again being the stand out year with a turnover rate of 1.13 days. I guess, having no inventory helps with quick turnover rates. Table 8.3 below shows the figures for asset turnover.Table 8.3Total Asset Turnover RatioSales/total assets0.561.130.830.66Market Ratios Market Ratios?????Earnings per Share (EPSNet profit after tax/nos of issued ordinary shares0.010.100.020.00Dividends per Share (DPS)Dividends/number of issued ordinary shares0.000.020.020.02Price Earnings RatioMarket price per share/earnings per share211.1125.56125.732,496.44Market ratios incorporate three ratios. These are: earnings per share (Net profit after tax/number of issued ordinary shares), Dividends per share (Dividends/number of issued ordinary shares), and price earnings ratio (Market price per share/earnings per share). Earnings per share are the percentage of profit allocated to each share. Dividends per share are the percentage amount of dividends paid to investors per share. The price earnings ratio is basically the amount of money you will have to invest in a firm to get $1 of the firm’s earnings. PSN pay very little dividends per share at 0.02% or about 2 cents per dollar. This seems very low and if you were investing for the dividends then this would not be the company to invest in. In 2018 PSN did not pay any dividends. The price earnings ratio is very high in 2015 given that the earnings per share were 0%. The price earnings ratio in the 2016 and 2018 was still very high, with 2017 being the lowest at $25.56. Table 8.4 below shows the figures referred to above. Table 8.4Net Profit Margin vs Profit MarginAside from the significant difference in 2017, the net profit margin has increased steadily at what appears to be a good rate. It has gone up by 4.2% from 2015 to 2016 and a further 4.5% from 2016 to 2018. 2017 shows a significant increase to 33.2%. Do loan amounts get included in this figure? If yes, then it would make sense and align with the rest of the ratios that the result of the drastic increase in numbers is due to a loan. The profit margin for the restated statements is around the same as the net profit margin with only a slight decrease in 2018 and a slight increase in 2016. This tells me that most of the profits come from operating income. Table 8.5 below shows the comparison between net profit margin and restated profit margin.Table 8.5Net Profit Margin-9.1%-33.2%4.6%-0.4%Profit Margin (PM)8.29%32.36%5.49%0.39%Current Ratio – current assets/current liabilities The current ratio is a measure of a firms ability meet its short-term obligations and is measured using the above calculation. The current ratio of PSN is decreasing steadily. Aside from 2017, which is an anomalous year overall, the current ratios are all over 1% however in 2018, it is starting to get on the lower side, sitting at 1.28%. I understand that a healthy current ratio is above 1.5%. I assume that the decreasing current ratio means that PSN are finding it harder to meet their short-term obligations. Table 8.6 below shows the figures for the current ratio.Table 8.6Liquidity Ratios ????Current RatioCurrent assets/current liabilities1.280.671.491.69Weighted Average Cost of CapitalI used the weighted average cost of capital of 10% as per the instruction in the assignment. I did, however, locate a couple of figures for cost of capital in my annual statement. There was a figure for broadcasting and a figure for publishing for each year. I did average the figures to get one figure, however, I was not sure if this was the right thing to do so I just went back to the 10% for safety.Final ThoughtsOn a final note, I would not invest in Pacific Star Network. The main reason is the lack of dividends paid. Also, over the four-year period, the market share price is consistently low. It fell in 2016 and has risen by $1.15 to $3.11 in 2018. The price earnings ratio is also very high. It would take a considerable amount of money to be invested in this company for it to be worthwhile.Step 9 – Capital investment planGiven that Pacific Star network (PSN) has a whole of sport theme, I have chosen to advise them on the investments of one sporting related option and one equipment upgrade option. In 2018 PSN purchased a 25% share in the Melbourne United Basketball Club (MU). The first option I have chosen is the outright purchase and ownership of the Melbourne United Basketball Club. I have forecast the initial cashflow to be -$12m. Revenue will be brought in from membership and merchandise sales as well as 60% of ticket sales at home games. With the forecast cashflow, the payback period for the capital outlay is nine years. The NPV is $0.95 with the IRR at 11.1%The second option for PSN is to update and install new equipment in their offices and radio stations in Melbourne and South Australia. The forecast initial cashflow for this option is -$50m. The revenue will be brought in from an increase in audience due to better quality radio and the increased sales of advertising among other things. With the forecast cashflow, the payback period extends beyond the 10-year period; however, profits will start to beOptionsPayback PeriodNPVIRRMelb. United9 years$0.9511.1%New equipment> 10 years-$32.040.4%made at the 10-year mark. The NPV is -$32.04 and the IRR is 0.4%. Table 9.1 shows the results of calculations of payback period, NPV and IRR. Table 9.1Firstly, the NPV stands out as a reason to purchase MU. The NPV for MU is positive and the NPV for new equipment is in the negative by a significant amount. This means that investing in new equipment would destroy value for PSN whereas investing in MU would add value for PSN. Over the 10-year period, at an IRR rate of 11.1% MU is expected to have a return of $133,200 on its initial investment. Over the same period, with an IRR rate of 0.4% the new equipment is expected to have a return of just $20,000. With the information presented above I would recommend that PSN go with option 1 and purchase the Melbourne United basketball Club. Step 10 – FeedbackI am unsure whether I find the feedback process helpful. I guess it is to an extent, as the feedback I have received for this assignment has picked up on a couple of little things that I missed. I attempted to discuss my ratios with other people to get unofficial feedback prior to the actual feedback process. I have asked twice on facebook if anyone had a similar company to me and wanted to compare spreadsheets, but I got only one reply, which didn’t eventuate into comparisons or feedback. I have completed the feedback component and added my completed feedback sheets below. I agreed with most of my feedback received, and edited my assignment accordingly. I think the only part I didn’t agree with was from Briana Humberstone when she mentioned not talk about my investment options when describing my understanding of economic profit. The reason I disagree with that is because I thought it would be good to use an example that is relevant to the assignment i.e. my investment options. These were particularly relevant given the opportunity costs associated with the decision. FEEDBACK GIVENFeedback From: Danny Muir Feedback To: Alyssa Turner . My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentaryStep 7 is completed very well. You explained the concept of contribution margin very clearly. You identified three products and (I think) realistically estimated the variable costs and selling prices in order to calculate the contribution margin.Current constraints were clearly identified and discussed. I imagine that if the government regulates the production of the drones, then there would be certain barriers of entry to the market, making it harder to enter. There is also the matter of supply and demand. If the government is the only consumer of the good, then there won’t be a great deal of demand and therefore there won’t be too much incentive for other firms to enter the market. If demand increases however, then the incentive will definitely be there.Step 8This section was set out very clearly. The use of diagrams made it easy to understand. One thing I can say is that I usually label my diagrams and reference them in in my text so it makes them clearly identifiable to a particular paragraph e.g. Table 1.1 shows…. Then label Table 1.1 as that.The discussion and commentary on the ratios and economic profit was thorough and relevant. You even economic profit showed you have good knowledge of the concepts and even refreshed my memory on some things.Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)Step 9 You have developed a well thought out capital investment plan with good arguments and reasoning behind your decision of which option to recommend. Again, the diagrams and your commentary make it flow really well.Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOverall ASS#2 Steps 7-9In my opinion this was a really well constructed and thought out assignment. I apologise for the lack of constructive criticism but it is hard to criticise things where there is none needed. There were a few red and green lines throughout the document but nothing that spell check and a final proof read can’t fix. Overall I though it was an interesting read. Well done.Feedback From: Danny Muir Feedback To: Briana Humberstone . My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentaryYou have identified three products your firm sells and it seems you have realistically estimated the variable costs and selling price. You have identified potential constraints. I would perhaps discuss those constraints in a little bit more depth.Step 8I can totally relate to the first part of your step 8 comments. Doing the ratios was fine but discussing and interpreting them was a whole different kettle of fish.I really enjoyed reading your step 9. I liked how there was sort of a narration of your thought processes during the completion of your ratios. You spoke about relevant ratios that really stood out to you, which is the same way I approached it. You calculated your economic profit and discussed it well. You had good reasoning behind your assumptions.Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)Step 9 Your step 9 was done very well. You explained you processes and reasoning behind your decisions very effectively. You did a lot of research in order to develop your assumptions, which is great. It seems you accurately calculated your payback period, NPV and IRR and explained your processes in doing so. Great job.Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOverall ASS#2 Steps 7-9 Overall I think this is a well-done assignment. Aside from the points stated above, there is nothing else I could really think of to mention. All your steps flowed nicely and were easy to read and understand. Well done.Feedback From: Danny Muir Feedback To: Loree Preston . My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentaryFirstly, the presentation of your assignment is a stand out, It looks great and is set out really well. You have described your thought processes to arrive at the decisions you have in relation to the products you chose. Your estimations and reasoning behind them seem valid and accurate. I had a similar situation when I worked out my contribution margins. The magazine with the smallest contribution margin actually produced the most revenue by a significant amount (by my estimations and assumptions of course).Your discussion on the contribution margins and constraints looks to be well thought out and well written.Step 8It seems you have clearly thought about what your ratios mean to your firm. You have analysed them well and added the tables, which make it easier to understand. The one thing I like to do in my assignments when using diagrams is reference them in my text and then label them accordingly e.g. Table 1.1 below shows…..then label the appropriate table. This is just personal opinion of course.You calculated your economic profit and showed your interpretation of your firm’s figures. Maybe just add a little bit of your understanding of what economic profit is.Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)Step 9 You have done good research when determining your prices for your investment options. Your calculations and forecast future cashflow appear sound. Again, the tables make everything look really neat and tidy. You have some great IRR figures there. To be getting nearly 100% return is very good. I think you have sufficiently discussed your recommendation and your reasons behind that recommendation.Your analysis and assumptions in relation to which option to recommend look correct from my view. So well done there.Just a small cosmetic issue, perhaps bring the first row of the table onto the next page to align it all.Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOverall ASS#2 Steps 7-9Regardless of the minor things mentioned above, this is a very well set out assignment. It was written well and I was able understand the content. It’s great to read the thought processes and ideas of other people and compare them to my own processes. Well done.FEEDBACK RECEIVEDFeedback From: Briana Humberstone Feedback To: Danny Muir _My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentaryI was pleased to see that you described each of your products so that the reader was aware of exactly what the product is and how It is used. I think your variable cost amounts would be spot on, if not very close, to being correct so well done!I agree with your comments about the magazines/journals being targeted at specific audiences, which would indeed make it hard to market to others. That makes it a big constraint for the company.Step 8You seem to have missed the “Total Asset Turnover Ratio”. Other than that, your ratios all seem to be correct, and they all seem to have the correct formulas. Your commentary looks very good and is very descriptive.The only thing I would comment on, is in your economic profit section you talk about one of your capital investments. Personally, I would have left that out and just talked about those in step 9, but I do get where you were going by talking about it in that section.Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)Step 9 The choices you made for your capital investments are interesting. I wasn’t sure at first if new equipment would be an acceptable investment but after reading your explanation on where the revenue would be coming from, I could see it as being a good investment. Your analysis on why investment 1 was better than investment 2 was very well done. You described your reasoning for making that decision very well and it made a lot of sense.Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOverall ASS#2 Steps 7-9Overall, I was impressed by your discussions and your descriptions. All of your equations seemed to be correct, you just need to fix up the ratio you forgot to do. Feedback From: Loree Preston Feedback To: Daniel Muir . My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentaryI rather enjoyed reading this step. You have not only covered your CM’s thoroughly you have included a total price comparison on total sales figures, which does give a valid reason why they would chose the lower CM product. You have addressed all the allocated tasks for this step.Step 8Step 8 is again, well written and you seem to have a good understanding of the ratios. There was not much discussion on the ratios based on reformulated financial statements. May I make a suggestion that was made to me? Copying your ratio lines into your word document in the areas you are discussing. This will give the markers something to compare to straight away and know what you are discussing.Have you had discussions with other students into regards to ratios? Or compared how your ratio’s differ to other companies?A small formatting error in your Current Ratio section. “I understand that I healthy current ratio……”Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)Step 9 I have to admit I do not have a big understanding of this section. Not my forte. However, I did note your payback period for option one in your written section says 10 years, however you have segmented days and months in a negative as well as the 10 years. This was a little confusing. You seems to have a good understanding of this area and it does show with your options.Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOverall ASS#2 Steps 7-9You seem to have a good understanding of the topics and task requirements. Well done and good luck. ................
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