PRINCIPLES OF FINANCIAL MARKETS GROUP ASSIGNMENT
In this assignment, the bottom-up analysis and top up analysis of both Cochlear limited company and CSL limited company have been done. Both the companies fall under healthcare industry. The current rate of interest, inflation rate, and current GDP rate has been determined in this assignment. The financial position of both the companies has also been analyzed in this project by preparing the balance for both the companies. The performance of both the companies and the analysis of ratios to determine the financial position of the companies under the same industry have been done in this project.
The principles of financial markets help to facilitate the recording, settlement, and clearing of financial and monetary transactions. This helps in strengthening the industries and also helps to forecast the financial stability of the companies under the same industry. The chosen companies fall under the same industry. The Cochlear limited company and CSL limited company falls under the healthcare industry. If the companies are not managed properly, it can pose remarkable risks to the system of finance. Although the companies performed well throughout the crisis period related to finance which happened recently. The market related to finance plays vital role in the development of the economy of the country. For economy's general health, application of principles of the financial market is extremely vital for operating under a proper business cycle both the companies required to apply the principles of the financial market. The inflation rate and the GDP of the country, under which both the companies are listed, will impact the functioning of the activities of the business.
Top down analysis
Analyzing the overall economic environment of both the companies:
Cochlear is a growing company. There was 12 % growth in profit for first half of the year.
The Cochlear limited company makes considerable efforts for reducing waste and the use of electricity. This company ensures the recycling, reuse of waste products. Cochlear limited company manufactures designs and supplies the Hybrid electro-acoustic implant, Baha bone conduction implant, and Nucleus cochlear implant.
CSL limited company performs well under the factors related to protection of the consumer, changes in tax legislation and insurance mandates. According to Fang et al. (2015, p.160), CSL limited company is considered as the leader in global biotech. CSL limited company manufactures drugs that covers a third of the market. As exposed collectively, CSL net worth presently is tens of billions. The CSL limited company is the largest manufacturer of drugs under healthcare industry to recover many patients suffering from heart attack all over the globe.
Considering how changes in forecasting in economic fundamentals will impact on company’s performance in the industry:
Changes in forecasting in economic fundamentals have impacted highly on both the companies operating in the same industry. The cycle of business in which the company operates indicates the changes in forecasting economic fundamentals. The major investment areas of the companies are impacted by economic fundamentals such as inflation rate and interest rate. The interest rate which is 1.5 % in Australia also impacts the performance of the companies. The inflation rate of the country as compared to the previous year is 1.97 % which influences the performance of the companies under the same industry. The various indicators and stages in business such as the GDP growth rate is also an economic fundamental which will impact the company’s performance under the same industry. According to Jones et al. (2015, p.1), the downturn in economy and recession may affect both the companies in the same industry. Amending the forecast and compensating the alteration of possible changes is important to avoid the potential problems related to the flow of cash of the companies.
Demonstrating the current interest rate of both the companies:
The current interest rate of CSL limited company is 5.3% whereas the current interest rate of Cochlear Limited Company is 4 %. Therefore, it indicates that Cochlear limited company has a lower rate of interest as compared to CSL limited company. According to Montes et al. (2017, p.26), Cochlear limited company having a lower rate of interest stimulates the growth of economy better than CSL limited company. The lower rate of interest of Cochlear Company makes it easier and cheaper to borrow money for development of its business activities. On the other hand, the CSL limited company having a slightly higher rate of interest as compared to Cochlear will not be able to borrow money in a cheaper way.
Demonstrating the current value of the $AUD of both the companies:
The current value of $AUD of Cochlear limited company is $164.25 and the current value of $AUD of CSL limited company is $159.54. The difference between the value of the $AUD of both the companies under the same industry has been demonstrated. Both the companies listed under the American Stock Exchange (ASX) shows the unconnected value of $AUD. The difference in the value of $AUD of both the companies under same industry is $4.71.
The current GDP of the country represents 1.94 % of the total economy of the world. The current GDP growth of Australia amounted to $1.69 trillion. The GDP growth rate of the country will impact the performance of both the companies under the same industry.
Demonstrating the inflation rate:
The inflation rate of Australia, under which the Cochlear company and CSL Company is listed, has an inflation rate of 1.97%. This inflation rate of the country would affect the performance level of the countries which operates in the same industry.
The economy in which the business cycle is currently operating in:
The business cycle under which both Cochlear limited company and CSL limited company operates under the industry that manufactures equipment related to health care and provide or supply services related to health care. According to Eshraghi et al. (2017, p.315), the companies operate under the business cycle which focuses on distributing facilities related to health care. The cycle of business, in which both the companies operates under the same industry, involves development, marketing, and researching of biotechnology and pharmaceutical products. The companies also apply the principle of the financial market under the cycle of business in which it operates.
Analyzing current financial situation of both the companies:
The current financial status of both Cochlear and CSL limited company is in a good position. By preparing the balance of both the companies for two consecutive years it has been analyzed that the total assets value of both the companies differs to a great extent despite falling under the same industry. With the help of balance sheet, the noncurrent liabilities and current liabilities of both the companies have been analyzed. After calculating the total liabilities it has been analyzed that the total liabilities of Cochlear company for two years is $1101518 and of CSL limited company is $10954.4. According to Chubb et al. (2017, p.2360), the difference in the liabilities of both the companies is also observed in the balance of the companies. Under the current asset calculation both the companies, cash and cash equivalents, trade and other receivables, current tax assets and many other items have been calculated. Under the noncurrent assets intangible assets, property, plant equipment and other items have been calculated. The current assets and current liabilities of the companies under the same industry have been analyzed to determine the total assets of both the companies. The current liabilities and the noncurrent liabilities of the company have also been analyzed for both the companies to determine the total liabilities of the companies. Lastly, by preparing the balance sheet the net assets of the companies and the total equity of both the companies have been analyzed which shows the financial situation of both the companies.
Considering accounting ratios of both the companies:
The accounting of ratios for both Cochlear limited and CSL limited company has been analyzed. The current ratio analysis of Cochlear Company for the year 2017 and 2016 amounted to 1.690345621 and 2.162596575 respectively. The current ratio of CSL limited company for the year 2017 and 2016amounted to 2.844076386 and 2.777939464 respectively. Here the difference in the ratio between both the companies has been analyzed. The equity ratio and return on equity ratio of both the companies are different. The equity ratio of Cochlear Company has positively amounted whereas the equity ratio of CSL limited shows negative amount. This defines that the financial position of Cochlear Company is better ass compare to CSL limited company. According to Dimovski et al. (2016, p.18), there is a slight difference in the net profit and gross profit ratio for both the companies that have been analyzed in the statement of ratio analysis. The asset turnover ratio of both the companies also shows different values which indicate the difference in financial position of both the companies.
Measuring the performance of the firm of both the companies:
The income statement of both the companies has been prepared for analyzing the performance of Cochlear ltd and CSL limited company. According to Erel et al. (2015, p.289), the revenue of both the companies has been analyzed in the income statement. After calculating the total operating profit for both the companies, the gross profit has been analyzed by deducting the revenue from the cost of sales. The operating profit of both the company has also been analyzed by deducting the various expenses of both the companies from the gross profit. In the income statement of both the companies, the expenses that has incurred by both the companies includes research and development expenses, selling and marketing expenses and general and administrative expenses. The finance cost of the company, the finance income of the company and the gain on acquisition of the company under the same industry has also been analyzed to determine the profit before interest and tax .Lastly, the net profit of the company has been analyzed by deducting the tax expenses from EBIT. Therefore, the net profit that has been analyzed in the statement of income shows how differently both the companies are performing or carrying on its business activities under the same industry.
a) The Cochlear limited and CSL limited companies under the same industry could take steps to reduce the rate of interest to enhance its overall economic structure.
b) The company under the same could develop policies to reduce the rate of inflation so that the companies don't have to suffer from high cost of doing or carrying on its business.
c) The application of the financial market principles could be done by the companies for the development of the economic structure of the overall business structure that falls under the same industry.
d) The companies under the same industry could apply steps to reduce risk in the system of finance. This could be done by the companies to carry on the functions of the business in a proper way and smoothly.
e) The company could keep a check on the rate of inflation of the country under which it is listed. The company could do so to determine the cost under which it will be able to operate its business functions and activities.
Based on the analysis of ratio and analysis were done on the statement of financial position and statement of financial performance it has been observed that both the companies under the same industry operates in a different way. The interest rate of both the companies has been considered in this project for both the chosen companies to determine the overall economic structure of both companies. It has also been observed that the current inflation rate and the current GDP of the country under which the companies are listed also impacts the performance of the companies under the same industry.
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