Corporate Finance (BAFI1059) S2 2020

International Students' community

Corporate Finance (BAFI1059) S2 2020

Corporate Finance (BAFI1059) S2 2020 Page 1 of 9
School of Economics, Finance and Marketing
Master of Finance
BAFI 1059 – Corporate Finance
PROJECT (GROUP ASSIGNMENT)
Semester 2 – 2020
Marks
• This assignment is marked out of 100 and contributes 40% to the overall assessments.

Due Date
• Your report must be submitted via Turnitin/Canvas by 11:59 PM (Melbourne time) on the due date Friday 2nd October 2020.
• Late submissions where special consideration has not been granted will be penalised. Please go through the course guide to understand the implications.
Submission Instructions
1) Go to the following link to download RMIT’s Assignment Cover Sheet, fill in your details and attach it to the front page of your Word document.
https://www.rmit.edu.au/students/student-essentials/forms/assessment-forms
2) Save a PDF version of your document with file name saved in the following format:
BAFI1059_Project_Group_Number.pdf (e.g., BAFI1059_Project_Group_11.pdf). Your assigned group number is listed on Canvas under the People tab.
3) Upload the PDF file to the Turnitin/Canvas submission link.
Corporate Finance (BAFI1059) S2 2020 Page 2 of 9
Objective
The objective of this exercise is to enhance students’ understanding of some of the main issues in corporate finance and related business decision-making process. In this project students are required to prepare a business report based on a case study. Details about the case study and its requirements are set out below.
Scenarios
It is 31st December 2019.
Your team of four people form a financial analysis team at Aussie Finance Consulting (AFC), a renowned financial institution. The executive management of AFC has assigned you a task to carry out a special project for its client Whitehaven Coal Limited (WHC), which requires preparing a business report. This report will be presented to AFC executive management and the senior management of WHC.
Whitehaven Coal Limited (WHC) is a New South Wales based coal producer, with operations and development projects in The Gunnedah Basin. WHC has a portfolio of producing mines including the Werris Creek Mine, the Narrabri Underground Mine Stage 3 Extension Project, the Maules Creek Project and other projects.
The coal mining industry has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for coal. WHC has just been approached by Mid-Cen Electric Company with a request to supply coal for its electric generators for the next eight years. WHC does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in The Gunnedah Basin on 5,000 acres of land purchased 10 years ago for $12 million. Based on a recent appraisal, the company feels it could receive $15.5 million if it sold the land today.
Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would simply remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes.
Because it is currently operating at full capacity, WHC will need to purchase additional necessary equipment, which will cost $77 million. To get the equipment in running order, there would be a $2 million shipping fee and a $3 million installation charge. The equipment will be depreciated to zero on a straight-line basis over its economic life of 15 years. The contract runs for only eight years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 10 percent of its initial purchase price in eight years. However, WHC plans to open another strip mine at that time and will use the equipment at the new mine. The equipment also requires staff to be specially trained; fortunately, a similar equipment was purchased a year ago, and at that time the staff went through the $500,000 training program needed to familiarise themselves with the type of equipment. WHC’s
Corporate Finance (BAFI1059) S2 2020 Page 3 of 9
management is uncertain whether to charge half of this $500,000 training fee to the new project. The equipment also requires annual maintenance cost of $325,000.
The contract calls for the delivery of 500,000 tons of coal per year at a price of $93 per ton. WHC feels that coal production will be 620,000 tons, 680,000 tons, and 730,000 tons, respectively, over the first three years, and 590,000 tons per year over the remaining years. The excess production will be sold in the spot market at an average of $75 per ton in Year 1 with an expected decrease of 2% per annum in the following years. Variable costs amount to $35 per ton in Year 1 with an expected increase of 5% per annum in the following years. Fixed costs are $5,000,000 per year. The mine will require a net working capital investment of 5 percent of sales. The net working capital will be built up in the year prior to the sales.
WHC will be responsible for reclaiming the land at termination of the mining. The company uses an outside company for reclamation of all the company’s strip mines. It is estimated the cost of reclamation will be $2.5 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclamation to the state for use as a public park and recreation area. This will occur in Year 9 and result in a charitable expense deduction of $15.5 million.
You are required to analyse the project and make recommendations to WHC whether they should take the contract and open the mine.
For the purpose of the analysis, you have already assembled the following information:
Balance Sheet of WHC as of 31 December 2019
Assets
Cash at Bank
$121,345,000
Accounts receivable
$142,393,000
Inventory
$101,884,000
Marketable securities
$788,000
Plant, machinery and equipment
$4,070,382,000
Intangible assets
$22,946,000
Exploration and evaluation
$570,194,000
Total Assets
$5,029,932,000
Liabilities
Accounts payable
$214,564,000
Bank overdraft
$550,000
Commercial bills (due 31st Dec 2020)
$119,253,000
4.75% Coupon bonds (due Dec 2029 issued @$100 each)
$1,439,226,000
Shareholders’ Fund
Common stock 1,026,250,427 shares @ $2.927 each
$3,003,835,000
Retained Earnings
$252,504,000
Liabilities + Shareholders’ Fund
$5,029,932,000
Corporate Finance (BAFI1059) S2 2020 Page 4 of 9
Additional Information:
• The applicable interest rate on bank overdraft is 3.25% per annum and has monthly compounding.
• The commercial bills are currently yielding 3.75% per annum with quarterly compounding. They will mature on 31st December 2020 however, will be replaced by newer issues on that date. Thus, commercial bills may be assumed to run in perpetuity.
• The bonds are currently priced at $98 each and pay coupons semi-annually on 30th June, and 31st December.
• The coupon payment due to be paid on 31st December 2019 has been paid.
• The applicable company tax rate is 30% and the proportion of tax collected from the company and is claimed by shareholders is 0.50.
• The current yield on Australian Government 10-year bonds is 1.95% per annum.
• The expected market return including franking premium is 8.35% per annum.
Requirements
You are required to advise the company on the following:
a) Capital Budgeting Decision (35 marks)
(i) Should WHC take the contract and open the mine?
Steps in part (a):
The first part of the analysis requires you to work out the Weighted Average Cost of Capital (WACC) for WHC with the help of the given information.
As a part of the WACC calculation, you will need to collect monthly adjusted closing stock prices of WHC and index values of the All Ordinaries Index for the 2015-2019 period from the Yahoo Finance website or MorningStar DatAnalysis Premium database accessed via RMIT library website.
(15 marks)
Secondly, evaluate the project using NPV analysis and make recommendation to WHC.
(20 marks)
b) Capital Structuring Decision (25 marks)
In the next phase, WHC aims at expanding its operation beyond New South Wales. WHC needs to raise more capital for the purpose. It is advised that the company would be more valuable if it included more debt in its capital structure.
Corporate Finance (BAFI1059) S2 2020 Page 5 of 9
(i) Analyse WHC’s capital structure and give advice with reasonings to the WHC executives if they should use more debt to finance their future expansions.
Steps in part (b):
Determine whether WHC is under or over leveraged relative to the industry. According to Global Industry Classification Standard (GICS), WHC is classified to the Energy sector, the Energy industry group, and the Oil, Gas, & Consumable Fuels industry.
(10 marks)
Give your advice with reasonings to the WHC executives if they should use more debt to finance their future expansions. You might want to discuss advantages and disadvantages of using debt financing in your answer. Also consider WHC’s business risk and how it compares with the industry average. Note that a firm’s business risk can be measured as the standard deviation of the firm’s 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑇 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴 over the last five years.
(15 marks)
Instructions on how to obtain data for the calculations of industry average values for the debt ratio and business risk measure are provided in the file:
BAFI1059_S2_2020_Industry_Average_Guidance.pdf.
c) Dividend Policy Decision (15 marks)
Another aspect that WHC executives are perplexed about is the dividend policy they should adopt.
(i) Analyse WHC’s dividend payout policy, including discussion of the type of dividend policy employed, changes in dividend payout amounts or patterns, and the consideration of taxation, dividend imputation and franking credit issues. WHC’s dividend history can be obtained from the MorningStar DatAnalysis Premium database.
(5 marks)
(ii) Given the possibility of WHC significant future expansions, give your advice with reasoning to the WHC executives if they should maintain their current dividend distribution or pursue retention as their dividend policy.
(10 marks)
d) Evaluating Leasing Possibility (15 marks)
Instead of purchasing the equipment, your team, being experienced consultants, wishes to propose to WHC that they have another option which is leasing it. Coincidently, your other client, Resolute Leasing Limited (RLL), may be a suitable lessor. On discussions, the executives at RLL have asked you to prepare a lease quotation that could be
Corporate Finance (BAFI1059) S2 2020 Page 6 of 9
forwarded to WHC for consideration. For the purpose, RLL has provided the following information:
• RLL can get a 20% discount on the purchase price of the machinery.
• They expect the life of the machinery to be 15 years with a salvage value of $5 million after that. WHC may use this machinery for eight years, and RLL is confident that it can be leased to others after that.
• RLL uses the straight-line method for calculating depreciation.
• As the owner of the machinery, RLL is responsible for its annual maintenance cost.
• RLL’s effective tax rate is 10%.
(i) If the RLL’s after-tax required rate of return is 10% per annum, what will be the minimum annual lease payment that RLL would charge? Consider that RLL requires lease payments to be made annually in advance.
(8 marks)
(ii) Calculate the maximum annual lease payment that would make leasing a viable option for WHC?
(7 marks)
e) Business Report Overall Quality (10 marks)
The assignment is to be presented as a business report to both AFC and WHC executive management. This report needs:
• Page numbering
• Informative heading and sub-headings
• Numbered sections
• Executive summary
• Table of contents
• Reference list
Your report is to be submitted as a PDF version of your work.
The report must use a font/fonts suitable for business communication.
The reference style to be used is Harvard style referencing (author-date).
Your main report will have 4-5 pages (with a maximum of 3,000 words) excluding appendix and will be professionally presented. A concise, relevant and visually appealing report is essential for business communication.
Corporate Finance (BAFI1059) S2 2020 Page 7 of 9
General Instructions
Essential Contents:
Your report needs to set out the following at it least:
• An executive summary
• A table showing the calculation of WHC’s WACC using market data / CAPM
• A selection of NPV spreadsheet used in the NPV analysis
• A recommendation to WHC’s management whether they should take the contract
• Calculation of industry average debt ratio and business risk
• Discussion about capital structure and dividend policy suggested for WHC
• Calculation of RLL’s lease quotation for WHC
• A list of references
• Appropriate appendices.
Guidelines
Regarding the WACC calculations, whilst you need to present your final work in a table in the main body of your report, all subsidiary calculations need to be provided in an appendix. You need to provide detailed steps (e.g. formulae) that lead to the final answers. Correct final answers alone will not earn full marks. Also, annotate your appendix so that the examiners can understand your work.
Refer to the tutorial/additional questions for the topics – Capital Budgeting, Cost of Capital and Leasing to present your calculations.
Please round off your values to 4 decimal places for interest rates and two decimal places for amounts, e.g. 0.0659 or 6.59%, and $10,369.78
All assessment of numerical work is marked consequentially. So, you will be awarded marks for all correct calculations and procedures.
Marking Rubric
Marking rubrics are provided on the next pages.
Corporate Finance (BAFI1059) S2 2020 Page 8 of 9
Criteria
High Distinction
80-100%
Distinction
70-79%
Credit
60-69%
Pass
50-59%
Fail
0-49%
Pts
Capital Budgeting Decision
WACC and NPV calculations are mostly accurate. All workings are shown.
Presented in an easy to follow layout.
Recommendation is consistent with the findings.
WACC and NPV calculations have minor inaccuracies. All workings are shown.
Presented in an easy to follow layout.
Recommendation is consistent with the findings.
WACC and NPV calculations have some errors. All workings are shown.
Difficult to follow the calculations.
Recommendation is not clear or not consistent with the findings.
WACC and NPV calculations are mostly inaccurate. All workings are shown.
Difficult to follow the calculations or presentation or flow of information.
Recommendation not provided or not consistent with the findings.
WACC and NPV calculations are mostly inaccurate or incomplete. Workings are not shown.
Difficult to follow the calculations or presentation or flow of information.
Recommendation not provided.
35.0 pts
Capital Structuring Decision
Calculations on industry average debt ratio and business risk are mostly accurate. All workings are shown.
Discussion is provided and demonstrate a mastery of the relevant theory.
Capital structure recommendation is consistent with the findings.
Calculations on industry average debt ratio and business risk have minor inaccuracies. All workings are shown.
Discussion is provided and demonstrate a good understanding of the relevant theory.
Capital structure recommendation is consistent with the findings.
Calculations on industry average debt ratio and business risk have some errors. All workings are shown.
Discussion is provided, and a reasonable understanding of the relevant theory is shown.
Capital structure recommendation is not clear or not consistent with the findings.
Calculations on industry average debt ratio and business risk are mostly inaccurate. All workings are shown.
Discussion is provided but show poor understanding of the relevant theory.
Recommendation is not provided or not consistent with the findings.
Calculations on industry average debt ratio and business risk are mostly accurate or incomplete. Workings are not shown.
No discussion is provided.
Recommendation not provided.
25.0 pts
Corporate Finance (BAFI1059) S2 2020 Page 9 of 9
Dividend Policy Decision
Correctly commenting on the current situation. Advise the policy consistent with the reasonings.
Commenting on the current situation. Advise the policy consistent with the reasonings.
Advise the policy consistent with the reasonings.
Advise but no reasoning or inconsistent reasoning.
No advice or reasoning provided.
15.0 pts
Leasing
Leasing calculations are mostly accurate.
Correctly mention the viability conditions for leasing options.
Leasing calculations have minor inaccuracies.
Correctly mention the viability conditions for leasing options.
Leasing calculations have some errors.
Correctly mention the viability conditions for leasing options.
Leasing quotation calculations is mostly inaccurate.
Failed to mention the viability conditions for leasing option.
Leasing calculations mostly inaccurate or incomplete.
Failed to mention the viability conditions for leasing options.
15.0 pts
Report Writing Quality
Writing and presentation is business like, precise and elegant. Consistently use correct grammar with rare spelling errors.
Writing and presentation is business like and precise. Few grammatical or spelling errors.
Writing and presentation is precise and business like. Some grammatical or spelling errors.
Writing and presentation lacks professionalism or does not use an appropriate business style. Many errors in spelling and grammar.
Poor communication, spelling and grammar characterise the work.
10.0 pts
Total points
100.0

Tags:

Leave a Reply

Your email address will not be published.