Individual Assignment

Task Description

In this assessment, you will work individually:

1. To extract information from an annual report of an allocated company and calculate the Cost of Capital to the company

2. To calculate share price based on its expected future dividends.

3.  To assess a firm’s financing options and decide on the best option to raise capital

This individual assignment is designed to:

1. Show how the Cost of Capital can be roughly calculated based on annual report

2. Show how to calculate share price based on dividends paid.

3. Show how a change in capital structure could affect shareholders' wealth

4. Revise how the Financing decision is linked with Investment decision

Assignment instructions:
You are going to work on a separate Word Document and use the assignment instructions below as the guideline on how to progress your assignment. Remember, 20% of your assignment grade is allocated to the “Professional and informative presentation of results and recommendations” criterion so it is important to present your assignment professionally.

Part A: Extract data from annual report to calculate Cost of Capital (40%)

Step 1: Download the Financial Year (FY)2023 annual report of your allocated company and understand your allocated company.

Write a quick summary of your allocated company (no more than 1 page) on:

· What does your allocated company do ? Which industry are they in ?

· What products/services do they do ?

· How was the financial performance of the company in FY2022 in general ?

Step 2: Navigate to the Financial Statement section. Extract the information related to the Debt of your allocated company and calculate Cost of Debt

A) Your allocated company’s Debt

· Take a screenshot of your allocated company’s balance sheet or financial position and insert to your Assignment document (Make sure you have citation and reference for the information taken)

· How much is the total Debt of your allocated company? In this assignment, we are going to assume Total Debt = Total Liability

B) Your allocated company’s Financing Cost or Interest expense

· Take a screenshot of your allocated company’s profit and loss or income statement and insert to your Assignment document (Make sure you have citation and reference for the information taken)

· How much is the total Finance Cost or Interest expense of your allocated company?

C) Calculate the Cost of Debt

· Cost of Debt (%) = Financing Cost/Total Debt

· Note: This calculation will only give a rough idea of the Cost of Debt (%) as some of the Debts are interest free (e.g: Accounts Payable). However, this should be sufficient for our assignment

Step 3: Extract the information related to the Equity of your allocated company and calculate Cost of Equity

A) Your allocated company’s Equity

· How much is the total Equity according to your allocated company’s annual report? (Make sure you have citation and reference for the information taken)

B) Your allocated company’s Statistics

· Go to Yahoo FinanceLinks to an external site. search for your allocated company (check the ASX code to make sure you find the right one)

· Go to tab “Statistics”, take a screenshot (including the current share price) and insert to your Assignment document (Make sure you have citation and reference for the information taken)

· What is Beta of your allocated company? (If the Beta result shows as N/A, you can check out this website as well: Market WatchLinks to an external site. Links to an external site.Make sure you search for the correct company) Again, make sure you take a screenshot of your finding and insert to your Assignment document.

o How risky is your allocated company's share, compared to the overall market, based on Beta ?

· How many shares outstanding are there currently? (Use either result from Yahoo FinanceLinks to an external site. or Market WatchLinks to an external site.)

· What is market value of your allocated company's Equity based on the current share price and number of shares outstanding?

C) Calculate the Cost of Equity with the following assumptions:

· According to Vanguard (one of the biggest mutual funds in the world), the average top 300 Australian companies provides a return of 8.96% per year (S&P/ASX 300 Index).

· According to TradingEconmics.com, the current 10-year Australian Government Bond yield is 3.676%.

Step 4: Calculate the WACC of your allocated company

· Assumptions:

o The total Debt of your allocated company from Step 2A of part A is at market value.

o The market value of Equity is based on the current share price and number of shares outstanding from Step 3B of part A

· Calculate the WACC of your allocated company, show all workings and explain each step of your calculation.

o The WACC result might be a bit odd (Most of the weighting goes to equity or debt) as we assume the Book Value of Debt is the same as the Market Value of Debt (which is not the case in reality but for simplicity purpose that's what we assume in this assignment). As long as you use EXACTLY the data from previous steps and do the calculations correctly, you will be fine.

o Tax rate: 30%

Step 5 Calculate share price based on dividends

· Let's assume that your allocated company just announced that the company will be paying $0.5 of dividends this year but none in the next year. However, they confirm that they will resume paying dividends in 2 years' time. The dividend is expected to be 5% of the share price today. Calculate the dividend paid in year 2.

· Let's assume your allocated company is expected to grow at the rate of 1% forever after year 2. Based on the dividend paid and Cost of Equity(%) identified above, calculate the expected share price for today.

o Remember: Share price is only the total present value of all future cash flows. Check out week 7 if you are unsure

· Explain why we must use the Cost of Equity(%) in the above calculation, not the Weighted Average Cost of Capital(%)

o Hint: Look at how the Cost of Equity(%) and Weighted Average Cost of Capital(%) are calculated.

Part B: Assess the impacts of capital structure on return (40%)

Step 1: Calculate the NPV of a project

The CEO of your allocated company is considering a project that will generate the following Cash flows:

Use the Weighted Average Cost of Capital (WACC) from your step 4 of part A to calculate the NPV of this project (Show full workings). Advise if the project should be taken under the current WACC.

Step 2: With the extra information on Debt, Equity and the fund-raising options, assess which option is better for shareholders

The director of your allocated company understands that an optimal capital structure can help to maximise the NPV of the project from step 1 even further.

The CEO is considering a proposed option in which they are going to issue more equity to reduce their current debt by 20%.

With your understanding on the Capital Structure Topic, perform. your Capital Structure analysis (assume a company tax rate of 30% is to be applied). In your answer, you must:

· Include the Earning Before Interest and Tax (EBIT) from the FY2022 annual report of your allocated company. Take a screenshot of the table that shows the EBIT and insert it to your assignment document.

o If your company does not provide EBIT, you can calculate it through the following formula: EBIT = Net Profit after tax + Tax expense + Interest expense (or Finance Cost)

· Indicate the market value of your allocated company's debt with the amount of interest expense/ financing cost (Use the same numbers as your step 2 of part A). This will be used in the table below, under the current option.

· Indicate the market value of your allocated company's equity with the number of shares outstanding, market share price (Use the same numbers as your step 3 of part A). This will be used in the table below, under the current option.

· Calculate the new Debt and Equity under the proposed option, if more equity is to be issued to reduce 20% of the current market value debt.

· Calculate the new Interest Expense or Finance Costs under the proposed option, using the same cost of Debt from step 2 of part A and the new total Debt that you just calculated above

· Calculate the new Number of shares outstanding under the proposed option, using the same share price from step 3 of part A and the new total Equity that you just calculated above

· Complete the table below:

Details of each option:

· Once finished, compare the EPS under each option with the current EBIT of you allocated company:

EPS_{Current Option} =

EPS_{Proposed Option} =

Based on the above calculation, please advise your director if increased debt would reduce your allocated company's WACC and why ?

Explain to your director, in what situation increased debt would help to decrease WACC and what is considered as the optimal point ? Make sure you reference your source of information in your answer.

Step 3: Recalculate the WACC under the proposed option

· Recalculate the financial position under the proposed option:

· Recalculate the WACC (Show all workings) under the proposed option with the same cost of Debt and Equity used in Step 2  and 3 of Part A

Step 4: Recalculate the NPV using the new WACC and assess the impacts of the proposed option to shareholders' wealth

· With the WACC calculated in Step 3 of part B, recalculate the NPV of the project that was considered in Step 1 of part B

· How is the proposed option impacting (better or worse) to shareholder’s wealth, compared to the current option?

Step 5 Time to connect the dots!

In general, why should a finance manager understand both "Investment decision" and "Financing decision", in order to achieve the finance manager's goal ? (This is a general question for you to look back our 10 weeks of content and connect the key points together. You can use your allocated company as an example) In your discussion, you need to discuss:

What question/problem that the investment decision is addressing ? Discuss 1 key takeaway that a finance manager should have after conducting his/her analysis on the investment decision

What question/problem that the financing decision is addressing ? Discuss 1 key takeaway that a finance manager should have after conducting his/her analysis on the financing decision

How is the investment decision supported by the financing decision in order to achieve the finance manager's goal ?

Make sure you reference your source of information in your answer.