Assignment Task
You are required to discuss the background and setting of your selected company. In your discussion, you should address the following issues using publicly available information:
Company Background
1.1. Describe the profile of your company (include in your discussion: the nature of the business, industry, and age of your company).
1.2. Provide an evaluation of the current state of the sector or industry that your company operates within, business confidence levels (if appliable), and the outlook of the sector/industry moving forward.
1.3. What does the company make, sell or do? What are the key divisions or segments of the company? How do they contribute to profitability?
1.4. How is the company positioned in its industry? (This could include measures such as total assets, total revenue, market capitalization, and market share)
1.5. What are the key drivers of your company’s value?
1.6. What is the most important strategic focus of the company, and what is the supporting evidence for your choice?
Capital Structure And Cost Of Capital
2.1. As at the financial close date of your company’s latest Annual report, estimate the company’s unlevered and levered WACC (ignoring the impact of dividend imputation).
2.2. Calculate and graph weights for the company’s debt over the last five (5) years based on the market value of equity and net debt.
2.3. Do you think it would be beneficial for the company if it raised more or less debt than its current debt level? Justify your opinion.
Capital Budgeting And Real Options
Your company is considering setting up a production plant in Melbourne with a 10-year planned life. To build and fit out the facility, they will need to make an initial investment of $500 million. The facility will be fully depreciated on a straight-line basis over 10 years for tax purposes. After 10 years, it will have a salvage value of $100 million (Since it will be fully depreciated, any proceeds are fully taxable). EBITDA will be $120 million in the first year of operation, and then grow by 5% p.a. over the next two years. It will then grow by 2% p.a. for the remaining seven years. The project requires $50 million in net operating working capital at the start of the project, but at no other time will additional net operating working capital be required. The corporate tax rate is 30%.
Assume that your company maintains the same debt-to-value ratio you have computed in question 2.1, and the project is of comparable risk to the rest of the company’s activities. As a newly hired graduate in the capital budgeting division, you have been asked to evaluate the project using the WACC, Adjusted Present Value, and Flow-to-Equity methods, i.e., to compute net present value (NPV) with each method using the appropriate costs of capital calculated in question 2.1
Considering the real options that your company might have, please answer the question
- if your calculated NPV in question 3.1 is positive, or answer question
- if your calculated NPV in question 3.1 is negative. (4 marks)
- Your company decided to postpone the plant establishment despite its calculated NPV being positive. How could the real option analysis have supported this decision?
- Your company decided to go ahead with the plant establishment despite its calculated NPV being negative. How could the real option analysis have supported this decision?
