TASK
“1500 Words”
You are required to answer the following questions:
Question 1: [20 marks]
Green Energy Company has recently completed a $220,000, two-year study on its latest project, ‘Roof-top Solar”. It estimated that 28,000 units of its new Roof-top Solar units could be sold annually over the next 10 years at a price of $6,580 each. Subcontractors would install the unit at a cost of $4,700 per installation. Fixed costs of $11 million per annum will be incurred.
The initial outlay includes $52 million to build production facilities and $4.2 million in land. The $52 million facility will be depreciated using the prime cost method over the project’s life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $12.5 million. The land value is expected to increase by 1.5 per cent annually over the project period.
The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 10% discount rate on the new project.
Using the NPV approach, decide whether the project should be undertaken or not.
Question 2 [20 marks]
“Northland Mining” is considering a major Coal mine project in North Queensland, Australia. Costs of financing have been declining recently, and the company’s finance department is considering sourcing the capital through debt and equity.
Northland Mining’s bonds will mature in four years with a total face value of $80 million, paying a half yearly coupon rate of 10% per annum. The yield on the bonds is 15% per annum.
The market value for the company’s preference share is $6.50 per unit while the ordinary share is currently worth $1.90 per unit. The preference share pays a dividend of $1.10 per share. The beta coefficient for the ordinary share is 1.4. The market risk premium is estimated to be 10% per annum and the risk-free rate is 4% per annum.
The company is subject to a 30% corporate tax rate.
Below is the recent balance sheet for the company:
Debt:
Bonds: $80 million
Equity:
Preference Shares (100,000 units): $4 million
Ordinary Shares (10 million): $14 million
(a) Calculate the after-tax cost of each of the company’s current financing sources listed below:
(i). Bonds [2 marks]
(ii). Preference shares [2 marks]
(iii). Ordinary shares [2 marks]
(b) Using the information provided above, calculate the market values for the financing sources listed below:
(i). Bonds [2 marks]
(ii). Preference shares [2 marks]
(iii). Ordinary shares [2 marks]
(c) Using the information from the previous sections, calculate the company’s after-tax weighted average cost of capital (WACC). [4 marks]
(d) The finance manager of Northland Mining has identified a potential project with an IRR of 18% per year. Should this project be undertaken by the company? Discuss your recommendation using relevant calculations. [4 marks]
Question 3: Answer the following questions as directed: [20 marks]
(a) Western Agri-Business Ltd is considering short term financing for its working capital requirement. Discuss briefly the three key factors that the company should consider in selecting different sources of short term financing. [8 marks]
(b) Build-Smart Construction Ltd wants to borrow $100,000 to finance a new $150,000 hydraulic machine to be used in a new construction project. The machine will pay for itself in one year. The firm is considering the following alternatives to buy the machine:
Option A: The firm’s bank offers to lend the $100,000 at a rate of 12% by arranging a bill for one year.
Option B: The machine dealer offers to finance the machine with a one-year loan of $100,000, and the loan would require payment of principal and interest totaling $115,500 at year-end.
(i) Determine the face value of the bill. [4 marks]
(ii) Which option should Build-Smart Construction Ltd. select? [4 marks]
(iii) What would be your answer if the bank charged a $3000 arrangement fee for the bill? [4 marks]
Please note online submission via Turnitin is required for this assignment. Please see details under Requirements after Marking Rubric.
RATIONALE
SUBJECT LEARNING OUTCOMES
This assessment task will assess the following learning outcome/s:
- be able to identify, analyse and solve financial problems confronting business enterprises, particularly problems relating to corporate investment, asset management and financing decisions.
- be able to employ analytical techniques, using contemporary electronic aids appropriate to financial decision making.
- be able to analyse the impact of economic, legal and tax changes on the financial position of the firm.
- be able to demonstrate critical evaluation and communication skills relating to the scope, methodology, role, objectives and ethics of financial management within business organisations.
PRESENTATION
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All textual elements within an assessment must be submitted in a format that is readable by Turnitin. Specific exceptions, where an assessment requires the insertion of image based evidence of workings will be outlined in the context of the assessment. Students that deliberately attempt to insert content of assessments in a format that is not readable by Turnitin may be subject to Academic misconduct investigations.
The following are expectations for the presentation of your written assessment items (2 & 3):
- Include a Title Page, subject name, student ID and name.
- Type your assignment up (including equations) for submission via Turnitin
- Use line spacing 1.5 lines. Leave a margin (approximately 3cm) down the left side of each page. Set font size to 12 pt.
- Include a Reference List and any appendices.
REQUIREMENTS
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This task requires the use of APA7 referencing.
