This assignment requires students to prepare a detailed business report based on a case study by applying financial concepts such as capital structure, capital budgeting, and others in topics 1-7 in the course.
This is an individual assignment marked out of 100 and contributes 25% of your overall assessment for FIN1FOF.

Rubric

		N	D – C		B – A
		< 49%	50 – 69%		70% <
Conceptual Skills Work applies principles of finance correctly in interpreting the problem, discussing results, conclusions, and/or recommendations.	•	Frequent errors or unacceptable mistakes indicative of a lack of understanding of the core principles of finance.	• Interprets the problem, Identifies the correct means of solving the problem, and explains the solution to the problem in a manner which demonstrates an understanding of the principles of finance, though affected by some errors and/or incompleteness.	• • •	Interprets the problem correctly. Applies appropriate principles of finance to identify the correct means of solving the problem. Explains the solution to the problem in a manner which demonstrates a thorough understanding of the principles of finance.
Quantitative Skills Work demonstrates an aptitude to analysing and solving problems mathematically, with the assistance of financial technology.	•	Frequent errors or unacceptable mistakes indicative of a lack of understanding of the quantitative methods and financial technologies required to solve quantitative problems.	• Sources inputs and calculates a solution to the problem, though subject to some mistaken inputs, calculation and/or misuse of financial technology.	• • •	Identifies, calculates and/or sources the correct inputs required to solve the problem. Calculates the solution to the problem without error. Demonstrates skills in being able to solve problems with the use of financial technology.
Reflective Skills Work demonstrates an ability to critically reflect on financial data, problems, solutions and advice.	•	None or insufficient critical reflection of quantitative solutions, alternative interpretations and options for advice.	• Some limited critical reflection of quantitative solutions, alternative interpretations and options for advice.	• • •	Critically reflects on the strength and weaknesses of alternative conceptual interpretations of the fact-set, the problem and alternative solution methods. Critically reflects on quantitative solutions in light of client needs. Critically reflects on any advice flowing from the solutions.
Communicative Skills Writing demonstrates ability to clearly and accurately communicate financial analysis, solution and advice.	• • •	An absence of, or frequent errors in the presentation of, formulas and calculations. Interpretations and explanations are either missing, incomplete, or suffer from poor grammar and/or spelling errors. Little or no arguments and/or evidence is provided in support of any advice given.	Some but not all formulas and calculations are correctly presented. The interpretation and explanation of findings and methods is not clearly expressed and includes some poor grammar and/or spelling. Arguments and evidence in support of any advice provided is provided but not sufficiently convincing.	• • •	Correctly presents formulas and all calculations on which the solution to the problem is based. Clearly and accurately interprets findings and explains methods with few or no grammar and/or spelling errors. Convincingly presents the arguments and evidence in support of any advice provided.

Scenario

You work as a financial analyst in the Finance division of the Rural Services Ltd an Australian agribusiness company. Rural Services Ltd provides a range of products and services, across rural Australian towns, through a common distribution channel, including beef cattle feedlots, agricultural retail products, agency services, real estate services and financial services.

A deposit of lithium ore has been discovered recently on rural property owned by the company. Lithium is a critical element used in various applications, especially in the production of rechargeable batteries, which are used in a wide range of devices such as electric vehicles, smartphones, laptops, and energy storage systems. Additionally, lithium is also used in other industries, including aerospace, ceramics, glass, and pharmaceuticals.

The company is in the process of deciding whether or not to develop a mine on the property to extract the lithium to supply the rechargeable battery market in light of the increasing demand for rechargeable batteries. Your company’s Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with such a project, notwithstanding the significant diversification such an investment would represent for the company from its core activities.

In order to analyse the financial viability of the project you obtain the 2023 Income Statement and Balance Sheet for Rural Services Ltd. Moreover, in order to analyse the risk and return of this project, which is so different from the current activities of Rural Services Ltd, you also obtain the 2023 Income Statement and Balance Sheet for Core Lithium Ltd, a small lithium miner listed on the ASX. These financial statements are provided on pages 4 and 5. You calculate some financial ratios to compare the financial performance of the two companies, which are presented on page 6. You also collect some interest rate information, which is presented on page 7.

Rural Service Ltd 2023 Financial Accounts

Gross Profit	200.0
Selling, General and Administrative Expenses	(100.0)

Pre-Tax Profit	42.5
Tax	(12.8)
Net Profit	29.8
BALANCE SHEET	million
ASSETS
Cash	10.0
Accounts Receivable	200.0
Inventory	150.0
Property Plant and Equipment	250.0
Total Assets	610.0
LIABILITIES
Accounts Payable	200.0
Bank Loan	25.0
Corporate Bonds	150.0
Total Liabilities	375.0
SHAREHOLDERS’ EQUITY
Ordinary Shares	400.0
Retained Earnings	(165.0)

INCOME STATEMENT	million
Sales Revenue	1,000.0
Cost of Sales	800.0)

EBITDA	100.0
Depreciation	(50.0)
Interest Expense	(7.5)

Total Shareholders’ Equity 235.0

Total Liabilities and Shareholders’ Equity 610.0

Notes

The interest rate on the bank loan is 6.00% p.a.
The corporate bonds have a credit rating of BB and have 5 years to maturity. They make quarterly coupon payments at a coupon rate of 4% p.a.
The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 0.51. In 2023, they paid a dividend of $0.03 per share. The dividend is expected to grow at 5% p.a. for the next 3 years, after which it will grow at a constant 3% p.a. in perpetuity.

Core Lithium Ltd 2023 Financial Accounts

INCOME STATEMENT million

Sales Revenue 50.6

Cost of Sales (15.8)

Gross Profit 34.8

Interest Income 3.0

Selling, General and Administrative Expenses (21.0) Other Non-operating Income/(Expense) (1.5)

EBITDA 15.4

Depreciation (3.9) Interest Expense (2.3)

Pre-Tax Profit 9.2

Tax (1.6)

Net Profit 7.6

BALANCE SHEET million

ASSETS

Cash 152.8

Accounts Receivable 6.7

Inventory 28.9

Property Plant and Equipment 241.2

Other Assets 73.6

Total Assets 503.1

LIABILITIES

Accounts Payable 31.0

Bank Loan 83.6 Other Liabilities 33.6

Total Liabilities 148.2

SHAREHOLDERS’ EQUITY

Ordinary Shares 370.9

Retained Earnings (16.0)

Total Shareholders’ Equity 354.9

Total Liabilities and Shareholders’ Equity 503.1

Financial Analysis of Rural Services Ltd and Core Lithium Ltd 2023

FINANCIAL ANALYSIS	Rural Services Ltd	Core Lithium Ltd
Sales Revenue/Average PPE Margin	164%	31%
Cost of Sales/Revenue Ratio	80%	31%
Gross Margin	20%	69%
Tax Rate	30%	17%
Net Margin	3%	15%

Net Working Capital/Sales Revenue Ratio	15%	9%

Net Profit/Equity Return	13%	2%

Debt/Equity Ratio	74%	24%

Credit Rating	BB	BB
Beta	0.51	2.31

Interest Rates

Based on the current yields at which the 5-year and 10-year Government bonds are trading you assume that the 5-year risk-free rate is 3.974% and the 10-year risk-free rate is 4.315%.

The current corporate credit spreads are as presented in the table below.

Rating	Aaa/AAA	Aa2/AA	A2/A	Baa2/BBB	Ba2/BB	B2/B	Caa2/CCC	Ca/CC
Maturity
1	8	28	52	80	201	319	852	1,207
2	22	33	59	87	201	319	852	1,207
3	35	39	65	93	201	319	852	1,207
4	48	44	71	100	201	319	852	1,207
5	45	46	76	108	201	319	852	1,207
6	42	48	82	117	201	319	852	1,207
7	49	53	88	123	201	319	852	1,207
8	57	57	94	129	201	319	852	1,207
9	65	62	100	135	201	319	852	1,207
10	63	63	99	135	201	319	852	1,207
11	61	63	99	136	201	319	852	1,207
12	60	64	99	136	201	319	852	1,207
13	58	64	98	136	201	319	852	1,207
14	57	65	98	136	201	319	852	1,207
15	55	65	97	137	201	319	852	1,207
16	53	66	97	137	201	319	852	1,207
17	52	66	96	137	201	319	852	1,207
18	50	67	96	138	201	319	852	1,207
19	49	67	95	138	201	319	852	1,207
20	47	68	95	138	201	319	852	1,207
21	45	68	94	139	201	319	852	1,207
22	44	69	94	139	201	319	852	1,207
23	42	69	93	139	201	319	852	1,207
24	40	69	93	139	201	319	852	1,207
25	39	70	92	140	201	319	852	1,207
26	37	70	92	140	201	319	852	1,207
27	36	71	91	140	201	319	852	1,207
28	34	71	91	141	201	319	852	1,207
29	32	72	90	141	201	319	852	1,207
30	31	72	90	141	201	319	852	1,207
Average	45	61	89	129	201	319	852	1,207

Project Information

You estimate the investment required to undertake the project will be equal to 20% of the Property Plant and Equipment (PPE) shown in the Core Lithium Ltd 2023 Balance Sheet (page 5).
You are also aware that Rural Services Ltd has budgeted to spend $2 million in professional, geotechnical and legal fees appraising the project before making its final decision.
You estimate that the revenues in the first year of the project will equal the 2023 Revenue/Average PPE margin you have calculated for Core Lithium, shown on page 6, multiplied by the investment Rural Services will need to undertake the project.
Further you are advised that the size of the resource is estimated to provide a five year life for the project and that revenues will grow by 35% in year 2, 25% in year 3, 15% in year 4 and 5% in its fifth and final year.
You decide to be guided by the Cost of Sales/Revenue Ratio you have calculated for Core Lithium, as shown on page 6, which you will apply through the entire five year life of the project.
Depreciation will be calculated using the diminishing value method with the aim of fully depreciating the investment by the end of the life of the project.
You decide to apply the tax rate you calculated for Rural Services Ltd, shown on page 6.
During the life of the project, you estimate that the firm will need to provide for an annual increase in net working capital comprising an increase in Receivables and Stock, less an increase in Payables. You have calculated the Net Working Capital/Sales Revenue Ratio of Rural Services Ltd and Core Lithium shown on page 6. You decide to use the 2023 Net Working Capital/Sales Revenue Ratio of Rural Services Ltd to estimate the annual additional amount of Net Working Capital that will be required to service the Incremental Sales Revenue of the project, estimated each year.
You also assume that in the year after the final year of the project’s life the firm will recover in full this net increase in working capital.
In the year after the five year life of the project, you are advised that the company would need to spend $3 million in cleaning up the site and replanting.
Your research also shows that the equity risk premium on the ASX is between 4 – 6%, so you decide to apply a 5% equity risk premium in your estimation of CAPM.

Tasks

You are required to complete the following tasks.

Show the formula and complete calculations for each answer you calculate.
Define all variables of each formula used and show any calculations required to adjust them for use in applying the formula to solving each problem.
Format your answers as defined in each task.
When incorporating an answer to a prior task in a subsequent task, use the value as it has been formatted. For example, if a task required you calculate and format as a percentage to 3 decimal places, the answer should be formatted as 1.234%. If this value is subsequently included in the calculation of the answer to a subsequent task, then the value you must use is 1.234% or 0.01234.

Part 1: Calculate Rural Services Ltd’s Weighted Average Cost of Capital (30 marks)

Calculate the before-tax cost of Rural Services Ltd’s bank loans and corporate bonds. Show your answer formatted as a percentage to 3 decimal places. (6 marks)
Calculate the cost of Rural Services Ltd’s ordinary shares. Show your answer formatted as a percentage to 3 decimal places. (6 marks)
Calculate the estimated market value of Rural Services Ltd’s bank loans and corporate bonds. Show your answer formatted as dollar values. (6 marks)
Calculate the estimated market value of Rural Services Ltd’s ordinary shares. Show your answer formatted as dollar values. (8 marks)
Calculate Rural Services Ltd’s WACC. Show your answer formatted as a percentage to four decimal places. (4 marks)

Please turn over for Part 2

Part 2: Estimate the project’s incremental free cash flows (30 marks)

Prepare the depreciation table for project’s investment in PPE, using the Diminishing Value

Method. Show your answer formatted as millions to 2 decimal places. (10 marks)

Year	1	2	3	4	5
Opening Book Value
less Depreciation
Closing Book Value

Prepare the free cash flow table. Show your answer formatted as millions to 2 decimal places. (20 marks)

PROJECT	0	1	2	3	4	5	6
CASHFLOW STATEMENT	million	million	million	million	million	million	million
Incremental Sales Revenue
Incremental Cost of Sales
Incremental Earnings Before Tax & Depreciation
Depreciation
Pre-Tax Profit
Tax
Net Profit
add back depreciation
Investment
Change in Net Working Capital
Restoration Costs
Net Incremental Cashflow

Please turn over for Parts 3 and 4

Part 3: Calculate the project’s NPV, IRR and Profitability Index (20 marks)

Calculate NPV of the project using the parameters you have estimated above. Show your answer formatted as millions to 2 decimal places. (4 marks)
Calculate the IRR of the project using the parameters you have estimated above and the IRR function in Microsoft Excel. Show the parameters and values you incorporated in the IRR function as part of your answer. Show your answer as a percentage to 1 decimal place. (4 marks)
Calculate the Profitability Index of the project using the parameters you have estimated above. Show your answer as a percentage showing no decimal places. (4 marks)
Should the project be accepted based on the assumptions and parameters you have used above? Explain your answer (8 marks).

Part 4: Review and recalculate the project’s NPV, IRR and Profitability Index (20 marks)

Based on the analysis of the financial metrics you calculated on page 5 for Rural Services Ltd. and Core Lithium Ltd. What, if any, concerns might you have with the parameters you have used above to estimate the financial viability of the project? (5 marks)
If Rural Services Ltd could only proceed with the project, if it proves to be financially viable AND if it is totally financed by share capital, costed based on the estimated cost of a lithium mining company’s share capital, what would be the discount rate you would apply to evaluating the financial viability of the project? (5 marks)
Recalculate the NPV, IRR or Profitability Index of the project using this revised discount rate. Note, you need only recalculate ONE of these measures. (5 marks).
Based on this revised project evaluation, if Rural Services Ltd could only proceed with the project, if it proves to be financially viable AND if it is totally financed by share capital costed based on the estimated cost of a lithium mining company’s share capital, would you recommend that the project is financially viable? (5 marks)

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