This assignment is to apply the concepts and theories in the corporate finance class and perform critical analysis for a company you picked using real market and financial data.
You are expected to submit three individual reports during the semester. The exact deadlines for each report will be announced on Wattle. 3
From a list of the S&P/ASX 300 index member companies (see the Excel spreadsheet attached), pick a company (your company) and answer the following questions. To support your analysis, you could obtain information about these public firms from the following (non-exclusive) sources.
1. Australian securities exchange: https://www.asx.com.au/
2. Yahoo finance: https://au.finance.yahoo.com/
3. Google finance: https://www.google.com/finance
4. Company website, including annual reports disclosed.
If you use any data in the analysis, you should keep a copy of these data for verification purposes. However, you do not need to attach the data in your submission. Whenever possible, please relate your discussion to the specific situation of your firm – a general statement may not be sufficient. This is an essential requirement of the assignment. Whenever possible, the format of your answer should be structured — take the answer as a very short essay: there is a key point to start with, followed by some supporting evidence or arguments. You should keep you answer brief, but to the point.
Report 3 (total 40 marks)
WACC (20 marks)
Now let’s compute the cost of capital for your firm. Use the results from Report 2. You may revise your calculation reflecting the feedback given to you. In case you revise, please state the revisions clearly.
1. (3 marks) Compute the weighted average cost of capital (WACC). The base corporate tax rate in Australia is 27.5% (https://www.ato.gov.au/Rates/Company-tax/). You have assumed that the company is sound and safe (i.e., risk free) in computing the WACC. You need not consider the impact of dividend imputation in this report.
2. (5 marks) Using the result in Question 1, what would be the cost of capital if the firm had no debt? What is the difference of WACC compared with Question 1 ? What does the difference imply?
Your CFO says that your company’s bond are not risk free as they are subject to default risk.
Therefore, you need to adjust for credit risk in computing the cost of capital.
3. (2 marks) Visit the corporate website and find the credit rating of your company. Your company might not have any credit ratings when the company does not issue any bonds. However, it does not mean that the company has no credit risk. As long as the company has any debt, the company has credit risk. If you cannot find any ratings, look for similar firms in the same industry that have the ratings. Please report if this is the case.
4. Since it is not easy to obtain credit spreads for individual companies, you have decided to use a traded index of credit default spreads in Australia called iTraxx Australia. See details below.
The most recent data can be found below. You may use the ‘theoretical spread’ of iTraxx Australia. The number is quoted in basis points.
a. (3 marks) Revise the cost of debt and WACC for your company using the credit spread from iTraxx.
b. (7 marks) Considering the credit rating score of your company (or of a similar company), how would you present your estimate of WACC to the CFO? You must understand what kind of firms are represented in the iTraxx Australia. Refer to the websites above.
Investment and financing (10 marks)
5. Report the firm’s investment in property, plant and equipment (PPE) for the past five years. You may use the cash flow statement or the balance sheet. (If you cannot find data for the past five years, please use whatever years of data available.) Compare the amount of PPE year-by-year with its external financing using debt and equity by presenting the numbers for each year. You can examine the cash flow statement as well as the balance sheet. However, remember that the cash flow statement records the flow of PPE investment or financing during the fiscal year while the balance sheet shows that outstanding amount of capital stock, debt and equity. Here, the question is to examine the flows each year. (5 points)
6. Does the amount of PPE investment equal the amount of external financing? If not, why? (5 marks)
Payout policy (10 marks)
7. (3 marks) Describe the payout policy of your firm in the most recent year. Report such as payout ratio, total amount of payout, etc. In what form did the firm payout cash (i.e., cash dividend or repurchase)?
8. (7 marks) Is the firm sending any signal to the market regards its payout policy, especially during the recent economic environment when the economic recession is in sight? You may search news of the company on the internet, visit company website or read financial statement if available.
1. This assignment will be handled and marked by your tutor.
2. Format: your submission should be a single MS Word file that follows the requirements below:
a. Font: Times New Roman, size 12pts (you may use 11pts if you need more space, but please remember a more readable report tends to receive higher marks); Single line spacing; 2.54 cm margin to each side (A4 size)
b. Page limit: Report 3 Three pages. (everything included)
c. Due date: Report 3: 2020-10-28
d. The file name is “uXXXXX your name, course code”. For example, your file name should look like “u123456 Jack Brabham FINM2001”.
3. Support and consultations: if you need any clarification during the writing of your assignment, please contact your tutor. Their contact information is available on the wattle website. Your tutors could provide clarification, in case there is any confusion. However, given this is part of the assessment, they could not assist you completing the assignment in any way.
4. Submission: this assignment is to be completed individually and submit using Turnitin in the wattle website. The details of submission deadlines are on Wattle. You should complete the report no later than each submission date. The 48 hours between the completion and submission of the report should be used to handle the electronic submission – you are strongly encouraged not to submit at the last minute to avoid potential crash of the wattle site.
5. Late submission: Unless there is a special arrangement, late submission would attract a penalty of 5% per working day. No submission would be accepted after 23:59 of each submission date. Application for an extension should be filed before 23:59 of each submission date. Given that enough time (48 hours) has been provided to handle electronic submission, reasons such as computer crash or loss of USB would not be accepted for extension. (I have added one more hour after 23:29 just in case there might be some glitches in your internet system.)