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Corporate Finance

Major (Group) Assignment 1

Semester 1, 2022

Presentation: The assignment should be typed and include a signed cover sheet which should include names of all your group members, and everyone’s corresponding percentage contribution to the project.

Grading Policy: The total of this assignment is 12.5 marks. Make sure to include group members’ contribution percentages. Without the contributions included in the first page, I would take 10% off from your mark. If any members’ contributions are more than 10% less than your group’s highest contributor, your individual mark for the assignment will be bumped down 2 points from your group’s original score (e.g. reduction from 10 to 8).

Submission: Each group submit only 1 assignment (assuming you are 3-member group, only 1 of the members need to submit the assignment), listing individual members’ contribution, through MyLO under the ‘Assignment’ icon. Students who hand in the assignment late should consult the Tasmanian School of Business and Economics: Late Submission Policy rules found in the unit outline.

Instructions: This group assignment deals with Cost of Capital and Corporate Investment Decisions. In completing this assignment, you need to use a financial media (such as Google Finance, Yahoo Finance, WSJ, and etc.). Attach a printout (as an appendix at the end of your submission) including every piece of information you obtain from the financial media in this assignment.

Background: The COVID-19 outbreak has significantly impacted various sectors of the global economy. It has affected business activities across the globe, disrupted the global supply chains, significantly decreased tourism and business travels, and many more. It is well known that the COVID-19 pandemic had a significant impact on the Australian stock market. For this assignment each group would be randomly assigned a publicly listed ASX firm to determine its cost of capital during the period of the pandemic. Most publicly traded corporations are required to submit half-yearly and annual reports to the ASX detailing the financial operations of the company over the past half-year or year, respectively. These

reports are available on the ASX website athttps://www2.asx.com.au/or in the investor section of the company’s own website, yahoo finance

(https://au.finance.yahoo.com/quote/%5EAORD?p=%5EAORD) and market index

(https://www.marketindex.com.au/asx-listed-companies). Go to the any of these websites and search for announcements made by the firm assigned to you. Find and download the annual report or half-year report for 2021. Look at the statement of financial position to find the book value of debt and the book value of equity. If you look in the report, you should find a section titled ‘Interest Rate Risk Management’, which will provide a breakdown of the non-current debt. Use the cash-rate as the proxy for risk-free rate (https://www.rba.gov.au/statistics/cash-rate/). Show all formulas and step by step calculations. It is the responsibility of each group to contact the class lecturer to be assigned a specify firm. Each question is worth 2.5 marks (thus 5*2.5=12.5 marks in total). Discuss all results and highlight their relevance to the investor where applicable.

Task:

1. What is the most recent share price listed for your assigned firm? What is the market value of equity, or market capitalisation? How many shares does have outstanding? What is the most recent annual dividend? Can you use the dividend discount model in this case? Using the past 52 weekly data estimate beta for your assigned firm? Estimate the cost of equity for your assigned firm using the CAPM. Note the ASX200 index is the proxy for the market.

2. Compare your estimated beta in task 1 to the beta found on https://au.finance.yahoo.com/. How similar are they? Why might they be different?

3. Look at the financial statements and their relevant notes to find the types of non- current debt and estimate the current business loan rates for each of the assigned firm’s debts. What is the weighted average cost of debt for the firm using the book- value weights and the market-value weights if available? Does it make a difference in this case if you use book-value weights or market-value weights? Calculate the cost of debt of the firm.

4. Calculate the WACC for the assigned firm using book-value weights and market-value weights. Assuming the firm has a 30 per cent tax rate. Which cost of capital number is more relevant? What does the value of the WACC mean?

5. Suppose the publicly listed firm assigned to you goes private. How would you determine its appropriate cost of debt? Does it make a difference if the company’s debt is privately placed as opposed to being publicly traded?