Assessment Item 3 (Topics 4 -7)
Value: 20%
Due date: 07-May-2018
Return date: 29-May-2018
Length: 1500 words
Submission method options
Alternative submission method
Task
Question 1 (25 marks)
Home Guardian has recently completed a $200,000, two-year study on its new pest control device. It can go into production for an initial investment in equipment of $5 million. The equipment will be depreciated straight line over the useful life of 5 years to a value of zero. The fully depreciated equipment is expected to sell for $1,200,000 at the end of its useful life. The project also requires investment in land value of $300,000 which is expected to have a realisable value of $500,000 at the end of the project. Investment of $400,000 in cu
ent assets will be recovered at the termination of the project. The marketing department has estimated that 200,000 units of its new device could be sold annually over the next five years at a price of $10 each. Fixed costs of $500,000 per annum will be incu
ed.
The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. All capital gains will also be taxed at a rate of 30%. The company uses a 12% discount rate on the new project. Using the NPV approach, advise the firm whether the project should be undertaken.
Question 2 (25 marks)
HRE Mining Limited’s (HRE) is considering a major gold exploration project in South Sudan. Costs of financing have been declining recently causing the finance department to consider sourcing capital through debt and equity issues. The company’s bonds will mature in six years with a total face value of $100 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 $4.75 per unit while the ordinary share is cu
ently worth $1.85 per unit. The preference share pays a dividend of $0.4 per share. The beta coefficient for the ordinary share is 1.4. No issue costs will be incu
ed by the company. The market risk premium is estimated to be 12% per annum and the risk-free rate is 4% per annum. The company is subject to a 30% corporate tax rate and intends to issue 200,000 preference shares and 5,000,000 ordinary shares. HRE’s cu
ent balance sheet shows the following information for bonds and shares:
$ Million
Preference shares 3
Ordinary shares 15
Bonds 100
a. Outline the necessary steps required to estimate the company’s weighted average cost of capital (2 marks).
. Calculate the after-tax cost of each of the company’s cu
ent financing sources (7.5 marks).
c. Using the information provided, calculate the market values for the financing sources for HRE (7.5 marks).
d. Using the information from b.) and c.) calculate HRE’s after-tax weighted average cost of capital (5 marks).
e. The company’s finance department has confirmed that the proposed project will generate an IRR of 15% per year. Discuss whether or not the project should be undertaken (3 marks).
Question 3 (15 marks)
Mid-Western Mining Ltd is considering short term financing for its working capital requirement. You are invited to provide a discussion on the three key factors that the company should consider in selecting different sources of short term financing. Briefly discuss these factors and illustrate with an appropriate example where possible.
Rationale
This task will assess your ability to meet the following learning outcomes:
· identify, analyse and solve financial problems confronting business enterprises, particularly problems relating to corporate investment, asset management and financing decisions;
· employ analytical techniques, using contemporary electronic aids appropriate to financial decision making;
· analyse the impact of economic, legal and tax changes on the financial position of the firm;
· demonstrate critical evaluation and communication skills relating to the scope, methodology, role, objectives and ethics of financial management within business organisations.
The feedback will assist you to determine where you may need to revise your work.
Marking criteria
Please read the section ' Presentation' below after the marking guidelines.
Remember, you must reference accurately and failure to do so will attract a penalty of up to 10% of available marks of the assignment. Also please note, Assessment items should be typed as handwritten, hand drawn assignments will not be accepted.
Assignments should show all workings and students will be penalised for failing to do this. Please adhere to a convention of 4 decimal places for the answer and approximations without rounding for calculations prior to the answer. Where necessary, state any assumptions you have made.
You will be assessed on:
· your understanding of the problem;
· your choice of method for solving the problem;
· your application of techniques;
· the accuracy of your answer;
· written communication skills;
· critical thinking and analysis.
Criteria
HD (85% - 100%)
DI (75% - 84%)
CR (65% - 74%)
PS ( 50% - 64%)
FL ( 0% - 49%)
Q1Calculate the NPV of the project and provide a critical analysis of the company’s future with the proposed construction of a new plant.
Applies co
ect principles and calculations, substantiated with workings or diagrams in order to co
ectly calculate the NPV. There are no e
ors in calculations. Provides a precise critical analysis of the company’s proposed future.
Applies co
ect principles and calculations, substantiated with workings or diagrams in order to co
ectly calculate the NPV. Workings may contain s few minor e
ors. Provides a detailed critical analysis of the company’s proposed future.
Applies co
ect principles and calculations, substantiated with
workings or diagrams in order to co
ectly calculate the NPV. Workings contain some minor e
ors. Provides a critical analysis of the company’s proposed future. May contain limited detail and reference to examples from the case.
Applies understanding of relevant principles, co
ectly calculates the NPV. Workings contain some major e
ors. Attempts to provide a critical analysis of the company’s proposed future.
No understanding of relevant principles, inco
ectly calculates the NPV. Workings contain major e
ors. Failed to provide a critical analysis of the company’s proposed future.
Q2. Complete calculation as required. Discuss your recommendations for the potential project and support with relevant calculations.
Applies co
ect principles and calculations, substantiated with workings or diagrams in order to a
ive at the right answer. There are no e
ors in calculations.
Applies co
ect principles and calculations, substantiated with workings or diagrams in order to a
ive at the right answer, shows workings but contains few minor e
ors.
Applies co
ect principles and calculations, substantiated with workings or diagrams in order to a
ive at the right answer, shows workings but contains some minor e
ors.
Applies understanding of relevant principles, shows workings but contains some major e
ors.
No understanding of relevant principles, no workings and contains major e
ors.
Q3. Discuss the factors relevant to the given scenario and illustrate with an appropriate example where possible.
Principles are applied in the appropriate manner to a
ive at the co
ect answer. The use of relevant principles and example shows creativity and imagination.
Discussion reflects detailed understanding of relevant principles. Uses an example to illustrate the discussion.
Discussion reflects good understanding of relevant principles. Makes use of an example to attempt to illustrate but relevance is unclear or inaccurate.
Discussion reflects basic understanding of relevant principles. Limited or no use of relevant example.
Discussion reflects no understanding of relevant principles. No use of relevant example.
Academic Writing Skills
The discussion/ report/other meets academic standards of syntax, vocabulary, spelling and punctuation and reflects an awareness of audience needs
Accurate use of syntax, spelling and punctuation; co
ectly refers to an extensive variety of sources to support arguments, including prescribed texts and a
oad range of additional readings; reference list of an extensive range of resources used, co
ectly formatted using APA style.
Accurate use of syntax, spelling and punctuation; succinct and effective use of vocabulary; co
ectly refers to a
oad range of sources to support arguments, including prescribed text and a variety of further readings; reference lists a
oad range of relevant resources used, co
ectly formatted using APA style.
Accurate use of syntax, vocabulary, spelling and punctuation; co
ectly refers to more than the minimum requirement of sources to support arguments, including prescribed texts and recommended readings; reference list formatted in APA style, with few or no e
ors.
Mostly accurate syntax, spelling and punctuation; co
ectly refers to minimum number of sources to support arguments, including prescribed texts; reference list used, formatted in APA style, with minor e
ors.
Inaccurate syntax, spelling and punctuation; inco
ectly refers to minimum number of sources, including prescribed texts; reference list used, not formatted in APA style, with e
ors.
Presentation
The following points are a general guide for presenting assessment items:
· Assessment items should be typed. Scanned handwritten / hand drawn assignments will not be accepted.
· Please submit one word document not multiple files.
· Use 1.5 spacing.
· Use a wide left margin. Markers need space to be able to include their comments.
· Use a standard 12pt font such as Times New Roman, Cali
i or Arial.
· Number your pages.
· Answer the questions chronologically.
· Always keep a copy of your assessments.
· Most importantly, always use your spelling and grammar checker, but remember that this does not pick up all e
ors. You must still manually and carefully edit your work.
Requirements
As per the CSU Referencing Policy, assessment should be fully referenced and you must reference accurately as failure to do so will attract a penalty of up to 10% of available marks of the assignment.
The Faculty of Business requires that students apply APA (American Psychological Association) referencing. If you are unsure of this style, please go to CSU Referencing website at http:
student.csu.edu.au/study
eferencing-at-csu
This assignment must be submitted through Turnitin in one word document. It is recommended that your name and student ID are included in the front page of the assignment. You must also insert page numbers. Further details about submission in Turnitin are provided under 'Online Submission'.