Microsoft Word - BAFI1012 - BUSINESS FINANCE ASSIGNMENT_Version 1 1 BUSINESS FINANCE INDIVIDUAL ASSIGNMENT MONDAY VERSION Semester 1 2019 (40 marks worth 40%) Due Date: Week 12 In this assignment you...

Microsoft Word - BAFI1012 - BUSINESS FINANCE ASSIGNMENT_Version 1
1
BUSINESS FINANCE
INDIVIDUAL ASSIGNMENT
MONDAY VERSION
Semester 1 2019
(40 marks worth 40%)
Due Date: Week 12


In this assignment you will pull together your understanding of the main concepts in Business
Finance and analyse financial statements to make some ‘real’ business decisions. Some of the
figures used in the following scenario are real, some are not. The point is to analyse the
figures, whether they be provided or sourced.
Scenario

Your financial analysis team at BLD Wealth Group has been tasked by the executive
management team to provide careful financial decision analysis for its client Tesla Inc.
This will require preparing a business report which will be presented to the executive
management of both BLD and Tesla Inc.

Background
Read the following article from the Financial Review to get some background.
https:
www.afr.com
usiness/mining/kidman-resources-charges-ahead-with-3year-tesla-
lithium-deal XXXXXXXXXXh10687
(or see canvas for a pdf copy)

Kidman Resources is considering a binding agreement with Tesla inc. to supply 5000
tonnes of lithium hydroxide for three years. However in order process the required
amount of lithium hydroxide, Kidman Resources must consider whether to build a new
efinery or outsource their supply ore (Li20).

Kidman Resources has undertaken a feasibility study costing $2 million to explore these
two strategies.

Option 1: Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a
processing plant will also need to be constructed at a cost $6 million. This plant will
need to be supplied with grinding machines, DMS flotation machines and other
equipment at a total cost of $16 million. Kidman Resources’ cu
ent fleet of Haul
trucks, water carts and dump trucks will meet the needs for this project, however until
ecently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a
evenue of $15 million per year, which will increase by 2.8% per annum adjusted for
ising costs. Due to the additional complexities involved with the construction and
management of this new refinery, 5 new engineers (yearly salary per engineer
$160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All
other remaining labour force required is expected to cost $3 million per annum for the
2
duration of the project.
For tax reasons you will expense the cost of the processing plant immediately. The cost
for the construction and installation of the new refinery and associated machines and
equipment will be depreciated over three years using the straight-line method. Due to
the nature of the mining project, the machines and equipment will likely have a salvage
value of $10 million at the end of three years. Finally, the required net working capital
is $2 million.

Option 2: Outsourcing the supply of ore

Alternatively, Kidman Resources can contract BHP to supply the required ore to
process into lithium hydroxide. Based on the required amount of lithium hydroxide,
management has quoted a total cost of $28 million. BHP has however offered this rate
on the condition that Kidman Resources pays 20% of the total cost in advance in the
eginning of the year, with the remaining paid in equal instalments thereafter. Kidman
Resources will process the ore into lithium hydroxide using existing facilities at an
expected cost of $4.4 million per year.

Your task
Part A: To ca
y out an analysis, you will need to calculate the appropriate Weighted Average
Cost of Capital (WACC). Kidman Resources executive management team are particularly
concerned that the WACC be accurate, thus you are expected to determine the WACC based
on recent market and other data. (Read below for additional information).

Part B: Ca
y out a detailed analysis of the two given options and make recommendations to
Kidman Resources about those options.

To establish the WACC you have already assembled the following information

 Previous year’s stock exchange data for the market (ASX200) and for Kidman,
adjusted for dividends and capitalization (Price Index). This data is organized
in the file: Project Data.xlsx. Use this dataset to calculate beta. For CAPM
purposes use the return on the market (%) provided in the next section.
Balance Sheet of Kidman Resources as of 30 June 2018

Extract of Balance Sheet for Kidman Resources
Issued Capital $ million
405,000,000 Ordinary shares of $2.00 full paid 810.00
1,500, XXXXXXXXXX% Preference Shares of $1.00 fully paid 1.50
Cu
ent Liabilities and Provisions
Bank Overdraft 4.00
Trade Creditors 6.00
3
Unsecured Notes 7.00
Non-Cu
ent Liabilities
Debentures 16.00
Term Loans 8.00
Mortgage 17.00

• The company’s preference shares are cu
ently trading at $0.60 each. The company’s
ordinary shares are cu
ently trading at $1.22 each.
• The risk-free rate of return is 2.28 % p.a., and the return on the market is 7.70 % p.a.
• Debentures have a coupon interest rate of 10% p.a. and could be re-issued at the
present time at an interest rate of 8% p.a. The debentures will be redeemed at their face
value in three years’ time. Face value is as per balance sheet value.
• The mortgage loan is repayable in eight years’ time and the cu
ent interest rate is
6.25% p.a. The mortgage was initially negotiated at 9.15% p.a.
• Term loans have a cu
ent interest rate of 6% p.a., but were negotiated at an interest
ate of 7% p.a. They are repayable in full in three years’ time. The term loans consists
of regular semi-annually interest payments with the principal repaid at maturity
• Unsecured notes will mature in six months and will not be replaced. They have a
cu
ent interest rate of 2.8% p.a.
• The cu
ent interest rate on the bank overdraft is 6.0% p.a.
• Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 28
percent
Your assessment requirements
Part A

Calculate WACC:
The first part of the analysis requires you to work out the Weighted Average Cost of
Capital (WACC) for Kidman Resources. With the help of the given information and
given data, you need to work out the individual costs1 and value of each of the sources
of capital and apply that to the WACC equation to work out the overall weighted cost.
(20 marks)



1 For the cost of ordinary shares you will need to work out kidman’s Resources beta. See canvas video.
4
Part B

Calculate NPV:
Evaluate the two options using NPV analysis and clearly identify which of the
two alternatives results in a higher valuation for Kidman Resources. Include
your opinion.

Beta analysis:
Describe in a short paragraph (less than half a page) what risks/events may cause
Kidman’s resources beta to significantly change. Assume due to some
unforeseen event (as you may have described), the beta of kidman’s Resources
is now 20 % higher than your original estimates. Would this change your
previous analysis? Describe
XXXXXXXXXXmarks)


Part C


Business Report overall quality XXXXXXXXXXmarks)

The assignment is to be presented as a business report to both Kidman Resources
executive management and BLD management.

Business reports are structured with:
 an executive summary
 table of contents
 informative headings and sub-headings
 numbered sections
 page numbering
 labelled graphs and tables (if used)
 a reference list.

The main content of your report should be 3-4 pages, excluding appendix and be
professionally presented. A concise, relevant and visually appealing paper is essential
for business communication.

Regarding the WACC calculations, whilst you need to present your final work in a table
in the main body of your report, all subsidiary calculations need to be provided in an
appendix.

The report is to be submitted as a PDF version of your work.

It must use a font/fonts suitable for business communication. The reference style to be used is
Harvard style referencing (author-date).



5
More specifically, your report in this case needs to set out the following:

1. An executive summary

2. A table showing the calculation of Kidman’s WACC using market data.

3. A table(s) showing your NPV calcualtions of both Alternative 1 and Alternative
2.

4. A recommendation to Kidman Resource managements as to which alternative
it should adopt.

5. An analysis of beta risk and any recommendations.

6. A reference list.

7. Appropriate appendices.


Further guidelines

Refer to the tutorial/additional questions for the topics - Capital Budgeting and Cost of Capital
to setup your spreadsheets for WACC and NPV analysis.

Please round off your values to 4 decimal places for interest rates and 2 decimal places for
amounts e.g XXXXXXXXXXor 6.59%, and $10,369.78

All assessment of numerical work is marked consequentially. So, you will be awarded
marks for all co
ect calculations and procedures.

To calculate beta please see the video on canvas.


Assignment requirements

This assessment contributes 40% to the total assessment for this unit.