Reference no: EM132386933

School of Economics, Finance and Marketing Master of Finance

BAFI 1059 - Corporate Finance

RMIT University

PROJECT

Objective

The objective of this exercise is to enhance students' understanding of some of the main issues in corporate finance and related business decision-making process. In this project students are required to prepare a business report based on a case study. Details about the case study and its requirements are set out below.

Scenarios

Your team of four people form a financial analysis team at Frontier Finance Consulting (FFC), a renowned financial institution. The executive management of FFC has assigned you a task to carry out a special project for its client Globe Mining Limited (GML), which requires preparing a business report. This report will be presented to FFC executive management and the senior management of GML.

Requirements
You are required to advise the company on the following:

a) Capital Budgeting Decision

(i) Should GML take the contract and open the mine?

Steps in part (a):

The first part of the analysis requires you to work out the Weighted Average Cost of Capital (WACC) for GML with the help of the given information and given data.

Secondly, evaluate the project using NPV analysis and make recommendation to GML.

b) Capital Structuring Decision

GML has shown a profit every year for the past five years and the shareholders are satisfied with the company's management. Its earnings are also relatively stable with the standard deviation of EBIT/Total Assets being 5% over the last five years.

GML was founded 10 years ago by the current CEO, Martin Evans. Prior to founding GML, Martin was the founder and CEO of a failed oil and gas exploration company. The resulting bankruptcy made him extremely averse to debt financing.

In the next phase, GML aims at expanding its operation beyond New South Wales. GML needs to raise more capital for the purpose. It is advised that the company would be more valuable if it included more debt in its capital structure.

(i) Analyse GML capital structure and give advice with reasonings to the GML executives if they should use more debt to finance their future expansions.

Steps in part (b):

Determine whether GML is under or over leveraged relative to the industry. According to Global Industry Classification Standard (GICS), GML is classified to the Energy sector, the Energy industry group, and the Oil, Gas, & Consumable Fuels industry.

Give your advice with reasonings to the GML executives if they should operate at the industry average debt ratio. You might want to discuss advantages and disadvantages of using debt financing in your answer. Also consider GML's business risk and how it compares with the industry average.

c) Dividend Policy Decision

Another aspect that GML executives are perplexed about is the dividend policy they should adopt.

(i) Give your advice with reasoning to the GML executives if they should pursue dividend distribution or retention as their dividend policy.

d) Evaluating Leasing Possibility

Instead of purchasing the equipment, your team, being experienced consultants, wishes to propose to GML that they have another option which is leasing it. Coincidently, your other client, Resolute Leasing Limited (RLL), may be a suitable lessor. On discussions, the executives at RLL have asked you to prepare a lease quotation that could be forwarded to GML for consideration. For the purpose, RLL has provided the following information:

• RLL can get a 10% discount on the purchase price of the machinery.

• They expect the life of the machinery to be ten years with a salvage value of $5 million after that. GML may use this machinery for seven years, and RLL is confident that it can be leased to others after that.
• RLL uses the straight-line method for calculating depreciation.
• As the owner of the machinery, RLL is responsible for its annual maintenance cost.
• RLL's effective tax rate is 15%.

(i) If the RLL's after-tax required rate of return is 12% per annum, what will be the minimum annual lease payment that RLL would charge? Consider that RLL requires lease payments to be made annually in advance.
(ii) Calculate the maximum annual lease payment that would make leasing a viable option for GML?

e) Business Report Overall Quality
The assignment is to be presented as a business report to both FFC and GML executive management. This report needs:
• Page numbering
• Informative heading and sub-headings
• Numbered sections
• Executive summary
• Table of contents
• Reference list

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

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

Your main report will have 4-5 pages (with a maximum of 3,000 words) excluding appendix and will be professionally presented. A concise, relevant and visually appealing report is essential for business communication.

Attachment:- Corporate Finance.rar