Reference no: EM131979660 , Length: word count:1500

Finance Assignment -

Complete all three parts of the written assignment below.

1. Evidence of Group Work

Please see "FINM4000 Example of Group Meeting Record" at the bottom of this document. Each group must provide 3 brief records of group meetings as part of the assignment. These briefly list who was present at meetings as well as tasks and contributions.

• Completing this table is worth 5 marks of your total score
• Please note that all group members need to contribute equally to the task.
• If a group member does not contribute to the task, the group's meeting minutes can be used as evidence to demonstrate this. The student's mark can be reduced by the lecturer if they consider that there is sufficient evidence that they did not contribute.

2. Company Perspective- Myer

Consider the sources below and answer the following questions.

Source 1: Myer 2017 Annual Report

Source 2: Login to Open Athens and select the "Morningstar" link.

Search for "MYR" (Myer Holdings) and click on the company.

You will need to click on below tabs (on left hand side) and find relevant information to answer following questions:

• Financial Data
• Price History

See instructions for each question below.

Source 3: Myer profits slump as stocktake sale flops; shares hit all-time low

FEBRUARY 9 2018

Myer boss Richard Umbers says another shock fall in sales and earnings has fortified his confidence that the department store has the correct strategy by building up its digital offering.

The historic retailer on Friday revealed its January stocktake sale flopped, with sales for the month down 6.5 per cent compared to last year.

Combined with a soft Christmas, Myer said sales for the first half of the financial year had fallen 3.6 per cent, and that it expected net after-tax profit for the half to come in between $37 million and $41 million - down as much as 42 per cent from last year.

Myer's share were savaged and closed down 9 per cent at 58¢ - its lowest ever price since floating at $4.10 in 2009.

Chief executive Richard Umbers blamed the result on a "challenging" retail environment that included heavy discounting, reduced customer foot traffic and more online shopping.

But he said the effect of these factors hardened his view that Myer's strategy was on the right path by focusing on its online business and its integration into stores through its "omni-channel" strategy.

....Myer said online sales were up 49 per cent in the half, but warned it did not expect any improvement in trading conditions for the second half of the year.

The company said it anticipated it would write-down the value of assets at its half year results on March 28.

The company has almost $1 billion in intangible assets on its balance sheet, such as goodwill and brand names, which easily outweigh its current $480 million market value.

A significant write down to the Myer's book value or a further fall in profit could put it in breach of the debt covenants it has lenders. These can include maintaining a certain debt to equity ratio or earnings to interest repayments ratio.

But Mr Umbers said Myer was not in breach of any such covenants, and that he could not speculate on whether a write-down might affect those obligations without knowing how big such a write-down would be.

Friday's earnings downgrade prompted Credit Suisse analyst Grant Saligari to slash his price target for the stock from 56¢ to 20¢, commenting that Myer had under-invested in stores, value and service, and that online sales growth would not offset the decline of in-store sales until 2020.

"With Myer reporting a deteriorating sales trend and a precipitous profit decline, there appears to be little value for existing shareholders," he said.

a) Write a 200-word background on Myer Holdings Limited briefly describing the industry in which the company operates in and its main areas of business. Identify one key opportunity and two key threats to the company from competitors or other factors in 2017-18. Use Morningstar and other sources in your analysis.

b) Calculate and discuss how Myer's cash conversion cycle has changed from 2016 and 2017. What is the cause of this change? Do we need any additional comparison data to make our analysis more complete?

Hint: On Morningstar search "MYR", click on "Financial Data" tab and refer to "Profit and Loss" and "Balance Sheet" statements for 2016 and 2017.

c) Go to Morningstar and search for Myer "MYR".

• Go to Price History (on left hand menu)
• Select the "Market Sensitive Announcement" charts. If you hover over the red dots you can see the announcement that preceded the price change.

Question: Does the Myer "Market Sensitive Announcement Chart" support or dispute the Efficient Market Hypothesis (EMH)? What are some reasons that the EMH may not apply in this case?

d) Consider the Myer 2017 Annual Report (Source 1 above). Based on the note to financial statements about long-term Borrowings (Note D3) what type of debt is Myer holding in 2017?

e) If Myer issues 5-year annual coupon bonds with a face value of $1000 and a coupon of 3% p.a. today and the yield to maturity on bonds of similar risk and maturity is 4%, how much will each bond sell for?

f) If you purchased the Myer bonds from e), how would a downgrade in the credit rating (from say BBB to BB) affect the price of these bonds? Would these Myer bonds be an attractive asset for investors? Why or why not?

g) Assume the return to the market portfolio to be 9%, the risk-free rate is 0.25% and the Myer share beta is 1.12. Assume also that Myer will pay a lump sum dividend in the next period (2018) equal to the total Myer dividends per share from 2017. Assume that dividends will grow at the same rate as the Myer 3-year operating revenue grew in 2017 for the foreseeable future. Consider the below sources and answer the question:

• Go to Morning star>MYR> select the "Dividend History" tab to find most recent dividends
• Go to Morning star>MYR> select the "Financial Data" tab > select the "Growth Rates" tab to find the operating revenue growth rate

Question: What is the current price of Myer shares based on the above information? Would you purchase the share today? Why or why not?

h) If you were a financial analyst advising your client would you recommend for them to purchase Myer shares today? Why or why not? Use the analysis from a-g in your answer.

3. Capital Budgeting

Consider the following three sources and answer the following questions.

Source 1: Sydney Morning Herald

From Sydney Morning Herald.

The once venerable Myer department store chain is now worth less, in market capitalisation, than hungry upstart, Kogan.com. Not just less, but more than 50 per cent less. Fittingly, that sounds like a Myer stocktake sale. Myer is now worth about $400 million, by market value. When it relisted on the Australian Securities Exchange in 2009, after being floated by private equity sellers, it was worth about $2.4 billion.

Source 2: Myer Yahoo Finance

Source 3: Morningstar>MYR> "Financial Data" tab

a) According to the sources above what is Myer's current market capitalisation (use current market data)? What does this number mean?

b) What is the "book" value of Myer's equity in 2017? (Hint: see financial statements) Why does it differ so much from the current (2018) market value of its equity? Refer to the efficient market hypothesis in your answer as well as your own research.

c) Below are details about a project Myer is considering to undertake today (2018). Please answer questions i-vi with the aid of an excel spreadsheet. You also need to answer the below questions in your word file and refer to your excel spreadsheets as supporting documents. Assume all numbers are in Canadian dollars.

Assume today is April 2018 and Myer is considering changing its strategy and opening a new store in Canada. The capital expenditure involved in setting up the store is $10 million Canadian dollars and the store will have a life of 5 years. The total incremental revenues per year from the store are expected to be $5.5 million Canadian dollars starting at the end of year 1 and continuing until the end of year 5. Incremental revenues will increase by 2% per year after the first year. Costs are expected to be 40% of revenues and will be paid in Canadian dollars. A working capital outlay of $2 million Canadian dollars will be made today and will then be recovered at the end of year 5. The store will be depreciated to $7.5 million Canadian dollars book value over the 5 years and the annual depreciation expense will be $500,000 per year. Assume that at the end of year 5 the store will be sold for $9 million Canadian dollars. The tax rate Myer will be taxed at for revenues from this store will be 40%.

Assume that today and for the next five years $1 AUD will buy $1 Canadian dollars. (So the currencies are equivalent)

i) Calculate the Free Cash Flows in Australian dollars (AUD) to this project.

ii) Calculate the NPV in AUD for the project assuming the cost of capital is 5% and recommend whether Myer should undertake the project.

iii) What is the IRR of the project? With a discount rate of 5% should we accept the project?

iv) If Myer's cost of capital went up to 6% given the fact that the company was perceived to be more risky (and its cost of financing went up), how would this affect your decision?

v) If the Australian dollar depreciated against the Canadian dollar and today and over the next five years with one Canadian dollar only buying $0.95 Australian dollars, how would the NPV ( in AUD) and IRR change? How would this affect your decision?

vi) Based on the analysis you did in questions i-v what would your advice be to the Myer board about this project? Why?

Attachment:- Assignment File.rar