Reference no: EM132793286

HC2091 Business Finance - Capital Structure and Project Evaluation

Capital Structure and Project Evaluation

Learning Outcome 1. Explain the theoretical foundations which underpin business financial management

Learning Outcome 2. Undertake capital investment decisions using appropriate discounted cash flow techniques

Learning Outcome 3. Account for systematic and unsystematic risk in making investment decisions

Learning Outcome 5. Calculate the cost of capital and explain its implications on financial strategy

This group assignment task is a capital budgeting and project evaluation task with two parts:

Part 1: Research on capital structure

Part 2: Project Evaluation and Sensitivity Analysis

INTRODUCTION
The introduction should briefly explain the purpose of the group assignment (not more than 200 words)

PART 1. ANALYSIS OF CAPITAL STRUCTURE

Note: You need approval for your ASX Listed Company. No duplication of topic. Register your company by sending an email to [email protected] on or before 29 January 2021. A penalty of 30% will be applied for non-approval. A file of ASX Listed Companies is provided under Assessments>Group Assignment

Download the 2019-2020 Financial Statement of your chosen ASX Listed company.
a) Analyze the existing capital structure. Comment on the breakdown of capital sources.
b) If the company needs to raise funds for a project that will cost $10Million AUD, what factors will affect their decision whether to borrow or issue shares?
c) Based on your analysis in part a & b, what approach will you recommend for your chosen company?

PART 2. PROJECT EVALUATION AND SENSITIVITY ANALYSIS

Assume that your group is working for the finance department of a company, which is considering to launch a new product that is expected to sell for an average price of $40 per unit. Launching this product will require the company to choose either one of the following equipment:
- Equipment A with the cost of $1 500 000 and zero residual value after 3 years. The company expects it can sell 250 000 units per year at this price for a period of 3 years with this equipment.
- Equipment B with the cost of $2 000 000 and zero residual value after 3 years. The company expects it can sell 270 000 units per year at this price for a period of 3 years with this equipment.

For both equipment, to produce a unit of product, the company needs to spend a variable cost per unit of $15. Cash fixed costs per year is $350 000. Other information is available below:

Depreciation method: straight line Discount rate: 11%
Tax Rate: 30%

Required Tasks:
Compute the annual operating cashflow (OCF) to be generated by the company for each equipment, using the tax shield approach. Which equipment would you choose?

Assume that company chooses Equipment A, perform an analysis of cash flows for the project to determine the sensitivity of the project NPV with the following changes in the value drivers and provide your results in (a) relevant tables:
Unit sales decrease by 15% Price per unit decreases by 15%

Conclude which value driver has greater impact on the NPV of the project cash flows.

CONCLUSION
Based on the outcome of two parts, provide brief conclusion, summarizing what you have done in the assignment (not more than 200 words).

References
Follow the Holmes reference guideline and give your reference details.

Attachment:- Capital Structure and Project Evaluation.rar