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FINA6000 Managing Finance - Laureate International Universities

Assessment - Case Analysis

Learning Outcome 1: Analyse financial information and evaluate financial performance of a business.

Learning Outcome 2: Apply time value of money to the valuation of a variety of cash flows, securities and projects leading to sound investment and financing decisions.

Learning Outcome 3: Analyse risk and return associated with investments.

Learning Outcome 4: Apply various capital budgeting techniques to investment decision making. Apply various capital budgeting methods in investment decision making within a business.

Learning Outcome 5: Analyse the cost of capital and explore its link to the capital structure of an organisation.

Learning Outcome 6: Analyse working capital and payout policies and their impact on the liquidity position of a business.

Context:
The issues of risk and return are central in Corporate Finance and among the key decisions made by the Financial Manager of a corporation are the investment, financing and risk management decisions. In this assignment, the Capital Asset Pricing Model (CAPM), a model that links risk and return would be used to determine the cost of equity of a listed company and using it together with other costs of capital to calculate the weighted average cost of capital (WACC). The WACC is important in evaluating a project that a listed company plans to undertake, a project that has the same risk profile as the average risk of the company's existing projects. This assessment is on companies listed on the Australian Securities Exchange (ASX) and it focuses on:

• Testing the students' ability to perform risk and return calculations based on historical stock prices of a listed company.
• Critiquing the CAPM and suggesting two alternative approaches
• Testing students' knowledge of the concept of cost of capital
• Evaluating whether a project is suitable for investment based on given assumptions using the most superior capital budgeting technique
• Discussing other factors that need to be considered before the project can be taken on board
• Assessing students' ability to prepare a professionally prepared report.
Instructions:
From the list provided of some selected 28 Australian companies, your group of maximum three students, will be allocated by your Facilitator a company to analyse.

(a) Using monthly stock market prices and ASX200 index values collected for the period 31 December 2015 to 31 December 2020, perform a regression analysis that will allow you to determine the beta of the shares of your allocated company. (15 marks)

(b) Using the Capital Asset Pricing Model (CAPM) determine the cost of equity of the stock of your allocated company. (10 marks)

(c) The CAPM has been widely criticised as a model that does not represent accurately the risk return relationship. Critically evaluate this statement and provide any two approaches suggested in academic literature that could be an improvement to this model. (10 marks)

(d) Your company is considering investing in a project which has the same risk as the average risk of its existing projects. You need to use the following assumptions to determine whether the project is acceptable for investment. (20 marks)

• It will cost 5% of the Net Book Value of existing fixed assets
• Investment in working capital is 0.75% of the value of the initial outlay
• The fixed assets will be depreciated at a reducing balance method over a period of 7 years
• Sales growth rate for next year: 60% of the average sales growth per annum over the last 5 years. Thereafter sales are expected to grow at the rate of 5% per annum until the project finishes.
• Direct cost of labour and materials used in manufacturing the goods sold averages about 40% of sales level each year.
• The company has debt and pays an interest of $50 000 at the end of every year until the project ends
• Corporation tax rate is 30%

(e) Discuss other quantitative and qualitative factors that need to be considered before this project could be considered.

Consider the following as you work on this assignment:

• Data sources are annual reports, yahoo finance (au.finance.yahoo.com)
• You are expected to do calculations on an Excel Spreadsheet but the Assessment will be presented in a report format in a Word document. (See instructions below of how to embed an EXCEL file into a WORD document)
• Remember to cite the sources of information used. Put the list of references at the bottom of the report
• You will be assessed on how well you address the key questions in the assessments and how well you write the report.

Attachment:- Managing Finance.rar