Reference no: EM133623118

Finance

Assessment Instructions

Assessment 2 has two parts. Part 1 is on company perspective and Part 2 is on capital budgeting. You must complete both parts. The assignment must be completed individually and submitted using Turnitin on the portal before the due date. Both Word and Excel files must be submitted.

When doing your assignment, you might like to consider the following points.

Answer each question directly and fully, using the minimum number of words. You do not need to write an essay.

Include all of your calculations in the Excel spreadsheet, and then report the final results in the Word document. Where necessary, make sure you explain your analysis in the Word document.

Consult Academic Success Centre resources on the portal and on campus for assistance with referencing and plagiarism. You do not need to reference lectures and tutorials.

Because the assignment is to be submitted using Turnitin, any plagiarism will be identified. It is possible that you could get zero for your assignment if you copy someone else's work.

You will need to use the following two sources:

Lend Lease Limited (LLC) Annual Report 2023

Yahoo Finance

Part 1: Company Perspective

Consider the 2023 Annual Report for Lend Lease Limited (LLC).

Briefly comment on how LLC governance is organized. Do you notice any strategies in place to align manager and shareholder interests at LLC based on the Annual Report? Provide one example.

What is the net working capital for LLC in 2022 and 2023? What type of working capital management strategy is LLC probably pursuing? What are the advantages and disadvantages of this strategy?

Identify in the annual report two major risks that LLC faces. Are these risks systematic or unsystematic? Explain your answer.

Say you are trying to value LLC shares as of 30 June 2023. The closing LLC price for this day was $7.64. Assume that LLC will pay a dividend of $0.20 in 2024. You also estimate that for the next two years (2025 and 2026) dividends will grow at 25% per year. After this (starting in 2027) you estimate dividends will grow at a constant rate of 5% forever. Assume the Australian 10 year government bond has a yield of 4.2%, the market risk premium is 6.5% and the beta of LLC is 0.82. Based on your valuation, should you buy LLC shares? Explain your answer.

Calculate the market capitalization of LLC on 30 June 2023. Assume that the total number of shares outstanding on this day is the same as that reported in the annual report.

What source of funding (non-current) is LLC primarily using to finance its operations? What are the advantages and disadvantages of this source of financing?

Part 2. Capital Budgeting

Consider the following information.

In order to satisfy a sharp increase in demand due to the end of the pandemic, LLC is evaluating investing in one of two major projects; these projects will be called Project A and Project B. In order to mitigate risk, LLC has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $2.5m as a fixed fee for her expert consulting services.

Project A has an initial outlay of $45 million and Project B has an initial outlay of $60 million.

Project A will generate additional revenues of $25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $75 million immediately, this working capital will be recovered at the end of the project.

Project B will generate additional revenues of $35 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $90 million immediately, this working capital will be recovered at the end of the project.

The operating costs of both projects will be 20% of the revenues from years 1 to 10. Both projects will be depreciated on a straight line basis over ten years to zero book value. LLC has estimated that some assets involved in the upgrades can be sold at the end of year 10 respectively for $25 million (Project A) and $35 million (Project B). The tax rate is 30%. All cash flows are annual and are received at the end of the year. The cost of capital for both projects is 11%.

Calculate the FCFs for each project.

What is the NPV for each project?

What is the discounted payback period for each project?
What is the IRR for each project?
Assume that the risk of investing in these projects is higher than the overall risk of LLC. What would happen to the discount rate and consequently NPV of the two projects if this was the case? Explain your answer.

Suppose that LLC has a payback rule of 3 years. Based on all of your analysis, which project should be chosen? Justify your answer.