Reference no: EM133156393 , Length: word count:1000
FINM4000 Finance - Kaplan Business School
Assessment Description
Answer the questions below with reference to the following sources: Complete all three parts of the written assignment below.
Question 1: Company Perspective - Kogan.com Ltd
a) Consider the 2020 Annual Report of Kogan.com Ltd. (KGN). Briefly illustrate how KGN' governance is organized. Do you notice any strategies in place to align manager and shareholder interests at KGN based on the Annual Report? Provide one example.
b) What is the Net Working Capital for KGN both in 2019 and 2020. What type of current asset management strategy is the company pursuing? Explain why and what are the pros and cons of this strategy.
c) Consider the KGN 2020 Annual Report. Identify two of the major risks discussed. Are these risks systematic or unsystematic? Why?
d) You are trying to value KGN share today (End of 2020). Assume the current price of the share in the stock market is $17.99. Assume that the total dividend paid by KGN in the 2020 year were paid as a lump sum (at once) today. You also estimate that for the next two years dividends will grow respectively at 50% and 25% per year. After this (starting in time 3) you estimate dividends will grow at a constant rate of 3.5% forever. Assume that today the Australian 10Y Government bond has a yield of 1.15%, the market risk premium is 4.55% and the beta of KGN is 0.72. Based on this price would you purchase the share? Why or why not?
e) What was the market capitalization of KGN on the 29 January 2021, assuming that the total number of share outstanding is the same as per the end of the 2020FY? (Use the closing price on that day).
f) What type of source (non-current) is KGN primarily using to finance its operations? What are the advantages and disadvantages of this source of financing?
g) Assume that KGN would like to replace its non-current "lease liabilities" (2020) with a new issuing of bonds. Assume that the issue will have a coupon rate of 5% with a 15 year maturity. Assume this are semi-annual coupon bonds and each have a face value of $1,000 and the required rates of return for similar bonds in the market is 4.5%. What would be the issuing price of these bonds? How many bonds Kogan.com Ltd. will have to issue in order to replace its non-current "lease liabilities"?
2. Capital Budgeting - Kogan.com Ltd.
Answer the below questions in your word file and refer to your excel spreadsheet as a supporting document. Upload your excel spreadsheet under "Excel Submissions".
All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluating investing in a "Mega Warehouse" project in Australia. KGN has already identified two existing warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN asked "Axiom Ltd." to conduct a technical due diligence. "Axiom Ltd." is asking $100,000 as a fixed fee for its consulting services.
Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85 million.
Project A will generate additional revenues of 45 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $1million immediately, this working capital will be recovered at the end of the project. Project B 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 $2million immediately, this working capital will be recovered at the end of the project.
The operating costs of both projects will be 30% of the revenues from year 1-10. Both investment will be depreciated on a straight-line basis over ten years to 0 book value. KGN has estimated that the "Mega Warehouses" can be sold at the end of year 10 respectively for $125 million (Project A) and $100 million (Project B). The tax rate is 30%. All cash flows are annual and are received at the end of the year. The weighted average cost of capital for both projects is 6%.
a) Calculate the FCFs to each project
b) What is the NPV for each project?
c) What is the Discounted Payback Period for each project?
d) What is the IRR for each project?
e) Assume that the risk of investing in these "Mega Warehouses" is higher than the overall risk of the company, what would happen to the discount rate and consequently NPV of the two projects? Why?
f) Suppose that KGN' management payback rule is 7.5 years. Based on your analysis in b),
c) and d) which project should be chosen? Justify your answer with reference to theory. What other factor might affect the final decision?
3. Video Presentation
Students are required to produce a video presentation regarding "Section 2" of this assessment. The goal of the presentation is to explain the steps taken in order to estimate the FCFs and other capital budgeting measures. Moreover, students are required to justify their recommendation regarding the feasibility of this investment.
Attachment:- Finance.rar