Rubric N D- C B - A < 49% 50 - 69% 70% < Conceptual . Interprets the problem, Identifies the Interprets the problem correctly. Skills correct means of solving the problem, and Applies appropriate principles of finance to Frequent errors or unacceptable mistakes explains the solution to the problem in a identify the correct means of solving the Work applies principles of indicative of a lack of understanding of manner which demonstrates an problem. finance correctly in the core principles of finance. understanding of the principles of finance, Explains the solution to the problem in a interpreting the problem, though affected by some errors and/or manner which demonstrates a thorough discussing results, conclusions, incompleteness. understanding of the principles of finance. and/or recommendations Quantitative Identifies, calculates and/or sources the Skills Frequent errors or unacceptable mistakes correct inputs required to solve the indicative of a lack of understanding of . Sources inputs and calculates a solution to problem. Work demonstrates on the quantitative methods and financial the problem, though subject to some Calculates the solution to the problem aptitude to analysing and without error. solving problems technologies required to solve mistaken inputs, calculation and/or misuse of financial technology. Demonstrates skills in being able to solve mathematically, with the quantitative problems. problems with the use of financial assistance of financial technology. technology. Critically reflects on the strength and Reflective Skills weaknesses of alternative conceptual None or insufficient critical reflection of Some limited critical reflection of interpretations of the fact-set, the Work demonstrates an ability to critically reflect on financial quantitative solutions, alternative quantitative solutions, alternative problem and alternative solution methods. data, problems, solutions and interpretations and options for advice. interpretations and options for advice. Critically reflects on quantitative solutions in light of client needs. advice Critically reflects on any advice flowing from the solutions Some but not all formulas and calculations Correctly presents formulas and all Communicative An absence of, or frequent errors in the are correctly presented calculations on which the solution to the presentation of, formulas and calculations. The interpretation and explanation of problem is based Skills Interpretations and explanations are either findings and methods is not clearly Clearly and accurately interprets findings Writing demonstrates ability to missing, incomplete, or suffer from poor expressed and includes some poor and explains methods with few or no clearly and accurately grammar and/or spelling errors. grammar and/or spelling. grammar and/or spelling errors. communicate financial Little or no arguments and/or evidence is Arguments and evidence in support of any Convincingly presents the arguments and analysis, solution and advice. provided in support of any advice given. advice provided is provided but not evidence in support of any advice sufficiently convincing. providedPart 3: Calculate the project's NPV, IRR and Profitability Index (20 marks a) b) Calculate NPV of the project using the parameters you have estimated above. Show your answer formatted as millions to 2 decimal places. (4 marks) Calculate the IRR of the project using the parameters you have estimated above and the IRR function in Microsoft Excel. Show the parameters and values you incorporated in the IRR function as part of your answer. Show your answer as a percentage to 1 decimal place. (4 marks) Calculate the Profitability Index of the project using the parameters you have estimated above. Show your answer as a percentage showing no decimal places. (4 marks) Should the project be accepted based on the assumptions and parameters you have used above? Explain your answer (8 marks). Part 4: Review and recalculate the project's NPV, IRR and Profitability Index (20 marks a) Based on the analysis of the financial metrics you calculated on page 5 for Rural Services Ltd. and Core Lithium Ltd. What, if any, concerns might you have with the parameters you have used above to estimate the financial viability of the project? (5 marks) If Rural Services Ltd could only proceed with the project, if it proves to be finandally viable AND if it is totally financed by share capital, costed based on the estimated cost of a lithium mining company's share capital, what would be the discount rate you would apply to evaluating the finandal viability of the project? (5 marks) Recalculate the NPV, IRR or Profitability Index of the project using this revised discount rate. Note, you need only recalculate ONE of these measures. (5 marks). Based on this revised project evaluation, if Rural Services Ltd could only proceed with the project, if it proves to be financially viable AND if it is totally financed by share capital costed based on the estimated cost of a lithium mining company's share capital, would you recommend that the projectis financially viable? (5 marks) Scenario You work as a financial analyst in the Finance division of the Rural Services Ltd an Australian agribusiness company. Rural Services Ltd provides arange of products and services, across rural Australian towns, through a common distribution channel, including beef cattle feedlots, agricultural retail products, agency services, real estate services and financial services. A deposit of lithium ore has been discovered recently on rural property owned by the company. Lithium is a critical element used in various applications, especially in the production of rechargeable batteries, which are used in a wide range of devices such as electric vehicles, smartphones, laptops, and energy storage systems. Additionally, lithium is also used in other industries, including aerospace, ceramics, glass, and pharmaceuticals. The company is in the process of deciding whether or not to develop a mine on the property to extract the lithium to supply the rechargeable battery market in light of the increasing demand for rechargeable batteries. Your company''s Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with such a project, notwithstanding the significant diversification such an investment would represent for the company from its core activities. In order to analyse the financial viability of the project you obtain the 2023 Income Statement and Balance Sheet for Rural Services Ltd. Moreover, in order to analyse the risk and return of this project, which is so different from the current activities of Rural Services Ltd, you also obtain the 2023 Income Statement and Balance Sheet for Core Lithium Ltd, a small lithium miner listed on the ASX. These financial statements are provided on pages 4 and 5. You calculate some financial ratios to compare the financial performance of the two companies, which are presented on page 6. You also collect some interest rate information, which is presented on page 7. Rural Service Ltd 2023 Financial Accounts INCOME STATEMENT million Sales Revenue 1,000.0 Cost of Sales 800.0) Gross Profit 200.0 Selling, General and Administrative Expenses (100.0) EBITDA 100.0 Depreciation (50.0) Interest Expense (7.5) Pre-Tax Profit 42.5 Tax (12.8) Net Profit 29.8 BALANCE SHEET million ASSETS Cash 10.0 Accounts Receivable 200.0 Inventory 150.0 Property Plant and Equipment 250.0 Total Assets 610.0 LIABILITIES Accounts Payable 200.0 Bank Loan 25.0 Corporate Bonds 150.0 Total Liabilities 375.0 SHAREHOLDERS' EQUITY Ordinary Shares 400.0 Retained Earnings (165.0) Total Shareholders' Equity 235.0 Total Liabilities and Shareholders' Equity 610.0 Notes 1. The interest rate on the bank loan is 6.00% p.a. 2. The corporate bonds have a credit rating of BB and have 5 years to maturity. They make quarterly coupon payments at a coupon rate of 4% p.a. 3. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 0.51. In 2023, they paid a dividend of $0.03 per share. The dividend is expected to grow at 5% p.a. for the next 3 years, after which it will grow at a constant 3% p.a. in perpetuity.Core Lithium Ltd 2023 Financial Accounts INCOME STATEMENT million Sales Revenue 50.6 Cost of Sales (15.8) Gross Profit 34.8 Interest Income 3.0 Selling, General and Administrative Expenses (21.0) Other Non-operating Income/(Expense) (1.5) EBITDA 15.4 Depreciation (3.9) Interest Expense (2.3) Pre-Tax Profit 9.2 Tax (1.6) Net Profit 7.6 BALANCE SHEET million ASSETS Cash 152.8 Accounts Receivable 6.7 Inventory 28.9 Property Plant and Equipment 241.2 Other Assets 73.6 Total Assets 503.1 LIABILITIES Accounts Payable 31.0 Bank Loan 83.6 Other Liabilities 33.6 Total Liabilities 148.2 SHAREHOLDERS' EQUITY Ordinary Shares 3709 Retained Earnings (16.0) Total Shareholders' Equity 354.9 Total Liabilities and Shareholders' Equity 503.1 Financial Analysis of Rural Services Ltd and Core Lithium Ltd 2023 Rural Core Services Lithium FINANCIAL ANALYSIS Ltd Ltd Sales Revenue/Average PPE Margin 164% 31% Cost of S5ales/Revenue Ratio B80% 31% Gross Margin 20% 69% Tax Rate 30% 17% Net Margin 3% 15% Net Working Capital/Sales Revenue Ratio 15% 9% Net Profit/Equity Return 13% 2% Debt/Equity Ratio 74% 24% Credit Rating BB BB Beta 0.51 2.31 Interest Rates Based on the current yields at which the 5-year and 10-year Government bonds are trading you assume that the 5-year risk-free rate is 3.974% and the 10-year risk-free rate is 4.315%. The current corporate credit spreads are as presented in the table below. Rating Aaa/AAA Aa2/AA A2/A Baa2/BBB Ba2/BB B2/B Caa2/CCC Ca/CC Maturity 8 28 52 80 201 319 852 1,207 IN 22 33 59 87 201 319 852 1,207 35 39 65 93 201 319 852 1,207 48 14 71 100 201 319 852 1,207 45 46 76 108 201 319 852 1,207 6 42 48 B2 117 201 319 852 1,207 49 53 123 201 319 852 1,207 57 57 94 129 201 319 852 9 1,207 65 62 100 135 201 319 852 1,207 10 63 63 99 135 201 319 852 11 1,207 61 63 99 136 201 319 852 1,207 12 60 64 99 136 201 319 852 13 1,207 58 64 98 136 201 319 852 14 1,207 57 65 98 136 201 319 852 1,207 15 55 65 97 137 201 319 852 1,207 16 53 66 97 137 201 319 352 1,207 17 52 66 96 137 201 319 852 1,207 18 50 67 96 138 201 319 352 19 1,207 49 67 95 138 201 319 852 1,207 20 47 68 95 138 201 319 852 1,207 21 45 58 34 139 201 319 852 1,207 22 44 69 94 139 201 319 852 1,207 23 42 69 93 139 201 319 852 24 1,207 40 69 93 139 201 319 852 1,207 25 39 70 92 140 201 319 852 26 1,207 37 70 92 140 201 319 852 1,207 27 36 71 91 140 201 319 852 28 1,207 34 71 91 141 201 319 852 1,207 29 32 72 90 141 201 319 852 1,207 30 31 72 90 141 201 319 852 1,207 Average 45 61 89 129 201 319 852 1,207Project Information You estimate the investrment required to undertake the project will be equal to 20% of the Property Plant and Equipment (PPE) shown in the Core Lithium Ltd 2023 Balance Sheet [page 5). You are also aware that Rural Services Ltd has budgeted to spend 52 million in professional, gectechnical and legal fees appraising the project before making its final decision. You estimate that the revenues in the first year of the project will equal the 2023 Revenue/Average PPE margin you have calculated for Core Lithium, shown on page 6, miultiplied by the investment Rural Services will need to undertake the project. Further you are advised that the size of the resource is estimated to provide a five year life forthe project and that revenuoes will grow by 35% inyear 2, 25% inyear 3, 15% in wvear 4 and 5% in its fifth and final year. You decide to be guided by the Cost of Sales/Revenue Ratio you have calculated for Core Lithium, as shown on page &, which yvou will apply through the entire five year life of the project. Depreciation will be calculated using the diminishing value method with the aim of fully depreciating the investment by the end of the life of the project. You decide to apply the tax rate you calculated for Rural Services Ltd, shown on page B. During the life of the project, you estimate that the firm will need to provide for an annual increase in net working capital comprising an increase in Receivables and Stock, less an increase in Payables. You have calculated the Net Working Capital/Sales Revenue Ratio of Rural Services Ltd and Core Lithium shown on page 6. You decide to use the 2023 Net Working Capital/Sales Revenue Ratio of Rural Services Ltd to estimate the annual additional amount of Met Working Capital that will be required to service the Incremental Sales Revenue of the project, estimated each year. You also assume that in the yvear after the final year of the project's life the firm will recover in full this net increase in working capital. In the year after the five year life of the project, you are advised that the company would need tospend 53 million in cleaning up the site and replanting. Your research also shows that the equity risk premium on the ASX is between 4 - 6%, so vou decide to apply a 5% equity risk premium in your estimation of CAPM. Tasks You are required to complete the following tasks. Show the formula and complete calculations for each answer you calculate. s Define all variables of each formula used and show any calculations required to adjust them for use in applying the formula to solving each problem. * Format your answers as defined in each task. * When incorporating an answer to a prior task in a subsequent task, use the value asit has been formatted. For example, if a task required you calculate and format as a percentage to 3 dedmal places, the answer should be formatted as 1.234%. If this value is subsequently included in the calculation of the answer to a subsequent task, then the value you must use is 1.234% or 0.01234. Part 1: Calculate Rural Services Ltd's Weighted Average Cost of Capital (30 marks) a) Calculate the before-tax cost of Rural Services Ltd's bank loans and corporate bonds. Show your answer formatted as a percentage to 3 decimal places. (6 marks) b) Calculate the cost of Rural Services Ltd's ordinary shares. Show your answer formatted as a percentage to 3 decimal places. (6 marks) ) Calculate the estimated market value of Rural Services Ltd's bank loans and corporate bonds. Show your answer formatted as dollar values. (6 marks) d) Calculate the estimated market value of Rural Services Ltd's ordinary shares. Show your answer formatted as dollar values. (8 marks) ) Calculate Rural Services Ltd's WACC. Show your answer formatted as a percentage to four decimal places. (4 marks) Part 2: Estimate the project's incremental free cash flows (30 marks) a) Prepare the depreciation table for project's investment in PPE, using the Diminishing Value Method. Show your answer formatted as millions to 2 decimal places. (10 marks) Opening Book Value less Depreciation Closing Book Value b) Prepare the free cash flow table. Show your answer formatted as millions to 2 decimal places. (20 marks) BRocr [ o ] 3] a[ 4] s e N N A e ||| | | | | Incremental Earnings Before Tax & Depreciation oo ||| | | | | Pre-Tax Profit Tax s ||| | | [ [ Change in NetWorking Capital wwmmon || | | | [ [