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BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation CASE STUDY INSTRUCTIONS Please read carefully before continuing. 1. This Case Study must be submitted via the DropBox on the LMS (which can be found in the Assessment section). Hard copies will not be accepted. Any member of your group may submit your assignment, and it will automatically be credited to all students in the group. Make sure you have successfully attached your Case Study document(s) before submitting and exiting the DropBox. Make sure you receive email confirmation of your submission. 2. The Case Study submission can be a Word document, an Excel file or a PDF file. You may submit more than one attachment if you wish. (It is recommended that you perform calculations using a spreadsheet, which is likely to reduce the chance of errors.) You will not be able to modify this Excel file and submit it as part of your assignment - it is just to provide you with the details of your assignment and the data you will need. The exception is Step 1, which you should copy and include in your Case Study submission so that the person marking the assignment knows what online data you have used. 3. You are strongly urged to include all workings, so that you can receive partial marks if the answer is incorrect but some of the work you have done is correct. 4. There is no word limit. However, any form of professional writing should be concise, so if your Case Study is unnecessarily wordy, this could affect your mark. This is not an essay - it is a business report. You don't need a formal introduction, body and conclusion, like an essay. You want to communicate information as succinctly as possible. You should start with an Executive Summary, summarising your recommendations, and then the rest of the report provides the detailed explanations and calculations. Use subheadings and labels for all information so that the reader (i.e. the person marking your assignment) can easily find information and follow the logic of your argument and your recommendations. The only difference between your Case Study and a normal business report is that with a business report you don't need to show your workings - your colleagues and superiors in the workplace will trust that you know your stuff. I trust you to - but I want to see your workings so that I know what you have done, so that you can receive partial credit if the answers are not entirely correct. 5. The deadline is 11.00pm on Sunday 7 June - this is 3 days later than the date given in the Subject Learning Guide. 6. Everyone in the group is expected to make a contribution to the Case Study, and you are expected to make every effort to include each person in the group. If you have done so, but one or more members of the group does not contribute, you should not put that person's name on the Case Study submission. 7. You do NOT need to complete an "Academic Integrity Assignment Submission Form". By submitting your assignment via the LMS, you are agreeing to the Statement of Student Responsibility that appears on the LMS login page. BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation - CASE STUDY PART 1 - GROUP IDENTIFICATION Enter your Group No: 5 Enter your Group Password (from the LMS Gradebook): QLGPF5 Thank you. Please complete Table 1 below and then continue to Part 2. Please enter the Names and Student Numbers of those who have contributed to this Case Study into Table 1 below. After you have completed Part 4 (and therefore Table 2 is complete), please print this page and include it with your Case Study submission. (You can do this by creating a PDF document directly from this page, or by printing it out and then scanning it.) TABLE 1 Name TABLE 2 Student No. Online data Gladys Carolina Roa Bustamante 18040750 Australian company tax rate: Thanh Truc Nguyen Credit spread for corporate bonds: Bin You 17828097 Dhanuksha Chaveera Wickramaratne 18376303 Laszlo Endre Szalay 18374592 Applicable date for risk-free rate: 10-year risk-free rate: Values 0.3 248 bp 5/29/2015 2.725% BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation - CASE STUDY PART 2 - CASE STUDY REQUIREMENTS You work in the Finance division of the Adelaide Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to prepare a report on this potential project, and to make a recommendation as to whether or not the company should proceed with the project. Your report should include the following: 1. 2. 3. 4. 5. 6. 7. Calculation of the company's Weighted Average Cost of Capital. Explanation of the circumstances in which it would be appropriate to use the company's WACC as the discount rate in evaluating the project. Calculation of the Net Present Value of the project. Calculation of the Internal Rate of Return of the project. Calculation of the Payback Period of the project. Explanation of which of these methods should be used to evaluate the project. Your recommendation as to whether or not the project should proceed. BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation - CASE STUDY PART 3 - COMPANY DATA The following data should be used in calculating the company's Weighted Average Cost of Capital. Capital Structure Corporate Bonds The company's debt consists of corporate bonds with a face value of $1,500,000. The bonds mature in 10 years. They pay a semi-annual coupon at a coupon rate of 4.5% p.a. Standard and Poor's have given the company a debt rating of BB+. Preference Shares The company' has 300,000 preference shares on issue. The preference shares pay an annual dividend of $1.33. They are currently trading for a price of $11.62. Ordinary Shares The company' has 1,000,000 ordinary shares on issue. The ordinary shares have a beta of 1.7. The shares have just paid a dividend of $0.900. The dividend is expected to grow at a rate of 8% for the next 4 years, and after that it will grow at a constant rate of 2% p.a. in perpetuity. Other Information The long term market risk premium is 10.0% p.a. Online Information (Instructions for obtaining this information are contained in Part 4.) The company tax rate is 30%. The credit spread for Adelaide's bonds is 248 bp. The 10-year risk-free rate is 2.725%. BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation - CASE STUDY PART 4 - ONLINE DATA Follow the instructions below to locate online data that you will need for your Case Study. 1. Find the Australian company tax rate for the 2014/15 tax year. Go to www.ato.gov.au In the Search box at the top of the screen, enter 'Company tax rate' and click the magnifying glass. Click on the first item in the list of results. Enter the company tax rate for the 2014/15 tax year (as a percentage) in Box A below. Australian company tax rate (2014/15) - Box A 0.3 2. Find the credit spread on 10-year bonds with a BB+ credit rating. Go to www.bondsonline.com Click on 'Today's Markets' from the menu on the left-hand side of the screen. Under the subheading 'Corporate Bond Spreads', click on the link 'US Corporate Debt spread data'. Scroll down to the table entitled 'Reuters Corporate Spreads for Industrials'. Credit spreads are expressed in basis points, where a basis point is 0.01%. A credit spread is the amount we need to add to the risk-free rate to find the yield on a bond with a given credit rating (or debt rating). Current credit spreads are only available for a fee - the ones you see are out of date, but we will use them as if they are current. Australian credit spreads (current or historic) are not obtainable without paying a fee, so we will use US corporate credit spreads and we will assume that they are applicable to Australia. We will add them to the Australian risk-free rate (see Step 3 below), rather than the US risk-free rate. Determine the credit spread for Adelaide's bonds and enter this value (in basis points) in Box B below. Credit spread for Adelaide's bonds - Box B 248 bp 3. Find the yield on 10-year Australian Treasury bonds. Go to www.rba.gov.au Click on 'Statistics' near the top of the page, and then, under the subheading 'Economic and Financial Statistics', click on 'Interest Rates' Click on the 'XLS' link to open the spreadsheet containing 'Indicative Mid Rates of Commonwealth Government Securities - 2013 to Current'. This spreadsheet contains daily yield data for Australian Treasury bonds on issue on a given date. Row 3 contains the maturity date of each bond. Search along Row 3 to find the column containing the bond that is closest to maturing 10 years from now. Then go down that column to find the last value in the column. The value you see is the current yield on 10year Australian Treasury bonds, which we will use as the risk-free rate in the Capital Asset Pricing Model. The date in Column A, at the start of that row, is the most recent date (the date closest to today) for which yields are available. Enter the 10-year risk-free rate in Box C below (as a percentage). In the box below Box C, from the drop-down menu, select the applicable date for the yield that you have obtained (the date in Column A of the spreadsheet). After you complete this page, include a copy of Part 1 in your Case Study submission. 10-year risk-free rate - Box C Enter the applicable date for the above yield (the date in Column A of the spreadsheet) 2.725% 5/29/2015 Because Adelaide's bonds also mature in 10 years, you will add the credit spread for the company's bonds to the 10-year risk-free rate to determine the before-tax cost of the company's bonds. BUS5AFS - ACCOUNTING AND FINANCE for Sustainable Value Creation - CASE STUDY PART 5 - PROJECT DATA The following data should be used in evaluating the project to purchase a new equipment. A feasibility study has been undertaken into the purchase of the new plastic injection machine. The cost of preparing the feasibility study was $5,000. The equipment will cost $17,000, is expected to have a working life of 3 years, will be depreciated on a straightline basis to a book value of zero, and is expected to have a salvage value of $2,800 at the end of 3 years. The new equipment will improve efficiency and result in increased revenue of $10,300 in its first year of operation, but because of reduced efficiency from normal wear and tear, revenue will decrease by 6% per year for the remaining 2 years of the equipment's life. Excluding maintenance, all other costs from operating the equipment will be $3,000 per year. Maintenance costs will amount to $1,100 in the equipment's first year of operation, and will then increase by $100 per year for the remaining 2 years of the equipment's life. The equipment will be installed in a building that is owned by the company, but currently is not being used. If the project does not proceed, this building could be rented out for $1,200 per year. The equipment will require additional net working capital of $1,900 which will be recovered in full after the equipment is sold at the end of its working life. Management has indicated that the maximum acceptable Payback Period for the company is 4 years. They also want ALL cash outflows at the beginning of the project (including any increase in net working capital and any other costs) to be recovered within the maximum acceptable payback period of 4 years
