Assessment 2 Information Subject Code: FINM4000 Subject Name: Finance Assessment Title: Individual Assignment Assessment Type: Assignment Word Count: 1000 Words (+/-10%) Weighting: 30% Total Marks: 50 Submission: Online Due Date: 19:55 AEST Friday of Week 11 WARNING Students must present their own work when completing this assessment. Any student sharing, copying, buying/selling, colluding or cheating in any way when doing this assessment with another person, an organisation or with an AI Chatbot, ChatGPT or anything else, will score zero for this assessment and have an academic misconduct recorded against their name. 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: Coles Limited (COL) Annual Report 2023 https://www.colesgroup.com.au/investors/?page=reports Yahoo Finance https://au.finance.yahoo.com/quote/COL.AX/ Page 2 Kaplan Business School Assessment Outline 2024 T1 Part 1: Company Perspective (25 marks) Consider the 2023 Annual Report for Coles Limited (COL). 1. Briefly comment on how COL governance is organized. Do you notice any strategies in place to align manager and shareholder interests at COL based on the Annual Report? Provide one example. (3 marks) 2. What is the net working capital for COL in 2022 and 2023? What type of working capital management strategy is COL probably pursuing? What are the advantages and disadvantages of this strategy? (3 marks) 3. Identify in the annual report two major risks that COL faces. Are these risks systematic or unsystematic? Explain your answer. (3 marks) 4. Say you are trying to value COL shares as of 30 June 2023. The closing COL price for this day was $18.08. Assume that COL will pay a dividend of $0.80 in 2024. You also estimate that for the next two years (2025 and 2026) dividends will grow at 5% per year. After this (starting in 2027) you estimate dividends will grow at a constant rate of 3% forever. Assume the Australian 10 year government bond has a yield of 4.3%, the market risk premium is 6.0% and the beta of COL is 0.6. Based on your valuation, should you buy COL shares? Explain your answer. 10 marks) 5. Calculate the market capitalization of COL 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. (3 marks) 6. What source of funding (non-current) is COL primarily using to finance its operations? What are the advantages and disadvantages of this source of financing? (3 marks) Page 3 Kaplan Business School Assessment Outline 2024 T1 Part 2: Capital Budgeting (25 marks) Consider the following information. In order to satisfy future growth opportunities, COL is evaluating investing in one of two major projects; these projects will be called Project A and Project B. In order to mitigate risk, COL has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $25m as a fixed fee for her expert consulting services. Project A has an initial outlay of $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 $1 million 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 $2 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. COL 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 $10 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 6%. 1. Calculate the FCFs for each project. (10 marks) 2. What is the NPV for each project? (5 marks) 3. What is the discounted payback period for each project? (2.5 marks) 4. What is the IRR for each project? (2.5 marks) 5. Assume that the risk of investing in these projects is higher than the overall risk of COL. What would happen to the discount rate and consequently NPV of the two projects if this was the case? Explain your answer. (2 marks) 6. Suppose that COL has a payback rule of 7 years. Based on all of your analysis, which project should be chosen? Justify your answer. (3 marks)