Group assignment due by 9am Mon 29 2017.

1. Skydive the Beach Group Limited (hereafter known as "Skydive") ordinary shares are

listed on the Australian Securities Exchange following the company's $25 million nonunderwritten Initial Public Offering ("IPO") in 2015. Veritas Securities was the corporate

advisor and lead manager of the IPO and received a fee of $1.25 million for their services. On

April 4, 2017 Skydive announced the acquisition of Reef Magic Cruises ("RMC"), and the

details are contained in the ASX announcement dated 03/04/2017 with the Headline

"Acquisition of Reef Magic Cruises" (hereafter referred to as Announcement). RMC is a

tourism operator in Cairns offering day trips to the Great Barrier Reef. Upon settlement of the

transaction RMC will then become a wholly-owned subsidiary of Skydive. Skydive already

has plans for generating substantially higher returns from its RMC business and one of its

first strategies is to purchase a smaller, faster passenger vessel, internally named the Reef

Magic 4. Of course, before they purchase the vessel, a rigorous financial analysis is needed to

confirm if the vessel will contribute to increasing the wealth of Skydive shareholders.

2. You are employed in Skydive's finance department and have impressed senior

management with your aptitude for financial analysis. This talent was developed through the

practice-oriented assignments that you completed at University. The Chief Financial Officer

("CFO") has asked you to perform a financial analysis of the planned purchase of the Reef

Magic 4 using a purpose-built preformatted EXCEL spreadsheet. The CFO has suggested you

liaise with Skydive employees from a variety of different departments to collect the

information that is necessary to perform the analysis. You will also search through public

documents to identify some of the assumptions that will be required in your financial

analysis, and to locate the data required to analyse Skydive's 2016 equity capital raising.

Your analysis will be provided to the Board of Directors who must approve substantial

capital expenditures. The directors are accountable to the shareholders and so a rigorous due

diligence is necessary to be confident that the investment in the Reef Magic 4 is justified. The

following paragraphs contain a substantial amount of information that has been gathered and

it is your job to determine which information is relevant to the financial analysis.

3. In January 2017 Skydive commissioned Tourism Australia to analyse prospects for the

Cairns tourism industry. The report cost $175,000 and was paid in full in March 2017. The

forecasts indicate a large, and growing, potential market in the Cairns precinct due to the

revitalised convention centre, an abundance of natural and unique treasures, and growing

numbers of international flights between Cairns and nearby south-east Asian cities. These

factors encourage the Board of Directors that the decision to purchase the Reef Magic 4 is the

right decision but you caution that it must first pass an objective cost-benefit assessment.

4. The capital cost of the Reef Magic 4 in 2017 is exactly the same as the cost of the Reef

Magic 2 as reported in the Announcement. According to the Australian Taxation Office

("ATO") the Reef Magic 4 is classified as a non-current asset and has an estimated useful life

25300 FBF Autumn 2017 Group Assignment Page 1 of eight years. However, Skydive will operate the Reef Magic 4 for ten years only, at which

time it will be sold. Skydive has a policy of depreciating all non-current assets to zero over a

twenty-year period for internal management reporting purposes.

5. To allow sufficient space for the Reef Magic 4 to dock at the Cairns Reef Fleet Terminal

Skydive will need to arrange for additional mooring space. However, Skydive's due diligence

into the RMC acquisition reveals that RMC has berthing rights for a pier that it is currently

leasing to an unrelated tourist operator for a fixed $115,000 per annum. If Skydive proceeds

with the Reef Magic 4, they will cancel the lease (without any financial penalty) and moor

the vessel at the pier. If Skydive do not purchase the Reef Magic 4 they will continue to lease

the pier for the foreseeable future. The directors question if the lease is relevant to the

analysis because it has previously been classified as lease income.

6. In 2015, Skydive contributed $2 million towards a $4 million upgrade of the Cairns Reef

Fleet Terminal. Cairns Council contributed the remaining $2 million. Skydive is depreciating

their contribution of the upgrade in their financial statements over a twenty-year period,

consistent with ATO policy. The assets related to this investment have no value today.

7. If Skydive purchase the Reef Magic 4 then they must sell certain slipway assets. The assets

had a total capital cost in 2013 of $600,000 and for tax purposes have a ten-year life. The

slipway assets have a scrap value today of $130,000. Skydive will use the sale proceeds to

distribute a $130,000 dividend to its shareholders today.

8. Skydive will implement a private placement to raise $800,000 from sophisticated investors

to partly finance the Reef Magic 4. The placement will be managed by Veritas Securities for

a fee of 1% of the amount raised. Today, inventory (consisting mostly of spare parts) will

need to increase from the current $400,000 to $700,000. Accounts receivable will increase by

$750,000 to $3.6 million, and accounts payables would remain at $1,880,000.

9. Conservative forecasts are for the Reef Magic 4 to carry 28,000 passengers in the first

year of operations (i.e., 2018). Although the stated capacity of the vessel is 150 it operates at

below capacity for many days of the year, and is unable to operate at all for prolonged

periods during an adverse weather event. To obtain an estimate of the sales revenue for Reef

Magic 4 for a particular year you multiply the average revenue per passenger ("ARPP") for

the year by the number of passengers for the year. Your starting point for ARPP is based on

figures in the Announcement. You use the appropriate FY2016 figures in the section

'FINANCIALS OF RMC' to calculate ARPP. Due to improved yield management strategies

Skydive are confident that in the first year of operations they can achieve a 3% p.a. increase

in the ARPP compared to the FY2016 ARPP figure. From 2018 the ARPP is assumed to

increase at 2% p.a. Skydive management are confident that the number of passengers will

conservatively increase by 1.5% each year for the life of the Reef Magic 4.

10. It costs $370,000 a year to operate Skydive's Wollongong headquarters. With careful

management Skydive believes they will not require any additional personnel in headquarters

if they purchase the new ferry. In any case, the annual headquarters operating expense will

increase by just 2% each year.

11. At the moment, fixed operating costs across the entire Skydive business are $14.5 million

per annum. With the purchase of the Reef Magic 4 fixed costs would rise to $17.3 million

each year. The annual RMC wages expense based on approximately 100 employees is

25300 FBF Autumn 2017 Group Assignment Page 2 $7,800,000. Wages directly associated with the purchase of Reef Magic 4 amount to

$1,450,000 per year. Reef Magic 4's annual fuel expense is forecast to be $1,100,000 in the

first year. With better vessel management and engine efficiencies, Skydive assumes they can

reduce the annual fuel expense by 3% every following year.

12. The Reef Magic 4 will require no maintenance in the first three years of its life because it

is covered by a manufacturer's three-year warranty. However, after the warranty expires, the

annual repairs and maintenance expense that is needed at the end of each year is assumed to

be $870,000. Skydive would still implement the usual repairs and maintenance on the vessel

up to and including year ten to maintain resale value.

13. The purchase of the new vessel will produce food preparation cost synergies across the

existing fleet of Reef Magic vessels resulting from larger purchase quantities and improved

negotiating power with suppliers. The annual food preparation expense for the existing

vessels is $386,000. Analysis indicates that this figure can be reduced by $46,000 each year

with the introduction of the Reef Magic 4. The managing director has studied the preliminary

figures that you have collected and enquired if the $386,000 is an opportunity cost.

14. Skydive has stated (page 6 of the Announcement) its policy is "to maintain [a] prudent

capital structure". Therefore, Skydive will borrow $2 million today to finance the Reef Magic

4. The ten-year interest-only loan has annual repayments of $140,000 (assuming a fixed

interest rate of 7% p.a.).

15. The Australian Maritime Safety Authority ("AMSA") requires that passenger ferries

possess a valid and current National System Certificate of Survey, Vessel Identifier and

Certificate of Operation. These compulsory certifications are required before Skydive can

commence operations with the Reef Magic 4. The three certificates cost a total of $200,000

and are valid for ten years. The ATO confirms that all AMSA certificates are operating

expenses. To preserve the resale value of the Reef Magic 4 Skydive will recertify the vessel

in ten years' time. Marketing expenses relating to the Reef Magic 4 will be included in

Skydive's existing annual marketing budget of $2,130,000.

16. Skydive's managers suggest that the cost of the $175,000 Tourism Australia report be

spread over the ten-year evaluation period. This strategy will ensure the cost earns a fair

return and also reduce the impact of a large one-off expense on net profit.

17. An analysis of recent vessel transactions suggests that the Reef Magic 4 will have a resale

value of $1,800,000 in eight years' time and $1,300,000 in ten years' time. You note the

ATO regulation that all non-current assets be depreciated to zero. You also have clarified the

tax policy that all operating expenses are tax deductible in the year the expense in incurred.

18. The company tax rate is 30% and the required rate of return is 14%.

REQUIREMENTS

Your team must answer the following eight questions. Questions 1 to 4 require information

relating to the capital budgeting decision of the Reef Magic 4. Questions 5 to 8 relate to

Skydive's equity and debt position. All answers must be entered into the pre-formatted

EXCEL spreadsheet available on UTSOnline. The number of passengers and average revenue

per passenger for each year must be provided in the pre-designated EXCEL cells.

25300 FBF Autumn 2017 Group Assignment Page 3 Capital Budgeting Information (15 Marks)

Present an itemised breakdown (and the total) for each of the following:

1. The cash flows at the start.

2. The cash flows over the life.

3. The cash flows at the end.

4. The NPV of the Reef Magic 4 and an explanation of your recommendation.

Equity and Debt Information (5 Marks)

5. Using the information in the Retail Offer Booklet relating to the entitlement issue

announced to the ASX on 05/10/2016 with the Headline "ANREO Retail Offer Booklet"

what is the theoretical value of the rights?

6. According to the ANREO Retail Offer Booklet, what is one reason that Skydive chose an

entitlement issue rather than using debt to finance the acquisition of Raging Thunder?

7. According to the ANREO Retail Offer Booklet, which "Key Risk" most closely describes

capital rationing?

8. You bought Skydive shares in the IPO. What is your percentage return based on today's

price? ("Today" can be any ASX trading day after 1 May 2017. We will confirm your

calculation).

Instructions

Enter your answers into the EXCEL spreadsheet provided under "Assignments" on

UTSOnline. The spreadsheet is protected which means that only a restricted number of cells

can be used. The cells that you cannot use are coloured grey. This specially-formatted

spreadsheet is designed so that it will print on one double-sided A4 page to speed up the

marking process allowing us to provide you with faster feedback.

Right click on the link "25300_assignment.xlsx" and choose "Save Target As...".

Open the spreadsheet and enter each team member's details and the tutorials details of one

team member. Marked spreadsheets will be returned in the nominated tutorial only.

Enter your answers to the eight questions in the vacant white cells. For Q1, 2 and 3, enter the

cash flow description and the dollar amount in the appropriate cells. Use whole dollars only ignore cents. There are more rows supplied than are required so if you've used all the rows

then it means you've got too many cash flow items. Q4 to 8 can be answered using the vacant

cells provided. Don't worry if any of your cells appear as "######" because we can view it.

It is your team's task as aspiring financial managers to gain experience at identifying relevant

information required to calculate cash flows. For this reason, we will not provide direct

"yeso" answers to your UTSOnline questions but will of course clarify perceived

ambiguities.

We will not answer questions by email (email is acceptable only for questions of a

private/personal nature). Questions belong on UTSOnline because everyone benefits from

your question and the answer (whether the answer is given by us or another student).

Any team member can submit the completed spreadsheet however it is each team member's

responsibility to confirm with the submitter that the spreadsheet has been correctly lodged.

Everyone in your team receives the team's mark so it your responsibility to ensure each team

member makes an equal contribution.

25300 Fundamentals of Business Finance Autumn 2017 Group Assignment Due by 9am Monday 29 May 2017 (Answers to be submitted using the Assignments feature of UTSOnline) Contributes 20% of your total assessment 1. Skydive the Beach Group Limited (hereafter known as \"Skydive\") ordinary shares are listed on the Australian Securities Exchange following the company's $25 million nonunderwritten Initial Public Offering (\"IPO\") in 2015. Veritas Securities was the corporate advisor and lead manager of the IPO and received a fee of $1.25 million for their services. On April 4, 2017 Skydive announced the acquisition of Reef Magic Cruises (\"RMC\"), and the details are contained in the ASX announcement dated 03/04/2017 with the Headline \"Acquisition of Reef Magic Cruises\" (hereafter referred to as Announcement). RMC is a tourism operator in Cairns offering day trips to the Great Barrier Reef. Upon settlement of the transaction RMC will then become a wholly-owned subsidiary of Skydive. Skydive already has plans for generating substantially higher returns from its RMC business and one of its first strategies is to purchase a smaller, faster passenger vessel, internally named the Reef Magic 4. Of course, before they purchase the vessel, a rigorous financial analysis is needed to confirm if the vessel will contribute to increasing the wealth of Skydive shareholders. 2. You are employed in Skydive's finance department and have impressed senior management with your aptitude for financial analysis. This talent was developed through the practice-oriented assignments that you completed at University. The Chief Financial Officer (\"CFO\") has asked you to perform a financial analysis of the planned purchase of the Reef Magic 4 using a purpose-built preformatted EXCEL spreadsheet. The CFO has suggested you liaise with Skydive employees from a variety of different departments to collect the information that is necessary to perform the analysis. You will also search through public documents to identify some of the assumptions that will be required in your financial analysis, and to locate the data required to analyse Skydive's 2016 equity capital raising. Your analysis will be provided to the Board of Directors who must approve substantial capital expenditures. The directors are accountable to the shareholders and so a rigorous due diligence is necessary to be confident that the investment in the Reef Magic 4 is justified. The following paragraphs contain a substantial amount of information that has been gathered and it is your job to determine which information is relevant to the financial analysis. 3. In January 2017 Skydive commissioned Tourism Australia to analyse prospects for the Cairns tourism industry. The report cost $175,000 and was paid in full in March 2017. The forecasts indicate a large, and growing, potential market in the Cairns precinct due to the revitalised convention centre, an abundance of natural and unique treasures, and growing numbers of international flights between Cairns and nearby south-east Asian cities. These factors encourage the Board of Directors that the decision to purchase the Reef Magic 4 is the right decision but you caution that it must first pass an objective cost-benefit assessment. 4. The capital cost of the Reef Magic 4 in 2017 is exactly the same as the cost of the Reef Magic 2 as reported in the Announcement. According to the Australian Taxation Office (\"ATO\") the Reef Magic 4 is classified as a non-current asset and has an estimated useful life 25300 FBF Autumn 2017 Group Assignment Page 1 of eight years. However, Skydive will operate the Reef Magic 4 for ten years only, at which time it will be sold. Skydive has a policy of depreciating all non-current assets to zero over a twenty-year period for internal management reporting purposes. 5. To allow sufficient space for the Reef Magic 4 to dock at the Cairns Reef Fleet Terminal Skydive will need to arrange for additional mooring space. However, Skydive's due diligence into the RMC acquisition reveals that RMC has berthing rights for a pier that it is currently leasing to an unrelated tourist operator for a fixed $115,000 per annum. If Skydive proceeds with the Reef Magic 4, they will cancel the lease (without any financial penalty) and moor the vessel at the pier. If Skydive do not purchase the Reef Magic 4 they will continue to lease the pier for the foreseeable future. The directors question if the lease is relevant to the analysis because it has previously been classified as lease income. 6. In 2015, Skydive contributed $2 million towards a $4 million upgrade of the Cairns Reef Fleet Terminal. Cairns Council contributed the remaining $2 million. Skydive is depreciating their contribution of the upgrade in their financial statements over a twenty-year period, consistent with ATO policy. The assets related to this investment have no value today. 7. If Skydive purchase the Reef Magic 4 then they must sell certain slipway assets. The assets had a total capital cost in 2013 of $600,000 and for tax purposes have a ten-year life. The slipway assets have a scrap value today of $130,000. Skydive will use the sale proceeds to distribute a $130,000 dividend to its shareholders today. 8. Skydive will implement a private placement to raise $800,000 from sophisticated investors to partly finance the Reef Magic 4. The placement will be managed by Veritas Securities for a fee of 1% of the amount raised. Today, inventory (consisting mostly of spare parts) will need to increase from the current $400,000 to $700,000. Accounts receivable will increase by $750,000 to $3.6 million, and accounts payables would remain at $1,880,000. 9. Conservative forecasts are for the Reef Magic 4 to carry 28,000 passengers in the first year of operations (i.e., 2018). Although the stated capacity of the vessel is 150 it operates at below capacity for many days of the year, and is unable to operate at all for prolonged periods during an adverse weather event. To obtain an estimate of the sales revenue for Reef Magic 4 for a particular year you multiply the average revenue per passenger (\"ARPP\") for the year by the number of passengers for the year. Your starting point for ARPP is based on figures in the Announcement. You use the appropriate FY2016 figures in the section 'FINANCIALS OF RMC' to calculate ARPP. Due to improved yield management strategies Skydive are confident that in the first year of operations they can achieve a 3% p.a. increase in the ARPP compared to the FY2016 ARPP figure. From 2018 the ARPP is assumed to increase at 2% p.a. Skydive management are confident that the number of passengers will conservatively increase by 1.5% each year for the life of the Reef Magic 4. 10. It costs $370,000 a year to operate Skydive's Wollongong headquarters. With careful management Skydive believes they will not require any additional personnel in headquarters if they purchase the new ferry. In any case, the annual headquarters operating expense will increase by just 2% each year. 11. At the moment, fixed operating costs across the entire Skydive business are $14.5 million per annum. With the purchase of the Reef Magic 4 fixed costs would rise to $17.3 million each year. The annual RMC wages expense based on approximately 100 employees is 25300 FBF Autumn 2017 Group Assignment Page 2 $7,800,000. Wages directly associated with the purchase of Reef Magic 4 amount to $1,450,000 per year. Reef Magic 4's annual fuel expense is forecast to be $1,100,000 in the first year. With better vessel management and engine efficiencies, Skydive assumes they can reduce the annual fuel expense by 3% every following year. 12. The Reef Magic 4 will require no maintenance in the first three years of its life because it is covered by a manufacturer's three-year warranty. However, after the warranty expires, the annual repairs and maintenance expense that is needed at the end of each year is assumed to be $870,000. Skydive would still implement the usual repairs and maintenance on the vessel up to and including year ten to maintain resale value. 13. The purchase of the new vessel will produce food preparation cost synergies across the existing fleet of Reef Magic vessels resulting from larger purchase quantities and improved negotiating power with suppliers. The annual food preparation expense for the existing vessels is $386,000. Analysis indicates that this figure can be reduced by $46,000 each year with the introduction of the Reef Magic 4. The managing director has studied the preliminary figures that you have collected and enquired if the $386,000 is an opportunity cost. 14. Skydive has stated (page 6 of the Announcement) its policy is \"to maintain [a] prudent capital structure\". Therefore, Skydive will borrow $2 million today to finance the Reef Magic 4. The ten-year interest-only loan has annual repayments of $140,000 (assuming a fixed interest rate of 7% p.a.). 15. The Australian Maritime Safety Authority (\"AMSA\") requires that passenger ferries possess a valid and current National System Certificate of Survey, Vessel Identifier and Certificate of Operation. These compulsory certifications are required before Skydive can commence operations with the Reef Magic 4. The three certificates cost a total of $200,000 and are valid for ten years. The ATO confirms that all AMSA certificates are operating expenses. To preserve the resale value of the Reef Magic 4 Skydive will recertify the vessel in ten years' time. Marketing expenses relating to the Reef Magic 4 will be included in Skydive's existing annual marketing budget of $2,130,000. 16. Skydive's managers suggest that the cost of the $175,000 Tourism Australia report be spread over the ten-year evaluation period. This strategy will ensure the cost earns a fair return and also reduce the impact of a large one-off expense on net profit. 17. An analysis of recent vessel transactions suggests that the Reef Magic 4 will have a resale value of $1,800,000 in eight years' time and $1,300,000 in ten years' time. You note the ATO regulation that all non-current assets be depreciated to zero. You also have clarified the tax policy that all operating expenses are tax deductible in the year the expense in incurred. 18. The company tax rate is 30% and the required rate of return is 14%. REQUIREMENTS Your team must answer the following eight questions. Questions 1 to 4 require information relating to the capital budgeting decision of the Reef Magic 4. Questions 5 to 8 relate to Skydive's equity and debt position. All answers must be entered into the pre-formatted EXCEL spreadsheet available on UTSOnline. The number of passengers and average revenue per passenger for each year must be provided in the pre-designated EXCEL cells. 25300 FBF Autumn 2017 Group Assignment Page 3 Capital Budgeting Information (15 Marks) Present an itemised breakdown (and the total) for each of the following: 1. The cash flows at the start. 2. The cash flows over the life. 3. The cash flows at the end. 4. The NPV of the Reef Magic 4 and an explanation of your recommendation. Equity and Debt Information (5 Marks) 5. Using the information in the Retail Offer Booklet relating to the entitlement issue announced to the ASX on 05/10/2016 with the Headline \"ANREO Retail Offer Booklet\" what is the theoretical value of the rights? 6. According to the ANREO Retail Offer Booklet, what is one reason that Skydive chose an entitlement issue rather than using debt to finance the acquisition of Raging Thunder? 7. According to the ANREO Retail Offer Booklet, which \"Key Risk\" most closely describes capital rationing? 8. You bought Skydive shares in the IPO. What is your percentage return based on today's price? (\"Today\" can be any ASX trading day after 1 May 2017. We will confirm your calculation). Instructions Enter your answers into the EXCEL spreadsheet provided under \"Assignments\" on UTSOnline. The spreadsheet is protected which means that only a restricted number of cells can be used. The cells that you cannot use are coloured grey. This specially-formatted spreadsheet is designed so that it will print on one double-sided A4 page to speed up the marking process allowing us to provide you with faster feedback. Right click on the link \"25300_assignment.xlsx\" and choose \"Save Target As...\". Open the spreadsheet and enter each team member's details and the tutorials details of one team member. Marked spreadsheets will be returned in the nominated tutorial only. Enter your answers to the eight questions in the vacant white cells. For Q1, 2 and 3, enter the cash flow description and the dollar amount in the appropriate cells. Use whole dollars only ignore cents. There are more rows supplied than are required so if you've used all the rows then it means you've got too many cash flow items. Q4 to 8 can be answered using the vacant cells provided. Don't worry if any of your cells appear as \"######\" because we can view it. It is your team's task as aspiring financial managers to gain experience at identifying relevant information required to calculate cash flows. For this reason, we will not provide direct \"yeso\" answers to your UTSOnline questions but will of course clarify perceived ambiguities. We will not answer questions by email (email is acceptable only for questions of a private/personal nature). Questions belong on UTSOnline because everyone benefits from your question and the answer (whether the answer is given by us or another student). Any team member can submit the completed spreadsheet however it is each team member's responsibility to confirm with the submitter that the spreadsheet has been correctly lodged. Everyone in your team receives the team's mark so it your responsibility to ensure each team member makes an equal contribution. 25300 FBF Autumn 2017 Group Assignment Page 4 TEAM LEADER NAME: TUTOR NAME: TUTORIAL DAY AND TIME: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 1. Cash Flows at the start STUDENT NUMBER TEAM MEMBER NAME (TEAM LEADER) Total Number of Passengers Average Revenue Per Passenger 2. Cash Flows over the life Total Year 10 Year 0 3. Cash flows at the end Total Grand total for each year 4. NPV Decision and explanation 5. Theoretical Rights Value 6. Reason for choice of debt 7. Key Risk 8. Percentage Return Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10