Q 2 WEEK 5 BHP are considering investing in a new gold mine in South Australia Gold in SA is buried very deep, so the mine will require an initial investment of $250 million Once this investment is made, the mine is expected to earn revenue at 12 fixed rate per year for the next 20 years It will cost 1 3 of the annual revenue per year to operate the mine After 20 years, the gold will be depleted The mine must then be stabilised on an ongoing basis, which will cost $5 million per year in perpetuity 60 of BHP capital is financed through debt which has a cost of 4 and the shareholders expect a 6 5 return on their equity Draw a timeline and set out the cash flows by year Determine the weighted average cost of capital (WACC) of BHP What is the NPV of this project Explain if BHP should accept this project according to the NPV rule If the credit risk of BHP decreased, how would this affect its WACC Would this impact on the WACC make the project more or less likely to be accepted given the same stream of cash flows Week 7 8 Q 1 Your company is planning to issue a 60 day commercial paper at a face value of $200,000 If the yield to maturity for the companys commercial paper is 4 per annum, how much is the funding that could be raised Q 2 Explain the companys decision in each of the following two circumstances Your company decides to make a long term investment and decides to fund it through borrowings in the money market due to its low cost of funds Alternatively a subsidiary company of yours wishes to raise money for working capital and decides to borrow such funds from the Capital market Your companys investment which is $500,000 eventually decides to issue bonds having a face value of $1,000 The given coupon rate is 11 p a with 8 years to maturity and now selling at $1,123 76 How many bonds would need to be purchased What is the annual yield to maturity of the bond As an investor you are planning to purchase the bond at the price of $1,123 76 and hold it for 4 5 years before you sell it at a market yield of 6 p a At which price would you sell the bond What is the HPY Is the HPY higher or lower than the Yield calculated in Part b) ii EXPLAIN WITHOUT ANY CALCULATIONS Can I get a written answer for this(on paper if possible) NOT excel please and include the relevant equations for each question as well This was all the information given in the question A quick response would be greatly appreciated Thank you so much 3

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 19, 2024

Q 2- WEEK 5 BHP are considering investing in a new gold mine in South Australia. Gold in SA is buried very deep, so the

Q 2- WEEK 5

BHP are considering investing in a new gold mine in South Australia. Gold in SA is buried very deep, so the mine will require an initial investment of $250 million. Once this investment is made, the mine is expected to earn revenue at 12% fixed rate per year for the next 20 years. It will cost 1/3 of the annual revenue per year to operate the mine. After 20 years, the gold will be depleted. The mine must then be stabilised on an ongoing basis, which will cost $5 million per year in perpetuity. 60% of BHP capital is financed through debt which has a cost of 4% and the shareholders expect a 6.5% return on their equity

Draw a timeline and set out the cash flows by year.
Determine the weighted average cost of capital (WACC) of BHP
What is the NPV of this project? Explain if BHP should accept this project according to the NPV rule.
If the credit risk of BHP decreased, how would this affect its WACC? Would this impact on the WACC make the project more or less likely to be accepted given the same stream of cash flows?

Week 7 & 8

Q 1

Your company is planning to issue a 60 day commercial paper at a face value of $200,000.If the yield to maturity for the companys commercial paper is 4% per annum, how much is the funding that could be raised?

Q 2

Explain the companys decision in each of the following two circumstances
1. Your company decides to make a long term investment and decides to fund it through borrowings in the money market due to its low cost of funds.
2. Alternatively a subsidiary company of yours wishes to raise money for working capital and decides to borrow such funds from the Capital market.

Your companys investment which is $500,000 eventually decides to issue bonds having a face value of $1,000. The given coupon rate is 11% p.a with 8 years to maturity and now selling at $1,123.76.
1. How many bonds would need to be purchased?
2. What is the annual yield to maturity of the bond?

As an investor you are planning to purchase the bond at the price of $1,123.76 and hold it for 4.5 years before you sell it at a market yield of 6% p.a.
1. At which price would you sell the bond?
2. What is the HPY?
3. Is the HPY higher or lower than the Yield calculated in Part b) ii. EXPLAIN WITHOUT ANY CALCULATIONS.

Can I get a written answer for this(on paper if possible) NOT excel please and include the relevant equations for each question as well.

This was all the information given in the question.

A quick response would be greatly appreciated! Thank you so much! <3