Posted: September 1st, 2015

Finance

Question 1 (25 marks)

The Crystal Glass Company is proposing the construction of a new plant in east Brisbane. The plant has an annual capacity of 100,000 tons and will cost $100 million to build. Profits on the plant will be taxed at a rate of 50 per cent. The company expects its new plant to produce 90,000 tons of plate-glass per year. The annual revenues of $59.4 million based on an anticipated selling price of $660 per ton will allow the company to gain 12 per cent market share in the first year of operation. Fixed costs are expected to average $12 million annually while variable costs are estimated to be around $140 per ton. The plant will be fully depreciated on a straight-line basis over ten years, with an estimated salvage value of $2 million at the end of the project. The required rate of return on the project is taken as 15 per cent due to the high degree of systematic risk associated with a cyclical product like plate-glass. Calculate the NPV of the project and ascertain if the company should go ahead with the proposed project.

Question 2 (25 marks)
NT Mining’s bonds will mature in four years with a total face value of $30 million, paying a half yearly coupon rate of 10% per annum. The yield on the bonds is 16% per annum. The market value for the company’s preference share is $6.5 per unit while the ordinary share is currently worth $2.0 per unit. The preference share pays a dividend of $1.0 per share. The beta coefficient for the ordinary share is 1.8 and retained earnings are expected to be more than sufficient to fund the ordinary equity component of any new investment.
The market risk premium is estimated to be 11% per annum and the risk-free rate is 5% per annum. The company is subject to a 30% corporate tax rate. Below is the balance sheet for NT Mining:
$ (Million)

Debt:
Bonds $30
Equity:
preference shares (100,000 units) $3
Ordinary shares (10 million units) $15

a. Calculate the after-tax cost of each of the company’s current financing sources as below:
• Bonds
• Preference shares
• Ordinary shares

b. Using the information provided, calculate the market values for the financing sources listed below:
• Bonds
• Preference shares
• Ordinary shares

c. Using the information from the previous sections, calculate NT Mining’s after-tax weighted average cost of capital (WACC). The finance manager has identified a potential project with an IRR of 20% per year. Should this project be undertaken by the company? Discuss your recommendation and support with relevant calculations.

Question 3 (15 marks)
XYZ Ltd is considering short term financing for its working capital requirement. You are invited to provide a discussion on the three key factors that the company should consider in selecting different sources of short term financing. Briefly discuss these factors and illustrate with an appropriate example where possible.
Rationale
This task will assess your ability to meet the following learning outcomes:
• identify, analyse and solve financial problems confronting business enterprises, particularly problems relating to corporate investment, asset management and financing decisions;
• employ analytical techniques, using contemporary electronic aids appropriate to financial decision making;
• analyse the impact of economic, legal and tax changes on the financial position of the firm;
demonstrate critical evaluation and communication skills relating to the scope,
• methodology, role, objectives and ethics of financial management within business organisations.
Marking criteria
Criteria HD (85% – 100%) DI (75% – 84%) CR (65% – 74%) PS ( 50% – 64%) FL ( 0% – 49%)
Q1Calculate the NPV of the project and provide a critical analysis of the company’s future with the proposed construction of a new plant. Applies correct principles and calculations, substantiated with workings or diagrams in order to correctly calculate the NPV. There are no errors in calculations. Provides a precise critical analysis of the company’s proposed future. Applies correct principles and calculations, substantiated with workings or diagrams in order to correctly calculate the NPV. Workings may contain s few minor errors. Provides a detailed critical analysis of the company’s proposed future. Applies correct principles and calculations, substantiated with
workings or diagrams in order to correctly calculate the NPV. Workings contain some minor errors. Provides a critical analysis of the company’s proposed future. May contain limited detail and reference to examples from the case. Applies understanding of relevant principles, correctly calculates the NPV. Workings contain some major errors. Attempts to provide a critical analysis of the company’s proposed future. No understanding of relevant principles, incorrectly calculates the NPV. Workings contain major errors. Failed to provide a critical analysis of the company’s proposed future.
Q2. Complete calculation as required. Discuss your recommendations for the potential project and support with relevant calculations. Applies correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer. There are no errors in calculations. Applies correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer, shows workings but contains few minor errors. Applies correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer, shows workings but contains some minor errors. Applies understanding of relevant principles, shows workings but contains some major errors. No understanding of relevant principles, no workings and contains major errors.
Q3. Discuss the factors relevant to XYZ scenario and illustrate with an appropriate example where possible.
Principles are applied in the appropriate manner to arrive at the correct answer. The use of relevant principles and example shows creativity and imagination. Discussion reflects detailed understanding of relevant principles. Uses an example to illustrate the discussion. Discussion reflects good understanding of relevant principles. Makes use of an example to attempt to illustrate but relevance is unclear or inaccurate. Discussion reflects basic understanding of relevant principles. Limited or no use of relevant example. Discussion reflects no understanding of relevant principles. No use of relevant example.
Academic Writing Skills
The discussion/ report/other meets academic standards of syntax, vocabulary, spelling and punctuation and reflects an awareness of audience needs Accurate use of syntax, spelling and punctuation; correctly refers to an extensive variety of sources to support arguments, including prescribed texts and a broad range of additional readings; reference list of an extensive range of resources used, correctly formatted using APA style. Accurate use of syntax, spelling and punctuation; succinct and effective use of vocabulary; correctly refers to a broad range of sources to support arguments, including prescribed text and a variety of further readings; reference lists a broad range of relevant resources used, correctly formatted using APA style. Accurate use of syntax, vocabulary, spelling and punctuation; correctly refers to more than the minimum requirement of sources to support arguments, including prescribed texts and recommended readings; reference list formatted in APA style, with few or no errors. Mostly accurate syntax, spelling and punctuation; correctly refers to minimum number of sources to support arguments, including prescribed texts; reference list used, formatted in APA style, with minor errors. Inaccurate syntax, spelling and punctuation; incorrectly refers to minimum number of sources, including prescribed texts; reference list used, not formatted in APA style, with errors.

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