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Refer to files attached.

Microsoft Word - BAFI1012 - BUSINESS FINANCE ASSIGNMENT_Version 1

1

BUSINESS FINANCE

INDIVIDUAL ASSIGNMENT

MONDAY VERSION

Semester 1 2019

(40 marks worth 40%)

Due Date: Week 12

In this assignment you will pull together your understanding of the main concepts in Business

Finance and analyse financial statements to make some ‘real’ business decisions. Some of the

figures used in the following scenario are real, some are not. The point is to analyse the

figures, whether they be provided or sourced.

Scenario

Your financial analysis team at BLD Wealth Group has been tasked by the executive

management team to provide careful financial decision analysis for its client Tesla Inc.

This will require preparing a business report which will be presented to the executive

management of both BLD and Tesla Inc.

Background

Read the following article from the Financial Review to get some background.

https://www.afr.com/business/mining/kidman-resources-charges-ahead-with-3year-tesla-

lithium-deal-20180517-h10687

(or see canvas for a pdf copy)

Kidman Resources is considering a binding agreement with Tesla inc. to supply 5000

tonnes of lithium hydroxide for three years. However in order process the required

amount of lithium hydroxide, Kidman Resources must consider whether to build a new

refinery or outsource their supply ore (Li20).

Kidman Resources has undertaken a feasibility study costing $2 million to explore these

two strategies.

Option 1: Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a

processing plant will also need to be constructed at a cost $6 million. This plant will

need to be supplied with grinding machines, DMS flotation machines and other

equipment at a total cost of $16 million. Kidman Resources’ current fleet of Haul

trucks, water carts and dump trucks will meet the needs for this project, however until

recently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a

revenue of $15 million per year, which will increase by 2.8% per annum adjusted for

rising costs. Due to the additional complexities involved with the construction and

management of this new refinery, 5 new engineers (yearly salary per engineer

$160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All

other remaining labour force required is expected to cost $3 million per annum for the

2

duration of the project.

For tax reasons you will expense the cost of the processing plant immediately. The cost

for the construction and installation of the new refinery and associated machines and

equipment will be depreciated over three years using the straight-line method. Due to

the nature of the mining project, the machines and equipment will likely have a salvage

value of $10 million at the end of three years. Finally, the required net working capital

is $2 million.

Option 2: Outsourcing the supply of ore

Alternatively, Kidman Resources can contract BHP to supply the required ore to

process into lithium hydroxide. Based on the required amount of lithium hydroxide,

management has quoted a total cost of $28 million. BHP has however offered this rate

on the condition that Kidman Resources pays 20% of the total cost in advance in the

beginning of the year, with the remaining paid in equal instalments thereafter. Kidman

Resources will process the ore into lithium hydroxide using existing facilities at an

expected cost of $4.4 million per year.

Your task

Part A: To carry out an analysis, you will need to calculate the appropriate Weighted Average

Cost of Capital (WACC). Kidman Resources executive management team are particularly

concerned that the WACC be accurate, thus you are expected to determine the WACC based

on recent market and other data. (Read below for additional information).

Part B: Carry out a detailed analysis of the two given options and make recommendations to

Kidman Resources about those options.

To establish the WACC you have already assembled the following information

Previous year’s stock exchange data for the market (ASX200) and for Kidman,

adjusted for dividends and capitalization (Price Index). This data is organized

in the file: Project Data.xlsx. Use this dataset to calculate beta. For CAPM

purposes use the return on the market (%) provided in the next section.

Balance Sheet of Kidman Resources as of 30 June 2018

Extract of Balance Sheet for Kidman Resources

Issued Capital $ million

405,000,000 Ordinary shares of $2.00 full paid 810.00

1,500,000 5% Preference Shares of $1.00 fully paid 1.50

Current Liabilities and Provisions

Bank Overdraft 4.00

Trade Creditors 6.00

3

Unsecured Notes 7.00

Non-Current Liabilities

Debentures 16.00

Term Loans 8.00

Mortgage 17.00

• The company’s preference shares are currently trading at $0.60 each. The company’s

ordinary shares are currently trading at $1.22 each.

• The risk-free rate of return is 2.28 % p.a., and the return on the market is 7.70 % p.a.

• Debentures have a coupon interest rate of 10% p.a. and could be re-issued at the

present time at an interest rate of 8% p.a. The debentures will be redeemed at their face

value in three years’ time. Face value is as per balance sheet value.

• The mortgage loan is repayable in eight years’ time and the current interest rate is

6.25% p.a. The mortgage was initially negotiated at 9.15% p.a.

• Term loans have a current interest rate of 6% p.a., but were negotiated at an interest

rate of 7% p.a. They are repayable in full in three years’ time. The term loans consists

of regular semi-annually interest payments with the principal repaid at maturity

• Unsecured notes will mature in six months and will not be replaced. They have a

current interest rate of 2.8% p.a.

• The current interest rate on the bank overdraft is 6.0% p.a.

• Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 28

percent

Your assessment requirements

Part A

Calculate WACC:

The first part of the analysis requires you to work out the Weighted Average Cost of

Capital (WACC) for Kidman Resources. With the help of the given information and

given data, you need to work out the individual costs1 and value of each of the sources

of capital and apply that to the WACC equation to work out the overall weighted cost.

(20 marks)

1 For the cost of ordinary shares you will need to work out kidman’s Resources beta. See canvas video.

4

Part B

Calculate NPV:

Evaluate the two options using NPV analysis and clearly identify which of the

two alternatives results in a higher valuation for Kidman Resources. Include

your opinion.

Beta analysis:

Describe in a short paragraph (less than half a page) what risks/events may cause

Kidman’s resources beta to significantly change. Assume due to some

unforeseen event (as you may have described), the beta of kidman’s Resources

is now 20 % higher than your original estimates. Would this change your

previous analysis? Describe

(16 marks)

Part C

Business Report overall quality. (4 marks)

The assignment is to be presented as a business report to both Kidman Resources

executive management and BLD management.

Business reports are structured with:

an executive summary

table of contents

informative headings and sub-headings

numbered sections

page numbering

labelled graphs and tables (if used)

a reference list.

The main content of your report should be 3-4 pages, excluding appendix and be

professionally presented. A concise, relevant and visually appealing paper is essential

for business communication.

Regarding the WACC calculations, whilst you need to present your final work in a table

in the main body of your report, all subsidiary calculations need to be provided in an

appendix.

The report is to be submitted as a PDF version of your work.

It must use a font/fonts suitable for business communication. The reference style to be used is

Harvard style referencing (author-date).

5

More specifically, your report in this case needs to set out the following:

1. An executive summary

2. A table showing the calculation of Kidman’s WACC using market data.

3. A table(s) showing your NPV calcualtions of both Alternative 1 and Alternative

2.

4. A recommendation to Kidman Resource managements as to which alternative

it should adopt.

5. An analysis of beta risk and any recommendations.

6. A reference list.

7. Appropriate appendices.

Further guidelines

Refer to the tutorial/additional questions for the topics - Capital Budgeting and Cost of Capital

to setup your spreadsheets for WACC and NPV analysis.

Please round off your values to 4 decimal places for interest rates and 2 decimal places for

amounts e.g. 0.0659 or 6.59%, and $10,369.78

All assessment of numerical work is marked consequentially. So, you will be awarded

marks for all correct calculations and procedures.

To calculate beta please see the video on canvas.

Assignment requirements

This assessment contributes 40% to the total assessment for this unit.

Microsoft Word - BAFI1012 - BUSINESS FINANCE ASSIGNMENT_Version 1

1

BUSINESS FINANCE

INDIVIDUAL ASSIGNMENT

MONDAY VERSION

Semester 1 2019

(40 marks worth 40%)

Due Date: Week 12

In this assignment you will pull together your understanding of the main concepts in Business

Finance and analyse financial statements to make some ‘real’ business decisions. Some of the

figures used in the following scenario are real, some are not. The point is to analyse the

figures, whether they be provided or sourced.

Scenario

Your financial analysis team at BLD Wealth Group has been tasked by the executive

management team to provide careful financial decision analysis for its client Tesla Inc.

This will require preparing a business report which will be presented to the executive

management of both BLD and Tesla Inc.

Background

Read the following article from the Financial Review to get some background.

https://www.afr.com/business/mining/kidman-resources-charges-ahead-with-3year-tesla-

lithium-deal-20180517-h10687

(or see canvas for a pdf copy)

Kidman Resources is considering a binding agreement with Tesla inc. to supply 5000

tonnes of lithium hydroxide for three years. However in order process the required

amount of lithium hydroxide, Kidman Resources must consider whether to build a new

refinery or outsource their supply ore (Li20).

Kidman Resources has undertaken a feasibility study costing $2 million to explore these

two strategies.

Option 1: Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a

processing plant will also need to be constructed at a cost $6 million. This plant will

need to be supplied with grinding machines, DMS flotation machines and other

equipment at a total cost of $16 million. Kidman Resources’ current fleet of Haul

trucks, water carts and dump trucks will meet the needs for this project, however until

recently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a

revenue of $15 million per year, which will increase by 2.8% per annum adjusted for

rising costs. Due to the additional complexities involved with the construction and

management of this new refinery, 5 new engineers (yearly salary per engineer

$160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All

other remaining labour force required is expected to cost $3 million per annum for the

2

duration of the project.

For tax reasons you will expense the cost of the processing plant immediately. The cost

for the construction and installation of the new refinery and associated machines and

equipment will be depreciated over three years using the straight-line method. Due to

the nature of the mining project, the machines and equipment will likely have a salvage

value of $10 million at the end of three years. Finally, the required net working capital

is $2 million.

Option 2: Outsourcing the supply of ore

Alternatively, Kidman Resources can contract BHP to supply the required ore to

process into lithium hydroxide. Based on the required amount of lithium hydroxide,

management has quoted a total cost of $28 million. BHP has however offered this rate

on the condition that Kidman Resources pays 20% of the total cost in advance in the

beginning of the year, with the remaining paid in equal instalments thereafter. Kidman

Resources will process the ore into lithium hydroxide using existing facilities at an

expected cost of $4.4 million per year.

Your task

Part A: To carry out an analysis, you will need to calculate the appropriate Weighted Average

Cost of Capital (WACC). Kidman Resources executive management team are particularly

concerned that the WACC be accurate, thus you are expected to determine the WACC based

on recent market and other data. (Read below for additional information).

Part B: Carry out a detailed analysis of the two given options and make recommendations to

Kidman Resources about those options.

To establish the WACC you have already assembled the following information

Previous year’s stock exchange data for the market (ASX200) and for Kidman,

adjusted for dividends and capitalization (Price Index). This data is organized

in the file: Project Data.xlsx. Use this dataset to calculate beta. For CAPM

purposes use the return on the market (%) provided in the next section.

Balance Sheet of Kidman Resources as of 30 June 2018

Extract of Balance Sheet for Kidman Resources

Issued Capital $ million

405,000,000 Ordinary shares of $2.00 full paid 810.00

1,500,000 5% Preference Shares of $1.00 fully paid 1.50

Current Liabilities and Provisions

Bank Overdraft 4.00

Trade Creditors 6.00

3

Unsecured Notes 7.00

Non-Current Liabilities

Debentures 16.00

Term Loans 8.00

Mortgage 17.00

• The company’s preference shares are currently trading at $0.60 each. The company’s

ordinary shares are currently trading at $1.22 each.

• The risk-free rate of return is 2.28 % p.a., and the return on the market is 7.70 % p.a.

• Debentures have a coupon interest rate of 10% p.a. and could be re-issued at the

present time at an interest rate of 8% p.a. The debentures will be redeemed at their face

value in three years’ time. Face value is as per balance sheet value.

• The mortgage loan is repayable in eight years’ time and the current interest rate is

6.25% p.a. The mortgage was initially negotiated at 9.15% p.a.

• Term loans have a current interest rate of 6% p.a., but were negotiated at an interest

rate of 7% p.a. They are repayable in full in three years’ time. The term loans consists

of regular semi-annually interest payments with the principal repaid at maturity

• Unsecured notes will mature in six months and will not be replaced. They have a

current interest rate of 2.8% p.a.

• The current interest rate on the bank overdraft is 6.0% p.a.

• Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 28

percent

Your assessment requirements

Part A

Calculate WACC:

The first part of the analysis requires you to work out the Weighted Average Cost of

Capital (WACC) for Kidman Resources. With the help of the given information and

given data, you need to work out the individual costs1 and value of each of the sources

of capital and apply that to the WACC equation to work out the overall weighted cost.

(20 marks)

1 For the cost of ordinary shares you will need to work out kidman’s Resources beta. See canvas video.

4

Part B

Calculate NPV:

Evaluate the two options using NPV analysis and clearly identify which of the

two alternatives results in a higher valuation for Kidman Resources. Include

your opinion.

Beta analysis:

Describe in a short paragraph (less than half a page) what risks/events may cause

Kidman’s resources beta to significantly change. Assume due to some

unforeseen event (as you may have described), the beta of kidman’s Resources

is now 20 % higher than your original estimates. Would this change your

previous analysis? Describe

(16 marks)

Part C

Business Report overall quality. (4 marks)

The assignment is to be presented as a business report to both Kidman Resources

executive management and BLD management.

Business reports are structured with:

an executive summary

table of contents

informative headings and sub-headings

numbered sections

page numbering

labelled graphs and tables (if used)

a reference list.

The main content of your report should be 3-4 pages, excluding appendix and be

professionally presented. A concise, relevant and visually appealing paper is essential

for business communication.

Regarding the WACC calculations, whilst you need to present your final work in a table

in the main body of your report, all subsidiary calculations need to be provided in an

appendix.

The report is to be submitted as a PDF version of your work.

It must use a font/fonts suitable for business communication. The reference style to be used is

Harvard style referencing (author-date).

5

More specifically, your report in this case needs to set out the following:

1. An executive summary

2. A table showing the calculation of Kidman’s WACC using market data.

3. A table(s) showing your NPV calcualtions of both Alternative 1 and Alternative

2.

4. A recommendation to Kidman Resource managements as to which alternative

it should adopt.

5. An analysis of beta risk and any recommendations.

6. A reference list.

7. Appropriate appendices.

Further guidelines

Refer to the tutorial/additional questions for the topics - Capital Budgeting and Cost of Capital

to setup your spreadsheets for WACC and NPV analysis.

Please round off your values to 4 decimal places for interest rates and 2 decimal places for

amounts e.g. 0.0659 or 6.59%, and $10,369.78

All assessment of numerical work is marked consequentially. So, you will be awarded

marks for all correct calculations and procedures.

To calculate beta please see the video on canvas.

Assignment requirements

This assessment contributes 40% to the total assessment for this unit.

Buidling a refinery

Cost of new refinery 22000000

Constructed cost 6000000

Floating machine

Revenue 15000000

Increase in revenue 2.80%

Engineer salary 800000

Existing enginner salary 600000

Labor cost 3000000

Life 3

Salvage value 10000000

Net working capital 2000000

Outsourcing the supply of ore

Cost of outsourcing 28000000

Cost of outsourcing 4400000

Initial payment 5600000

Installment 7466666.66666667

Part A:

Calculating the weighted average cost of capital

Cu

ent price of preference share 0.6

Cu

ent price of common share 1.22

Risk free rate 2.28%

Return on market 7.70%

Coupon rate of debentures 10%

Interest rate 8%

Nper 3

Face value 16

Mortgage loan

Time 8

Interest rate 6.25%

Mortgage rate 9.15%

Term loan

Interest rate 6%

Term loan 3

Unsecured loan

Duration 6 months

Interest 2.80%

Cu

ent interest rate 6%

corprate tax 28%

First calculating the cost of prefe

ed shares

Cost of prefe

ed shares = D1 / P0

D1 = 0.05

P0 = 0.6

Cost of prefe

ed...

SOLUTION.PDF## Answer To This Question Is Available To Download

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