corporate finance assignment

corporate finance assignment

Question 2 :

Art Glass was founded in 1974 by Arthur Morse who had spent several years in Europe working under master glass makers. Originally Arthur set up the company with his wife Susan and sold his glass products locally, but in the late 1990s, they joined with several other glass producers to form The Curved Glass Company, which then began an aggressive promotion campaign. Today, the company is one of the leading curved glass producer in Australia.

The management of Curved Glass is currently evaluating a potential new product; a tough but light curved glass designed for unusually shaped tall buildings and office blocks. The new product would cost more than their usual commercial exterior glasses and in market research conducted by the company’s research department at a cost of $700,000 it was judged superior to various competing products. Ann Andrews, the Chief Financial Officer, must analyse this project, along with other potential investments, and then present her findings to the company’s executive committee.

The project will require construction of a new plant that would have an annual capacity of 100,000 tons and will cost an estimated $25,000,000 to build. The estimated purchase cost of machinery is $14,000,000 but shipping costs to move the machinery to the plant would total $500,000 and the estimated installation charge is another $500,000.The land on which the plant will be built has been vacant since it was bought three years ago at a cost of $2,000,000. John Knight, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the new project. His contention is that if the land had not been bought, the firm would have had to spend the $2,000,000 (or even more) to buy the land for new project.

The company expects its new plant to produce 60,000 tons of glass per year and the management of Curved Glass anticipates they can sell the product at $510 per ton allowing the company to gain 12% market share in the first year of operation. Fixed costs are expected to average $15,000,000 annually while variable costs are estimated to be around $100 per ton. The plant will be fully depreciated on a straight-line basis over ten years, with an estimated salvage value of $1,000,000 after 10 years at the end of the project. The required rate of return on the project is taken as 15% due to the high degree of systematic risk associated with the new product. The company tax rate is 30%.

Now assume that you are an assistant to Ann and she has asked you to analyse the project and then to present your findings to her. Therefore,

a. Calculate the project’s incremental cash flow for each year and present in a tabular form.

b. Using the incremental cash flows calculate the projects:

i. Net Present Value

ii. Internal Rate of Return using interpolation method

iii. Payback Period

iv. Discounted Payback Period

c. Combining all the information recommend if the project should be undertaken or not and explain your decision to Ann outlining any specific points of consideration. (Maximum 250 words)

Please note if you use a spreadsheet you cannot submit a spreadsheet via EASTS – neither can you submit a spreadsheet as an embedded object in a Word document. If you construct your table in Excel then please simply copy and paste into Word. You can set up your data in a spreadsheet and use it check your answer but remember you still have to show how the NPV, etc. was derived. This does not mean giving the Excel algorithm. It does have to show how the solution was derived. So show how you have discounted the cash flows.

Question 3 :

You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: AGL Energy Ltd and Westpac Banking Corporation.

(For this question please note:

ï‚· _Use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data.

ï‚· _This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. EASTS does not support spreadsheets. Make sure that you show all your workings – for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Also please note using excel formula such as =COVAR() is not acceptable.)

a. Find the monthly opening and closing prices for the period 1 July 2014 – 30 June 2015 for AGL Energy Ltd (AGL.AX), and Westpac Banking Corporation (WBC.AX) and the Market as proxied by the All Ordinaries index (^AORD).

b. Calculate monthly holding period returns (%) for the period 1 July 2014 – 30 June 2015 for AGL, Westpac and Market. The monthly holding period return is the percentage return (%) you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price and include any dividends). Show the formula and at least one sample calculation.

c. Graph your results on one graph with returns on the y axis and time on the x axis.

d. Calculate the average monthly holding period return for AGL, Westpac and Market.

e. For AGL, Westpac and Market, what is:

i. The annual holding period return; and

ii. The standard deviation of the monthly holding period returns?

f. Calculate the covariance of AGL and Westpac over the year.

g. You decide to invest in a portfolio of two assets, calculate the expected portfolio return and risk if:

i. 10% of wealth is invested in AGL and 90% in Westpac

ii. 80% of wealth is invested in AGL and 20% in Westpac

h. Plot AGL, Westpac and Market on a risk / return graph as well as the two portfolios you calculated in part g. (See Fig 11.2 of text for example of graph)

i. Incorporating all the analysis explain which asset or combination of assets would you choose to invest as a rational investor. (maximum 250 words)