ABF204 - Techniques of Finance to Deal with Financial Problems - Case Study - Finance Assignment Help

Assignment Task

Learning Outcomes being assessed:
Describe and apply the basic concepts and techniques of finance to deal with financial problems.
Apply financial mathematics to solve business problems and perform financial functions (such as calculating present and future value of single cash flows, simple interest rate, annuities and perpetuities).
Interpret the importance of weighted average cost of capital (WACC)

Assessment Brief
Mini Cases provide complex problem-solving opportunities to real-world challenges by exploring current issues in the relevant field of study.
The case study assessment builds on scenario-based learning throughout the unit and encourages the development of reasoning, problem-solving and decision-making skills. This allows students to learn by doing, as a final step before applying knowledge in professional practice.

Answer both questions.

Question 1 – Understanding NPV
The CEO of Fosters (Daniel Andrews) is considering the acquisition of a new project known as Heineken. Daniel needs your advice as a chief financial officer (CFO) on the new acquisition using NPV analysis.
A feasibility study has been undertaken at the cost of $750,000 which has indicated that the project is technically feasible.
Heineken is priced at $15 million, and the acquisition would require:
$3 million in transportation costs
An installation cost of $2 million.
Initial working capital required for the project of $500,000. Assume a cash outflow in Year 0, and this is refunded back to Fosters at the end of the 8 year period. This assumes when the business is closed down at the end of Year 8, the working capital (accounts receivable plus inventory minus accounts payable) will be all converted into cash.
Heineken has a useful life of 8 years and will be depreciated using straight-line depreciation over 5-years.
It is expected to have a salvage value of $100,000 at the end of 8 years.
Heineken estimates for the 8 years that the following cash inflows and outflows for the business:
Revenue of $8.5 million per annum
Operating costs by $1.5 million per annum
The marginal tax rate is 30 precent.
The CEO advises you the company’s cost of capital assumption is 15 precent.
Would you go ahead with the new acquisition using NPV analysis?
Explain your recommendation in a 100-word proposal to the CEO.

Required:
Prepare an 8 year Income Statement Summary using the above information for the new Heineken Business, including depreciation and taxation (25 marks)
Prepare a cash flow summary, based on the Income Statement. Using Excel or a financial calculator to calculate the Net Present Value of the Project cash flows.

Question 2 – Using Weighed Average Cost of Capital (WACC)
ABC’s capital structure is made of 50% Ordinary Equity, 30% Preferred Stock and 20% Debt.
ABC’s dividend payout ratio is 40 precent, and the current expected net income is $650,000.
ABC’s marginal tax rate is 30% and investors expect the dividends and earning to grow at the rate of 6 precent per year in perpetuity.
ABC just paid a dividend of $5 per share on its 750,000 issued ordinary shares and is currently trading at $40 per share.
ABC has issued 300,000 new preference shares with the market price of $60 per share. ABC is committed to pay a dividend of $9 per share on its preference shares.
ABC has issued 12,000 corporate bonds with face value of $1000 and 15 years to maturity that currently are traded at their face value. ABC offers an annual coupon amount of $100 for each bond.
1)Determine the market value of ordinary equity, preference shares and debt.
2)Determine the cost of each capital structure component of ABC.
3)Calculate the weighted average cost of capital of ABC.
4)Which projects should ABC accept given the following investment opportunities.?
Project Initial Investment Rate of return
Dill $500,000 16.5%
Pit $450,000 14.5%
Sam $300,000 17.5%

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