BAFI1100 - Financial Decision Making - Accounting and Finance Assignment Help

Assignment Task

BNC is an investment firm specialising in corporate advice, particularly in regard to raising finance and company valuation. One of its clients, Jason Dune, the CEO of Dune Industries Ltd, has approached BNC seeking advice and assistance.

Question 1 Dune Industries Ltd is a large company listed on a stock exchange. It is a diversified company with manufacturing and trading divisions operating in a number of industries. Dune has recently developed a new product which is the first of its kind and which is expected to make a significant contribution to the company’s future earnings. Dune needs additional finance to bring the product to market. The company is seeking to raise $80 million in debt finance through a bond issue. Dune would like to issue bonds with a face value of $1000, a maturity of 20 years and an 8 per cent annual coupon rate. Interest would be paid semi-annually. Dune is considering offering an 8 per cent coupon because it is not sure what rating its bonds would receive. BNC has advised that similar bonds with an AA rating currently have a yield to maturity of 7.5 per cent and similar bonds with an A rating have a yield to maturity of 8.5 per cent.

Required:

(a) Calculate the price of the bonds, and the number of bonds Dune would need to issue, if the company was to receive an AA rating

(b) Calculate the price of the bonds, and the number of bonds Dune would need to issue, if the company was to receive an A rating 

Question 2 Dune Industries Ltd expects its new product will give it a significant first mover advantage in the market and that is expected to provide growth in earnings per share of 400% within the coming year, and 75% growth in each of the subsequent 3 years. After that time, it is expected competitors will have developed and brought to market similar products with the result that Dune would expect earnings growth to drop back to its normal level of 3% per year forever. Its cash dividend was 10 cents per share last year and is expected to remain at that amount for each of the next 5 years as the company builds its retained earnings to finance research and development. In the sixth year, it is expected shareholders will be rewarded with a payout ratio that will be 80% of the earnings per share, and the payout ratio is expected to remain at that level forever. The required rate of return on Dune’s ordinary shares is 20% per year and the latest earnings per share was 25 cents.

Required:

(a) Calculate the price that Dune Industries Ltd ordinary shares should be selling for in the market, assuming Dune’s growth projections are accurate. (4 marks)

(b) BNC is concerned that Dune’s earnings growth projections, as a result of the new product, might be too optimistic in the first four years. BNC is in favour of a more conservative approach and recommends the growth rates should be half (i.e. reduced by 50%) of Dune’s projections before growth returns to its normal 3% level. Calculate the price that Dune Industries Ltd ordinary shares should be selling for in the market, using BNC’s growth projections.

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