BFF5956 Understanding The Corporate Financing Decisions

Assignment Task

CORPORATE FINANCING DECISIONS

This individual assessment task is designed to test students’ achievement of learning outcomes 1-5

As the financial analyst of the company that you already selected in your group assignment, you are required to complete a report to the senior management of the company.

PART ONE: CORPORATE GOVERNANCE

1.1. Describe the composition of your company’s board of directors.

1.2. Does your company have an effective board of directors? Justify your answer using different measures, which might include board independence, board size, board busyness, board experience, board gender diversity, etc., in comparison with the company’s competitors.

You have access to large amounts of publicly available information about the company you selected. This publicly available information includes but is not limited to, annual reports, information releases to the ASX, and publicly available analyst reports.

PART TWO: RISK MANAGEMENT AND INTERNATIONAL CORPORATE FINANCE

Your company is considering expanding into Thailand due to its business-friendly environment. The new facility would require an initial investment in fixed assets of 5 billion Thai baht. The fixed asset investments would be fully depreciated on a straight-line basis over the eight (8) years that the facility operates. First-year revenue from the facility is expected to be 6 billion Thai baht and grow at 10% per year. The cost of goods sold would be 35% of revenue. The other operating expenses (outside of depreciation) would amount to 12% of revenue. Net working capital requirements would be 10% of sales and be required the year prior to the actual revenues. All net working capital would be recovered at the end of the eighth year. Assume that the tax rates are the same in the two countries.

2.1. Your team manager wants you to determine the NPV of the project in AUD using two methods:

• Method 1: Discount the net cash flows at the Thai baht cost of capital and then convert to AUD at the applicable spot rates.
• Method 2: Convert the net cash flows to AUD at the forward rates and then discount the cash flows using the AUD cost of capital that you already calculated in the group assignment.

You will need to obtain data on the THB-AUD spot exchange rate as well as risk-free rates on AUD and THB. Data on the AUD-THB spot exchange rate is available at Bloomberg’s website under Markets/Market data/Currencies. Data on risk-free rates on AUD and THB are available at under Markets/Bonds/World Government Bonds.

2.2. Please answer question 2.2.1 if your calculated NPVs in question 2.1 are the same, or answer question 2.2.2 if your calculated NPVs in question 2.1 are different.

2.2.1. Provide reasons and assumptions to justify why the calculated NPVs using the two methods are the same.

2.2.2. Provide reasons and assumptions to justify why the calculated NPVs using the two methods are different

2.3. Discuss the exchange rate risk associated with this project that your company is exposed to and propose hedging strategies using currency forwards and options contracts. Do you recommend that the company hedge the exchange rate risk using forwards or options contracts? Justify your recommendation. (Note: no calculation is required.)

In answering Part Two, you will need to clearly state and justify all assumptions made.

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