FIN203 - Fortescue Metals Group Limited’s Case Study - Written Assignment and Excel Spreadsheet - Corporate Finance Assignment Help

Assignment Task:

1. Company Perspective
Source 1: Fortescue Metals 2017 Annual Report

Source 2: Login to Open Athens and select the “Morningstar” link.

Search for “FMG” (Fortescue Metals) and click on the company.
You will need to click on below tabs (on left hand side) and find relevant information to answer
following questions:

• Financial Data
• Dividend History
• Other tabs

Source 3:
Why Fortescue Metals Group Limited share price may have further to fall Brendon Lau | March 5, 2018 |

Fortescue Metals Group Limited’s (ASX: FMG) share price could have more room to drop. [China's crackdown on pollution, "subdued" Chinese construction activity and global trade tensions have forced Fortescue to lower its iron ore price guidance for fiscal 2018. Fortescue released the updated guidance on Tuesday, saying there had been a “slower than anticipated recovery in contractual realisations”. A spokesman for Fortescue metals said it now expected to receive prices for its iron ore equal to about 65 per cent of a widely accepted industry benchmark price for fiscal 2018.]

1. Write a 200-word background on Fortescue Metals briefly describing the industry in which the company operates in and its main areas of business. Identify one key opportunity and two key threats to the company from competitors or other factors in 2017-18. Use Morningstar and other sources in your analysis. 
2. Calculate and discuss how Fortescue Metal’s cash conversion cycle has changed from 2016 2017. What is the cause of this change? Do we need any additional comparison data to make our analysis more complete?

3. If Foretescue Metals issues 5-year annual coupon bonds with a face value of $1000 and a coupon of 3% p.a. today and the yield to maturity on bonds of similar risk and maturity is 4%, how much will each bond sell for?
4. If you purchased the Fortescue bonds from d), how would a downgrade in the credit rating (from say BBB to BB) affect the price of these bonds? Would these Fortescue bonds be an attractive asset for investors? Why or why not?

1. Assume the return to the market portfolio to be 9%, the risk-free rate is 0.25% and the Fortescue share beta is 1.12. Assume also that Fortescue will pay a lump sum dividend in the next period (2018) equal to the total Fortescue dividends per share paid in 2017. Assume that dividends will grow at the same rate as the Fortescue 3-year operating revenue grew in 2017 for the foreseeable future. Consider the below sources and answer the question:

Go to Morning star>FMG> select the “Dividend History” tab to find most recent dividends
Go to Morning star>FMG> select the “Financial Data” tab > select the “Growth Rates” tab to find the operating revenue growth rate

2. Capital Budgeting

Read the following case study and answer the questions with the aid of excel spreadsheets. You also need to answer the below questions in your word file and refer to your excel spreadsheets as a supporting document. Upload your ONE excel spreadsheet per group separately under “Excel
Submissions”.

All amounts are in $USD. Fortescue is deciding between two iron ore projects in March 2017. Project A has an initial outlay of $13.75 billion and Project B has an initial outlay of $15.75 billion. Project A is projected to sell 155 million tonnes of iron ore for the next 5 years and have cost of sales equal to 40% of iron ore revenues. In addition to these cost of sales expenses Project A will use 40 million barrels of crude oil each year with each barrel costing $100. Project B will sell 200 million tonnes of iron ore for the next 5 years and have cost of sales equal to 45% of iron ore revenues. In addition to these cost of sales expenses Project B will use 30 mmillion barrels of crude oil each year with each barrel costing $100. Both Project A and B will also incur additional working capital expenses at the beginning of the projects of $400,000 and recover these at the end of year 5. Assume the iron ore will stay at the price it was in March 2017 for the next 5 years. Both mines
have depreciation costs of $2,000,000,000 a year. The tax rate is 30%. All cash flows are annual and are received/paid at the end of each year.
1. What are the Free Cash Flows to Project A and B? (Refer to excel spreadsheet) 
2. What is the NPV of Project A and B? Which project should be chosen and why? Assume the discount rate is 12%.

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