Objective
The objective of this exercise is to enhance students' understanding of some of the main issues in corporate finance and related business decision making process.
Additional Information:
- The applicable interest rate on bank overdraft is 10% per annum and has monthly compounding.
- The commercial bills are currently yielding 8% per annum. They will mature on 31st December 2018 however, will be replaced by newer issues on that date.
- Bank overdraft and commercial bills may be assumed to run in perpetuity.
- The Bonds are currently priced at $100.30 each and pay coupons each year on 31" March, 30th June, 30th September and 31" December.
- The coupon payments due to be paid on 30 June 2018 have been paid.
- The average dividend yield of stocks in the market index is 7.5% and the dividends are 70% franked.
- The applicable company tax rate is 30% and the proportion of tax collected from the company and is claimed by shareholders is .70.
- The current yield on 1 Year T-Bills is assumed to be 4.5% per annum.
Requirements
a) Capital Budgeting Decision:
(i) Which of the two options should ANL pursue?
Steps part (a):
The first part of the analysis requires you to work out the Weighted Average Cost of Capital (WACC) for ANL with the help of the given information and given data.
Secondly, evaluate the two options using NPV analysis and clearly identify which of the two alternatives is better for ANL.
b) Capital Structure Decision:
In the next phase, ANL aims at expanding business beyond Melbourne and cover all the major cities in Australia. ANL needs to raise more capital for the purpose. However, the executives worry about high debt in the current capital structure and are debating if they should raise sufficient money through common stock only. They intend to use new capital for both (a) further expansion and (b) repaying debt. Doing so will eventually convert company into an all-equity company.
(i) Calculate the required return on capital if ANL were to become an all-equity firm.
In light of MM propositions in the perfect world but with corporate taxes, discuss your findings in both the possible scenarios about:
(a) WACC and
(b) Return on equity.
Essentially you need to report (no more than 250 words) if your workings validate the arguments forwarded in MM theory.
(iii) Give your opinion if ANL should convert into an all-equity firm and explain why? (no more than 250 words)
c) Dividend Policy Decision:
Another aspect that ANL executives are perplexed about is the Dividend policy they should adopt.
(i) Give your advice with reasoning to the ANL executives if they should
pursue dividend distribution or retention as their dividend policy. (no more than 250 words) (5 marks)
d) Business Report overall quality
The assignment is to be presented as a business report to both OFC and ANL executive management. This report needs:
- Page numbering
- Informative heading and sub-headings
- Numbered sections
- Labeled graphs and tables (if used)
- Executive summary
- Table of contents
- Reference list
The report must use a font/fonts suitable for business communication. The reference style to be used is Harvard style referencing (author-date).
Your main report will have 3 - 4 pages (2,500 words approx.) excluding appendix and will be professionally presented. A concise, relevant and visually appealing paper is essential for business communication.
Essential Contents:
Your report needs to set out the following at it least:
1. An executive summary
2. A table showing the calculation of ANL's WACC using market data / CAPM.
3. A selection of NPV spreadsheets used in the NPV analysis of both the Options: 1 & 2.
4. A recommendation to ANL's management as to which option it should adopt.
5. Calculation of ANL's WACC when financing is all-equity.
6. Discussion about MM propositions, and your opinion about capital structure and dividend policy.
Attachment:- Corporate Finance.rar