Task Description
Length: 1000-3000 words (up to 500 words above 3000 permitted. Numbers and spreadsheets are not included in the word count)
How to submit: Under "Assessments" tab on the FINM4000 portal homepage.
• Please submit the Assignment electronically on the portal
• Please submit written answers and final numbers through "Written Report" link and submit any excel spreadsheets you used in calculating answers through "Excel Files for Report" link. Both of these sections will be marked.
1. Evidence of Group Work
Please see "FIN3000 Example of Group Meeting Record" on the portal under assessments. Each group must provide 3 brief records of group meetings as part of the assignment. These briefly list who was present at meetings as well as tasks and contributions.
• Completing this table is worth 10 marks of your total score
• Please note that all group members need to contribute equally to the task.
• If a group member does not contribute to the task, the group's meeting minutes can be used as evidence to demonstrate this. The student's mark can be reduced by the lecturer if they consider that there is sufficient evidence that they did not contribute.
2. Company Perspective
Consider the sources below and answer the following questions.
Fortescue Metals Group pays up on revived bond deal
a) Consider the 2013 Annual Report of Fortescue. Briefly explain how Fortescue's governance structure is organised. How does the board ensure that company owners are well informed about their operations? Provide one brief example.
b) Based on Sources 2 and 3 can you explain the most likely cause for the variation in Fortescue's operating sales revenue between 2012 and 2013? What do you expect to happen to Fortescue's operating sales in 2014-2015? Why?
c) According to the article Fortescue launched "a 9.75 per cent US$2.3bn senior secured seven-year non-call three bond at a discount of 97.608 to yield 10.25 per cent". What price would they have issued bonds at if the face value of each bond was $1000 and the coupons were annual? Was the bond sold at a discount of 97.608 and why was it sold at a discount?
d) How would JP Morgan have been involved in the Fortescue bond issue? Briefly discuss what functions would they have performed.
Answer the following 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 supporting documents.
All amounts are in $USD. Fortescue is deciding between two iron ore projects in May 2014. 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 40million barrels of crude oil each year. Project B will sell 200 million tonnes of iron ore for the next 5 years and have cost of sales equal to 55% of iron ore revenues. In addition to these cost of sales expenses Project B will use 30 million barrels of crude oil each year. Both Project A and B It 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 July 2014 for the next 5 years. Assume the crude oil will stay at the price it was in June 2014 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.
a) Fortescue is deciding between two iron ore mining projects. Use an excel spreadsheet to find the free cash flows for the following two projects A and B described below from years 0-5.
b) Calculate the NPV for Project A and B and advise which project should be undertaken with:
a. A WACC (cost of capital) of 12%?
b. A WACC (cost of capital) of 25%?
c) What is the IRR for Project A and B with a discount rate of 12%?
d) Based on your analysis in a-c which project should be chosen? Justify your answer with reference to theory.
e) Make a projection for iron ore and oil prices for the next 5 years based on your own research and use sensitivity analysis to evaluate which project should be chosen.
4. Investor Perspective
a) The Security Market Line shows the relationship between a stock's beta and its expected return. Consider the information in the below two tables for 2013.
Risk-free rate (Varies over time) 8%
Security Actual Return (2013) Systematic Risk
Rio Tinto
Share
(RIO.AX) 17.4% 1.29
Market
Portfolio 15.0% 1.00
Westfarmers
Share
(WES.AX) 13.8% 0.68
i) Based on the information above tables and some research comment on the betas of Rio Tinto and Westfarmers and why they are so different.
ii) Based on the information in the tables above graph the SML and indicate where Rio Tinto and Westfarmers would fall in relation to the SML. Should an investor buy these shares based on your analysis? Why or why not?
b) You are trying to value Rio Tinto shares today (April/May 2014). You decide to use the most recent dividend paid by Rio Tinto as Do and assume that this will be the only dividend paid this year. You also estimate that for the next three years dividends will grow at the same rate which they increased by from August 2013 to March 2014. After this (starting in time 4) you estimate dividends will grow at a constant rate of 12% forever. Assume that today the risk free rate is 3%, the expected return to the market is 15% and Rio Tinto's beta is 1. What is the price of a Rio Tinto share today? Based on this price would you purchase the share?