Complete all four parts of the written assignment below.
1. Evidence of Group Work
Please see "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. Financial Literacy
Consider the following two cases:
Jane: A 30-year accountant called Jane has a permanent job earning $75,000 p.a. and wishes to buy her first home costing $650,000. She has savings of $15,000 in her bank account, which she wishes to use as a down payment on her loan. She approaches an Australian bank who is willing to give her a 20-year mortgage at 6.5% p.a., compounded monthly.
Carla: A 35-year old finance analyst called Carla has a permanent job earning $85,000 p.a. wishes to buy her first home costing $650,000. She has savings of $100,000 in her bank account, which she wishes to use as a down payment on her loan. She approaches an Australian bank who is willing to give him a 15-year mortgage at 4.5% p.a., compounded monthly.
a) Calculate the i) monthly repayments and ii) total interest cost over the term of the loan, for Jane and Carla. Show your calculations.
b) Comment on the difference between the total interest expense that Jane and Carla have to pay. Why do you think this difference exists based on finance theory?
3. Company Perspective
Consider the attached sources and answer the following questions.
a) Write a 300-word background on Woodside Petroleum Ltd briefly describing the industry in which the company operates in and its main areas of business (you may wish to refer to CSR issues here). Identify one key opportunity and two key threats to the company from competitors or other factors in 2016-17.
b) Calculate the cash conversion cycle for Woodside Petroleum for the financial year 2016. How does this compare with the cash conversion cycle in 2015? Comment on the company's working capital efficiency relatively to its industry peers.
c) What is one example of a short-term debt financing instrument and one example of a long term debt financing instrument? In 2016, did Woodside predominantly use short term debt or long term debt financing (Refer to balance sheet and note C2 & C3 of the annual report)? Comment on the change in their financing activities from the previous year.
d) Consider the information below concerning a 3.65% p.a. coupon, semi-annual US$1.0 billion bond issued by Woodside Petroleum on 5/03/2015. Assume the maturity date of this bond is 5/03/2025.
Calculate the price of the bond with par value of $1.0bn on 5 March 2018 based on the above information if bonds of similar risk and maturity in the market are yielding 3.1% per annum. The $1.0bn bond discussed in the article comprises 1million bonds of $1000 par value.
i) Is the bond price higher or lower than the par value?
ii) Comment on the initial credit rating of the $1.0 billion at the date of placement (Feb/March 2015) as per the enclosed article. Assume the interest coverage ratio for Woodside has increased from 5 to 25 from 2015 to 2017. Based on this would the credit rating have improved or declined in 2017? (You may need to conduct some research here, especially with regards to the meaning of interest coverage ratio).
e) Consider the three sources below:
- Market return : 9.07%
- Risk-free rate of return: 2.5% p.a
- Woodside Petroleum Shares Price and Beta Data: (in AUD)
- Woodside Petroleum dividend (in USD)
- FX converter: 1 USD =1.31196 AUD
Referring to the above sources, the market return is taken as 9.07% per annum based on ASX200 index return and the risk-free rate in Australia, namely 10-yr government bond is 2.5%. Beta of the company is currently 1.37. Assume also that the total annual dividends paid for last year by Woodside is the sum of the interim dividend of 2017 and the final dividend of 2016 and that the annual dividends will grow at 2.5% for the foreseeable future. What is the current price of Woodside Petroleum shares in AUD? Would you purchase them today?
4. Capital Budgeting
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. The below projects are mutually exclusive.
All amounts are in $USD. Red River Resources is deciding between two iron ore projects in May 2017. Project A has an initial outlay of $15.75 billion and Project B has an initial outlay of $13.75 billion. Project A is projected to sell 160 million tonnes of iron ore for the next 5 years and have cost of sales equal to 50% 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 190 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 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 Jan 2017 for the next 5 years. Assume the crude oil will stay at the price it was in Jan 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.
a) Red River Resources 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 above from years 0-5.
b) What is the Discounted Payback period for each project? Which one is more favourable based on this measure?
c) Calculate the NPV and IRR 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%?
What type of analysis have you just performed?
d) Based on your analysis in a-c which project should be chosen? What is the approximate minimum price of iron ore (per tonne) at which your chosen project should be undertaken at a WACC of 12%?
Attachment:- Source.rar