This assessment is worth 15% of the total subject assessment and is marked out of 100.
Part A (40 Marks)
The management team of Online Jeans Sales have just received a new proposal from one of the firm's marketing managers. The proposal outlines a new investment to create a Custom Finish Laboratory. Through the lab, online customers will be able to select an option to personalise their jeans in a range of finishes. This proposal was made following the completion of market research costing $100,000.
The capital cost to establish the Custom Finish Lab will be $1,650,000. This cost will depreciated on the straight-line basis to zero over the 8 year productive life of the lab. It is estimated $100,000 will be recovered at the completion of the project as the salvage value of the lab.
In the first year of operations, the new lab is expected to increase the firm’s revenues by $1,445,000. In addition to depreciation, the costs to run the lab will include additional staff costs ($900,000 p.a.), materials costs ($210,000 p.a.), marketing costs ($46,000 p.a.), and other costs ($25,000 p.a.). Over the 8 year life of the lab, these revenues and expenses are expected to change. The following summarises the base-case, worst-case and best-case scenarios concerning these changes:
Base-case Worst-case Best-case
Revenues Increase by 10% p.a. Increase by 6% p.a. Increase by 15% p.a.
Costs (other than depreciation) Increase by 6% p.a. Increase by 10% p.a. Increase by 3% p.a.
The firm’s tax rate is 30% and all analysis should be based on after-tax figures. The firm requires a 16% required rate of return on all potential investments.
• For the base-case, worst-case, and best-case scenarios calculate the following:
o After-tax cash flows (9 marks).
o Payback periods (6 marks).
o Discounted payback periods (6 marks).
o Net present values (6 marks).
o Profitability index (3 marks).
• Other than modelling ‘best case’ and ‘worst case’ projections, discuss and describe what other capital budgeting approaches could be taken to allow for the increased riskiness of the estimated future cash flows (5 marks).
• Discuss whether the above proposal should be accepted. Discuss any further information that you may require to help you make the accept/reject decision about this project (5 marks).
Part B (60 Marks) Report
For this assignment, you are encouraged to use the information provided on the firm's corporate websites together with the following sources:
• OneSource: Global Business Browser (available through Library Databases: http://library.csu.edu.au/services/find-books-and-other-resources/databases/subject/business)
• Australian Stock Exchange http://www.asx.com.au/
• Yahoo Finance https://au.finance.yahoo.com/
• Reuters http://www.reuters.com/finance/markets
News sources such as those secured through the Library's ANZ Newsstream and Factiva databases are also likely to be relevant (http://library.csu.edu.au/services/find-books-and-other-resources/databases).
Show all your calculation on the annexure.
Your report should include:
• A brief executive summary.
• Body (use appropriate headings and sub-headings as relevant sign-posts).
The following guide is useful in providing further information on effective report writing: https://interact2.csu.edu.au/webapps/blackboard/execute/displayLearningUnit?course_id=_22905_1&content_id=_1053355_1
APN Outdoor Group (APO) is an ASX Listed firm which specialises in offering advertising services including digital billboards, static roadside billboards, transit advertising, rail advertising and airport advertising throughout Australia and New Zealand (Reuters, 2017). In 2016, the firm's sales exceeded AUD$300 million.
Being part of the finance team of APN Outdoor Group, you have been tasked with reviewing and preparing a report on the capital structure of the firm and critique whether the firm has been successful in maximising wealth generation for shareholders. An excelloent source for information specifically on the APN Outdoor Group is the analysis provided by the Wall Street Journal at http://quotes.wsj.com/AU/XASX/APO (Note: this site opens at an overview of APO.AX and historical financial data and ratios for the firm can be accessed by clicking on the link to 'All Sections' on the right).
Your report should be 1000 words and cover the following areas:
• Assume that for the 2016 year the firm APO.AU has a Beta of 1.3, that return on the ASX market was 7%, and that the yield on Australian Government bonds was 2.4%.
• Using data from the firm's 2016 annual report:
o Categorise the firm's current capital structure into debt and equity.
o Calculate the firm's after-tax Weighted Average Cost of Capital.
• Compare the firm's capital structure with at least one other firm operating within their industry.
• Critically analyse other key financial ratios for APN.
• Outline any significant changes to have occurred to the firm's capital structure during the past three years.
• Critically evaluate the extent to which the firm has been successful in maximising wealth for shareholders in the past three years.
• Discuss why it is important for the firm to minimise their cost of capital.
• Recommend possible ways in which the firm could adopt an alternative capital structure and lower their cost of capital.
This assessment task covers Topics 6 through 10. This will provide an opportunity to apply the concepts in an authentic scenario that you may encounter in the workplace and also:
• be able to evaluate and explain the congruence of accounting, finance and treasury functions.
• be able to demonstrate appropriate communication skills in the context of corporate finance.
• be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.
Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.
Use the following rubric as guidance:
Problem types/criteria HD( 85% to 100%) DI (75% to 84%)
CR (65% to 74%) PS (50% to 64%) FL (0% to 49%)
Be able to determine capital budgeting cash flows and calculate various measures relating to capital budgeting problems; Be able to identify and determine individual cost of capital and compute weighted cost of capital.
Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problem using appropriate finance methodology with no errors.
Identify and determine the cost of capital and be able to compute the cost of capital correctly with no flaws. Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with very few errors.
Identify and determine the cost of capital and be able to compute the cost of capital correctly, with minor flaws. Identify most of the incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with few errors.
Identify and determine most of the cost of capital and be able to compute the cost of capital correctly, with minor errors Identify a majority of the capital budgeting cash flows and calculate some of the measures relating to capital budgeting problems using appropriate finance methodology.
Identify and determine some of the cost of capital and be able to compute weighted cost of capital, with substantial errors. Fail to Identify the incremental capital budgeting cash flows and fail to calculate the measures relating to capital budgeting problems using appropriate finance methodology.
Fails to identify and determine most of the cost of capital. Does not demonstrate the ability to compute weighted cost of capital, contains multiple and substantial errors.
Be able to analyse the elements in the business environment that at a particular time cause the cost of the individual source of capital to be high or low.
Explicit and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Analysis of elements demonstrates a very broad and deep knowledge of the topic Clear and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Clear analysis of most key elements in business environment that cause cost of the individual source of capital to be high or low. Analysis lack explicit detail. Limited analysis of some elements in business environment that cause cost of the individual source of capital to be high or low. No analysis of relevant elements, fails to make links to the specific business environment.
Use appropriate financial technology such as excel spreadsheet to analyse data and and gather information relevant websites to conduct financial analysis.
Data used skilfully and demonstrates explicit integration into the analysis. The correct answers are derived using multiple relevant sources and the results are presented in a clear and professional manner. Data used competently and demonstrates integration into the analysis. The correct answers are derived using relevant sources and the results are presented in a clear and professional manner. Data sources used competently. Most correct results are derived using relevant sources but they may be some minor errors Data sources used competently. Most correct results are derived using relevant sources but they may be some major errors Data sources are not used competently. Most results are incorrect and derived using irrelevant sources. Contains major errors
Analyze business situations
Reach reasonable conclusion and recommendations on an alternative capital structure to lower cost of capital.
Quantitative and qualitative analysis persuasively and explicitly supports the conclusion and recommendations incorporating all factors determining cost of capital. Quantitative and qualitative analysis is use in a clear and concise manner to make reasonable conclusion and recommendations incorporating most of the factors determining cost of capital. Quantitative and qualitative analysis is used to make reasonable conclusion and recommendations incorporating most factors determining cost of capital. Quantitative and qualitative analysis is used to make reasonable conclusion and some recommendations. Quantitative and qualitative analysis is too simplistic or convoluted.
Use of literature/market research/evidence of reading.
Has developed and justified own ideas based on a wide range of sources which has been thoroughly analysed, applied and discussed. Reference list of an extensive rant of resources used. Literature is presented with soundly based criticisms, in a descriptive way and indicates a good understanding of the literature. Literature is presented with some criticisms, in a descriptive way and indicates a few limitations of understanding. Literature/market research is presented with some criticisms, in a descriptive way and indicates few limitation of understanding. No evidence of literature or irrelevant to the research question
Effectively and appropriately present your material and results and clearly convey your understanding of the results to the reader. All references and resources acknowledged and professionally presented using APA (6th ed) referencing. Output is logically argued, and well written in a manner that very effectively conveys the key outcomes and recommendations to the end user. All references and sources acknowledged and professionally presented. Well written argument with references and sources acknowledged and output professionally presented. Well written with a logical argument and with references and sources acknowledged and professionally presented. Written in clear language with references and sources acknowledged and professionally presented. Does not meet minimum (PS) expectations
As per the CSU Referencing Policy, each assessment item must indicate the style of referencing required for each task. Students should be directed to a single Guide that supports the required referencing style for each assessment task. For those tasks requiring the use of APA, students should be directed to the CSU Referencing website at http://student.csu.edu.au/study/referencing-at-csu
This assignment must be submitted through Turnitin.
It is recommended that your name and student ID are included in the first page and the pages should be numbered.
Further details about submission in Turnitin are provided in online submission.