Source 1: Annual Report 2020

https://www.kogancorporate.com/

Source 2: Kogan.com Ltd. (KGN.AX) Yahoo Finance

https://au.finance.yahoo.com/quote/KGN.AX/

a) Consider the 2020 Annual Report of Kogan.com Ltd. (KGN). Briefly illustrate how KGN’

governance is organized. Do you notice any strategies in place to align manager and

shareholder interests at KGN based on the Annual Report? Provide one example. (3 marks)

b) What is the Net Working Capital for KGN both in 2019 and 2020. What type of current asset

management strategy is the company pursuing? Explain why and what are the pros and

cons of this strategy. (3 marks)

c) Consider the KGN 2020 Annual Report. Identify two of the major risks discussed. Are these

risks systematic or unsystematic? Why? (2 marks)

d) Michael Bain is one of your clients and he is interested in purchasing the ordinary shares of

KGN which is currently priced, in the stock market, at $17.99. Assume that the total dividend

paid by KGN in the 2020 year were paid as a lump sum (at once) today. You estimate that

dividends will grow at a constant rate of 3.5% forever. Assume that today the Australian 10Y

Government bond has a yield of 1.15%, the market risk premium is 4.55% and the beta of

KGN is 0.72. Based on this price would you advise your client to purchase the share? Why

or why not? (7 marks)

e) What was the market capitalization of KGN on the 29 January 2021, assuming that the total

number of share outstanding is the same as per the end of the 2020FY? (Use the closing

price on that day). (2 marks)

f) What type of source (non-current) is KGN primarily using to finance its operations? What

are the advantages and disadvantages of this source of financing? (3 marks)

g) Assume that KGN would like to replace its non-current “lease liabilities” (2020) with a new

issuing of bonds. Assume that the issue will have a coupon rate of 5% with a 15 year

maturity. Assume this are semi-annual coupon bonds and each have a face value of $1,000

and the required rates of return for similar bonds in the market is 4.5%. What would be the

issuing price of these bonds? How many bonds KGN will have to issue in order to replace

its non-current “lease liabilities”? (5 marks)

2. Capital Budgeting – Blackmores Group [25 marks] EXCEL

Answer the below questions in your word file and refer to your excel spreadsheet as a supporting

document. Upload your excel spreadsheet under “Excel Submissions”.

All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluating

investing in a “Mega Warehouse” project in Australia. KGN has already identified two existing

warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN

asked “Axiom Ltd.” to conduct a technical due diligence. “Axiom Ltd.” is asking $100,000 as a

fixed fee for its consulting services.

Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85

million.

Project A will generate additional revenues of 45 million starting at the end of year 1 until the

end of year 10. It will also incur additional working capital expenses of $1million immediately,

this working capital will be recovered at the end of the project. Project B will generate additional

revenues of 25 million starting at the end of year 1 until the end of year 10. It will also incur

additional working capital expenses of $2million immediately, this working capital will be

recovered at the end of the project.

The operating costs of both projects will be 30% of the revenues from year 1-10. Both

investment will be depreciated on a straight-line basis over ten years to 0 book value. KGN has

estimated that the “Mega Warehouses” can be sold at the end of year 10 respectively for $125

million (Project A) and $100 million (Project B). The tax rate is 30%. All cash flows are annual

and are received at the end of the year. The weighted average cost of capital for both projects

is 6%.

a) Calculate the FCFs to each project (10 marks)

b) What is the NPV for each project? (5 marks)

c) What is the Discounted Payback Period for each project? (2.5 marks)

d) What is the IRR for each project? (2.5 marks)

e) Assume that the risk of investing in these “Mega Warehouses” is higher than the overall risk

of the company, what would happen to the discount rate and consequently NPV of the two

projects? Why? (2 marks)

f) Suppose that KGN’ management payback rule is 7.5 years. Based on your analysis in b),

c) and d) which project should be chosen? Justify your answer with reference to theory.

What other factor might affect the final decision? (3 marks)

https://www.kogancorporate.com/

Source 2: Kogan.com Ltd. (KGN.AX) Yahoo Finance

https://au.finance.yahoo.com/quote/KGN.AX/

a) Consider the 2020 Annual Report of Kogan.com Ltd. (KGN). Briefly illustrate how KGN’

governance is organized. Do you notice any strategies in place to align manager and

shareholder interests at KGN based on the Annual Report? Provide one example. (3 marks)

b) What is the Net Working Capital for KGN both in 2019 and 2020. What type of current asset

management strategy is the company pursuing? Explain why and what are the pros and

cons of this strategy. (3 marks)

c) Consider the KGN 2020 Annual Report. Identify two of the major risks discussed. Are these

risks systematic or unsystematic? Why? (2 marks)

d) Michael Bain is one of your clients and he is interested in purchasing the ordinary shares of

KGN which is currently priced, in the stock market, at $17.99. Assume that the total dividend

paid by KGN in the 2020 year were paid as a lump sum (at once) today. You estimate that

dividends will grow at a constant rate of 3.5% forever. Assume that today the Australian 10Y

Government bond has a yield of 1.15%, the market risk premium is 4.55% and the beta of

KGN is 0.72. Based on this price would you advise your client to purchase the share? Why

or why not? (7 marks)

e) What was the market capitalization of KGN on the 29 January 2021, assuming that the total

number of share outstanding is the same as per the end of the 2020FY? (Use the closing

price on that day). (2 marks)

f) What type of source (non-current) is KGN primarily using to finance its operations? What

are the advantages and disadvantages of this source of financing? (3 marks)

g) Assume that KGN would like to replace its non-current “lease liabilities” (2020) with a new

issuing of bonds. Assume that the issue will have a coupon rate of 5% with a 15 year

maturity. Assume this are semi-annual coupon bonds and each have a face value of $1,000

and the required rates of return for similar bonds in the market is 4.5%. What would be the

issuing price of these bonds? How many bonds KGN will have to issue in order to replace

its non-current “lease liabilities”? (5 marks)

2. Capital Budgeting – Blackmores Group [25 marks] EXCEL

Answer the below questions in your word file and refer to your excel spreadsheet as a supporting

document. Upload your excel spreadsheet under “Excel Submissions”.

All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluating

investing in a “Mega Warehouse” project in Australia. KGN has already identified two existing

warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN

asked “Axiom Ltd.” to conduct a technical due diligence. “Axiom Ltd.” is asking $100,000 as a

fixed fee for its consulting services.

Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85

million.

Project A will generate additional revenues of 45 million starting at the end of year 1 until the

end of year 10. It will also incur additional working capital expenses of $1million immediately,

this working capital will be recovered at the end of the project. Project B will generate additional

revenues of 25 million starting at the end of year 1 until the end of year 10. It will also incur

additional working capital expenses of $2million immediately, this working capital will be

recovered at the end of the project.

The operating costs of both projects will be 30% of the revenues from year 1-10. Both

investment will be depreciated on a straight-line basis over ten years to 0 book value. KGN has

estimated that the “Mega Warehouses” can be sold at the end of year 10 respectively for $125

million (Project A) and $100 million (Project B). The tax rate is 30%. All cash flows are annual

and are received at the end of the year. The weighted average cost of capital for both projects

is 6%.

a) Calculate the FCFs to each project (10 marks)

b) What is the NPV for each project? (5 marks)

c) What is the Discounted Payback Period for each project? (2.5 marks)

d) What is the IRR for each project? (2.5 marks)

e) Assume that the risk of investing in these “Mega Warehouses” is higher than the overall risk

of the company, what would happen to the discount rate and consequently NPV of the two

projects? Why? (2 marks)

f) Suppose that KGN’ management payback rule is 7.5 years. Based on your analysis in b),

c) and d) which project should be chosen? Justify your answer with reference to theory.

What other factor might affect the final decision? (3 marks)

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