This assessment is worth 15% of the total subject assessment and is marked out of 100.
Part A (50 Marks)
DecaSport is producing high technique and specialised sport shoes. The company has been conducting research and development of a new model, where the lower mould can automatically adjust itself to avoid foot injury. The model has been tested and the managing board is happy to launch its production if it’s financial viable. The company already spent $800,000 for research and development. The new model will have a five-year lifetime, after that the company will stop its production. The new production machines will need to be bought and are budgeted at $7.5 million but can be used for another 5 years after the production of the new product is finished. The company depreciates fixed assets on a straight line basis to zero.
The company expects to sell 80,000 pairs in the first year at $300 per pair. As the new technique can be potentially followed by competitors, every year the sale quantity is expected to decrease by 10% and the sale price will decrease by 8%. Gross profit on the product is targeted at 60% of sales. While the new model generates a high gross profit rate, the company expects a high level of product returns of 5% on sales. Marketing is one of the major parts of launching this new model. The company decides that the marketing cost of $1.2 million will be allocated annually based on annual units of sales.
As a financial manager of the company, you’re conducting a capital budgeting analysis of the financial viability of the new model. The company shareholders expect a return on investment of 25% pa. The company pays tax at the rate of 30% on profits.
a. Use an Excel spreadsheet to calculate the following criteria, and then consider whether the new model will maximise wealth for the shareholders:
- After-tax cash flows (7 marks).
- Net present value (4 marks).
- Payback period (4 marks).
- Profitability index (3 marks).
- Is it a viable project? Explain your answer (2 marks).
b. Although the company is optimistic about the new model, the board wants to know at what level launching the new model becomes risky. Use an Excel spreadsheet and recalculate after-tax cash flows and net present value for the below scenarios:
(i) Sales units at 10% higher than estimated in the first year (6 marks).
(ii) Sales units at 10% lower than estimated in the first year (6 marks).
(iii) Comments on your findings (4 marks).
(iv) You are required to use after-tax cash flows. Explain why this requirement is appropriate in decision making (4 marks).
c. Regarding buying new production machines at $7.5m to produce the new product, you can pay all at once when the purchasing contract is signed and receive a 5% discount. You can also choose to pay monthly or quarterly. If you pay monthly, you will pay at the end of each month. The monthly payment is $260,000 in the first year and $410,000 in the second year. If you pay quarterly, you will pay at the end of the quarter and the quarterly payment is $670,000 in 3 years. Using a risk adjusted rate of 8% and an Excel spreadsheet, provide a fully worked analysis. Decide and explain which payment option should be undertaken (10 marks).
Part B (45 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).
Australia and New Zealand Banking Group Limited (ANZ) is one of the big four banks in Australia, providing various banking and financial products and services to individual and business customers and playing a substantial role in the financial sector (Yahoo Finance, n.d.). However, together with other big banks within the sector, ANZ has been under the scrutiny of the banking royal commission.
As part of the finance team of ANZ Limited you have been tasked with reviewing and preparing a report on the capital structure of the firm to critique whether the firm has been successful in maximising wealth generation for shareholders.
Your report should be approximately 1000 words (in total) and cover the following areas:
1. Using data from the firm’s 2017 financial year annual report and other sources assume that the firm has a Beta of 1.37 (Yahoo Finance) and that capital return on the market for 2017 was 8.2%:
a. Categorise the ANZ’s current capital structure into debt and equity using its 2017 balance sheet. (6 marks)
b. Calculate the firm’s after-tax Weighted Average Cost of Capital (include any assumptions you have made in developing this metric). (4 marks)
c. Using the CAPM calculate whether the firm is providing an appropriate return given its risk. (4 marks)
d. Compare the firm’s capital structure with at least one other firm operating within a similar industry (6 marks).
2. Use five (5) key financial ratios to evaluate ANZ Limited’s performance. For each ratio used, you have to justify why these ratios are relevant to your evaluation (10 marks).
3. Outline and discuss any significant changes that have occurred to the firm’s capital structure during the past three years. What can we learn from these changes? (5 marks).
4. In the 2017 Annual Report, on page 10, ANZ’s Directors highlighted that they care about integrity and accountability. On page 35, they described the reputation risk facing by the business and how the business manages this risk. Given the impact on the share price of ANZ following the scandals identified by the banking royal commission during 2018, discuss whether you believe ANZ’s 2017 annual report adequately or properly represents the reputation risk that ANZ is facing and whether the firm has been acting with integrity and accountability. In your response critically identify some of the key findings from the royal commission and evaluate the extent to which the firm has been successful in managing its reputation risk (approx. 450-600 words) (10 marks).
Presentation – 5 marks
You are required to provide a quality presentation of the total assignment including using the correct report format for Part B, referencing throughout and a bibliography.
Please reference any sources of information you use with APA referencing style.