Assignment Task :

QUESTION 1

“Virgin Australia, Country's No. 2 Airline, Enters Bankruptcy Amid Virus Woes; Airline hopes to recapitalize and emerge in stronger financial position

Wall Street Journal; New York, N.Y.; 21 Apr 2020.

SYDNEY—Australia's second biggest airline, Virgin Australia Holdings Ltd., said Tuesday that it is entering voluntary administration, one of the first big airlines to seek bankruptcy protection as the coronavirus pandemic upends global travel.

The airline's move comes after it failed to secure the required financial assistance from state and federal governments in Australia. It appointed members of Deloitte to serve as voluntary administrators, and hopes to recapitalize the business and emerge in a stronger financial position…”

You are the CEO of a US-based airline which is a leading global provider of cargo airline, passenger charter airline, and aircraft leasing services. The airline currently has no branch or business operated in Australia but has an intention to make a takeover bid for Virgin Australia and becomes the potential new owner of Australia's second major carrier. The airline first needs to set up a proper business in Australia to accommodate the dramatic risks in this business. Before the airline makes the takeover bid, the management teams decide to spin off its aircraft leasing business and focus on cargo and passenger charter airline.

REQUIRED:

(a) Identify the appropriate business structure for the airline with reasons. 

(b) Briefly explain any two pros and cons of your proposed business structure.

(c) Define horizontal, vertical and conglomerate acquisition and identify the type of acquisition for the airline with reasons.

(d) What is your expectation of the market reaction to the announcement of a spin-off? Justify your answer.

 

QUESTION 2

The Jackson Company is considering producing a new product. It has recently completed a $500,000 two-year market study to judge the likely popularity of the new product. Based on the results of the study, Jackson has estimated that 20,000 units of its new product can be sold annually over the next eight years at a price of $8,604 each. Variable costs per unit are $7,520 and fixed costs total $11.63 million. Working capital specifically for this project is estimated to be $2.23 million and will be returned at the end of the project’s life. 

The project requires the purchase of a new machine costing $38 million. The machine will be fully depreciated using a straight-line method over its life of eight years. The company expects the machine to have a market value of $680,000 at the end of its life.

The tax rate applicable to Jackson is 33%. The after-tax discount rate is 11% per annum.

 

REQUIRED:

(a)  Advise if the cost of the marketing study should be included in the project evaluation? Explain.

(b)  Estimate the initial investment outlay of the project.

(c)  Estimate the annual after-tax operating cash flow of the project.

(d)  Estimate the terminal-year net cash flow.

(e)  Calculate the NPV of the project and advise if the project should be undertaken.

 

QUESTION 4

“SoftBank Plans $4.8 Billion Share Buyback Following Pressure From Elliott; The proposed share buyback isn't as large as the one urged by the activist shareholder

Wall Street Journal; New York, N.Y. [New York, N.Y] 13 Mar 2020.

TOKYO—SoftBank Group Corp. said it would spend as much as ¥500 billion ($4.8 billion) to buy back up to 7% of its own shares, following plunging stock prices and a pressure campaign from one of the world's most aggressive activists.”

“Stock-Buyback Plans Shrink; The new coronavirus may threaten companies' buyback plans—though a down market could also create a buying opportunity

Wall Street Journal (Online); New York, N.Y. 09 Mar 2020.

U.S. corporations are signalling a reduced appetite for stock buybacks this year, undermining a pillar of support for stocks at a time of heightened volatility.

Companies authorized around $122 billion in future buybacks through February, according to data compiled by equity research firm Birinyi Associates, marking a nearly 50% drop from the same period a year ago and representing the slowest pace in three years…”
 

REQUIRED:

(a) What are the benefits of share buybacks? You are the CEO of SoftBank. While having lots of firms suspend buybacks under current market conditions, will you suspend the share buyback plan? Justify your answer.

(b) Under the imputation tax system, Jason is an Australian investor who receives a fully franked dividend payment of $6,000. If Jason’s personal tax rate is 19% and the company tax rate is 30%, how much of this payment does Jason receive net of taxes?

 

QUESTION 5

You are the CFO of Dandenong Dairy Ltd. The company has an interest rate on its debt of 8 per cent per annum. The systematic risk of its equity is 1.4 and the effective company tax rate is 0.20. 30 per cent of its funding is provided by debt, while 70 per cent is provided by equity. The risk-free interest rate is 4 per cent per annum. In calculating its cost of capital, Dandenong Dairy has obtained two expert opinions as to the market risk premium (including the franking premium). One expert suggests that the market risk premium is 2 per cent per annum, while the other suggests that the market risk premium is 5 per cent per annum.

 

REQUIRED:

(a) What is Dandenong Dairy’s cost of capital based on these expert’s opinions of the market risk premium? Show all workings. 

(b) The first expert also suggests that “It is obvious that the companies should use as much debt as possible. It is cheaper than equity and the interest is tax deductible as well.” Do you agree with the statement? Justify your answer.

(c) When can the cost of capital for Dandenong Dairy be a valid measure of the cost of capital for a new project?

 

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  • Posted on : June 19th, 2019

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