Assessment Details:

 

1-    CAPM calculations 
Use figures from the annual report to calculate the company’s cost of equity. • You will have to either calculate or source for the beta of the company. You can try www.morningstar.com.au or www.reuters.com. If you are using the beta from an online source, you have to investigate the time period of their calculations. 
•    You can use the 10-year Australian government bond for the risk-free rate. 
•    Your Rm must be the same as the previous section.  
Include a table to show clearly the time frames of the variables used to calculate CAPM. 

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Do not include any special dividends as it is a once-off occurrence. Do not include franking credits include the page number of the annual report where you have obtained the figures 
Always use numbers from the main Income Statement and Statement of Financial Position.  
Use statutory, not underlying and do not use adjusted figures.  
If your company has many divisions/operations, you have to use the numbers of the main group.  
You may use the calculated EPS from the annual report, but check if they have used adjusted figures and note in your report what they have adjusted for.  
Make sure your D1 is the final and interim payout; without special dividends. Use the pay date, not ex-dividend date for dividends. Make a note in your report that as the payments are 6 months apart, the numbers do not fit the DGM formula well.  
P0 is the start of the reporting year or end price of the previous year; this would be in the annual report.  
3-    Selection of Recalculation 
Which one do you feel is more accurate/appropriate and why? Your reasoning must be based on your identification of shareholders from the previous section.  Use this to calculate the WACC. 
4-     Calculation of Rd 
Business loan rates vary with the terms of the contract. However, you can use the publicly available information as an estimation. 
Review the Statement of Financial Position in the annual report and look at the Non-current liabilities. You need to identify maturity, security, variability, and rate. 

Maturity - you will need to identify all the ones 1 year or less. These are to be ignored. We are only identifying the long-term debts. Typically, these would be in the borrowings section. You will have to read the notes to the items.  
Security – you need to identify if the borrowings are secured or not. Secured borrowings are at a lower rate.  
Variability – you need to identify if the various instruments are fixed or variable loans. You cannot use the interest repayments to ‘reverse’ engineer the rate.  
Rate - need to establish the base rate. There is no fixed approach, but you can follow these guidelines. Make sure to do the work and show evidence of it in your case study. You cannot be awarded marks if you do not present your workings: Look at the annual report for clues. Often they will mention the name of the bank or the rates used. You can only take the rates stated in the annual report if the rates are fixed. If not, you will have to do some research online.  
Bonds- for bonds you must attempt to calculate the yield to maturity and use that as rate. The week 6 tutorial will cover the theoretical explanation on how to do it. You can use Thomson Reuters Eikon to source the bond yield to maturity. 
Next, you need to rank the loans in order and apply a margin. Doing some research to justify the margins will earn you full marks for this section. 
 
5-    Comment on Re vs Rd 
What do you think the company would prefer? Are they able to increase their borrowing levels? 
What would the shareholders’ reaction be if the company were to increase its debt levels? 

6-    Calculating WACC 
How does the calculated cost of capital confirm your observation of the market’s reaction to the capital projects announced by the company?  

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  • Posted on : November 18th, 2018

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