GB550
Financial Management Subject Name
Subject Name Subject N Trimester 1, 2016
Assessment Information Assessment 2
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Session
Information
Total Marks Group Research Project
100 Marks
Weight
. 30%
Due Date Sunday Week 10, by 8pm AEST
.
Group Research Project
Submission and Assignment Structure
• This is an assignment designed for groups of three. Each group needs to complete Part 1 and 2 below.
• The Group Research Project needs to be handed up by one group member by
Sunday Week 10, by 8pm AEST on the portal home page under the
“Assessment 2” link.
• Please ensure the name of all group members is on the submitted assignment
• You need to do research of your own to do some parts of the assignment
• Use Harvard referencing if you are using information from another source in the form of in-text referencing and include a reference list at the end of the assignment. You do not need to reference lectures and tutorials.
o Marks are awarded for correct use of in text referencing and a reference list at the end of the assignment.
o Please consult “Student Learning Resources” uploaded on Moodle with the assignment for assistance with referencing and plagiarism.
• The assignment will go through turnitin, which means that any plagiarism or collusion will be traced and penalised o Please Policy for a definition of plagiarism and the consequences: http://kbs.edu.au/CurrentStudents/SchoolPolicies/InformationforallS tudents/StudentMisconductPolicy/tabid/445/Default.aspx
• If you cannot find a partner for this project please consult your lecturer
Some useful links are listed on the course outline and also include:
• Additional reading of relevant sections of the textbook
• News sources (some suggestions)
o http://www.theaustralian.com.au/business o http://www.abc.net.au/news/business/
o http://www.bloomberg.com/news/australia-newzealand/ o http://www.reuters.com/finance
o http://online.wsj.com/public/page/news-businessus.html?mod=WSJ_topnav_business_main
o http://www.economist.com/business-finance o http://www.asx.com.au/
o http://au.finance.yahoo.com/
PART 1: Finance in the News [40 marks]
In your group of three maintain a portfolio of three financial news articles and critically evaluate how the financial issue in each article relates to the theory studied in class. Analyse similarities, differences between issues in the articles studied and theory learned in class and make a conclusion concerning the application of financial theory in real life for each article. You may need to do additional research to understand certain terms in the articles. Calculations are encouraged if the article contains data.
Layout and Content:
• Provide an online link or reference (if hard copy) with your analysis.
• A reference list should be included at the end of your assignment and any sources you refer to in your analysis must also be referenced in-text. A referencing guide can be found on the portal under “Academic Success Centre/ Library” and is also uploaded under assessments on the portal site.
• Below each article provide a 400-500 word commentary which includes:
o A very brief summary of the article’s content (no more than 50-100 words) o An identification of a clear link between the issues discussed in the article and theory covered in class
o An analysis of the financial issue and a comparison with the theory studied in class.
Consider how financial theory applies/ doesn’t apply/ partially applies to the article and comment on the similarities and discrepancies.
o You can include calculations as part of your analysis.
• See “Part 1- Example of Article Analysis” uploaded under assessments on the portal. This example is however shorter and less detailed than your analysis needs to be for each article.
• 1000-2000 words (up to 500 words above 2000 permitted)
Assessment Rubric
• Please see “Part 1: Written Assignment Rubric” uploaded under assessments on the portal. You will be assessed according to the criteria on this rubric.
• Marks will firstly depend on the way students identify the link between the news articles and financial theories and concepts learned in class. Secondly, students need to demonstrate analytical skills where they find similarities and differences between the way financial concepts are addressed in class and how they are addressed in the articles.
• Plagiarism or inadequate references will attract harsh penalties.
Please note that students need to “identify the link between the news articles and financial theories and concepts learned in class. Secondly, students need to demonstrate analytical skills where they find similarities and differences between the way financial concepts are addressed in class and how they are addressed in the articles”
PART 2: Real-World Analysis [60 marks]
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1. Company Perspective- Santos [30 marks]
Consider the sources below and answer the following questions.
Source 1: Annual Report
Santos 2014 Annual Report: https://www.santos.com/media/2172/2014_annual_report.pdf (on the portal)
Source 2: Santos end 2014 Santos shelves debt raising in oil price rout
December 4, 2014
Tweaking the money tap: Having postponed a debt raising, Santos will review its spending plans for next year.
Energy producer Santos has been forced to postpone a €500 million ($733 million) hybrid debt raising in Europe and will slash capital and operating expenditure following a slump in oil prices below $US70 a barrel.
Chief financial officer Andrew Seaton said the company had decided to defer any hybrid issue until market conditions improve, noting the oil market had experienced volatility following the decision by the Organisation of Petroleum Exporting Countries not to cut output at a meeting in Vienna late last week.
Mr Seaton said Santos holds a -robust- funding position with $2 billion in available liquidity, but will review its spending plans for 2015. Santos already has outstanding hybrid capital securities in the European markets. But the yields on the securities have come under pressure after the company flagged plans to issue more securities as oil prices plunged.
The yield on the securities has spiked by an enormous 40 per cent in two trading sessions to almost 5 per cent from 3.5 per cent at the start of the month.
While the outright yield may appear to suggest a low cost of funds, the costs associated with converting the funds into Australian dollars and hedging the currency risk would have pushed the overall costs higher.
Santos could also be under pressure to protect its BBB+ Standard & Poor's credit rating which is on negative outlook to reflect the --commissioning risk of the company's two LNG projects- .
….The lower oil prices, if they persist, would eat into a forecast jump in Santos's cashflows from its two, big-ticket LNG projects, a venture in Papua New Guinea that started production earlier this year and the $US18.5 billion ($21.5 billion) GLNG project in Queensland set to begin exports in the second half of 2015.
An earlier estimate by Santos that operating cash flows would double from 2013 to 2016 assumed oil prices of $US100 a barrel. But consensus estimates for crude prices have been pared back, to $US90 a barrel, reducing the expected lift in Santos's cash flows to 65 per cent by 2016.
Brent crude prices are currently much lower than that, at about $US69.
Source: http://www.smh.com.au/business/mining-and-resources/santos-shelves-debt-raising-in-oil-price-rout-2014120411zwxy.html#ixzz3ocFAswZA
a) Analyse Santos’ short term liquidity based on 2013 and 2014 financial figures. (5 marks)
b) What is a convertible bond and why is it a hybrid security? (3 marks)
c) In 2014 is Santos financing using predominantly long-term or short-term debt? Are they using predominantly direct or indirect debt financing? Why? What currency are they predominantly borrowing in? Refer to Source 1. (5 marks)
d) Analyse the asset management, debt management, profitability and market expectations for Santos in 2014 as compared to 2013. (Hint: Use financial and market data in your ratio calculations and make sure to interpret and analyse the output) (14 marks)
e) According to the Sources above what has happened to the yields on Santos hybrid securities (convertible bonds) in 2014-15? Why has this happened? How would it affect the price of its existing bonds today? (3 marks)
2. Company Perspective- BHP [30 marks]
1. The total market value of BHP’s assets is $60,000,000. These assets are financed by $30,000,000 worth of issued bonds and $30,000,000 worth of issued ordinary shares. The bonds have an 8% annual coupon and are currently selling at their face value of $1000. The ordinary shares are currently selling at $30 and will pay a dividend at time 1 of $4.50 with dividends expected to grow at 1% forever. The tax rate is 30%.
a) What is the WACC of BHP according to the above information? (8 marks)
b) BHP decides to buy back $5,000,000 of its ordinary shares and issue $5,000,000 worth of new bonds. If the new bonds have an annual coupon rate of 5%, a maturity of 5 years, a face value of $1000 and similar bonds in the market yield 4%, how many bonds would BHP have to issue to raise the $5,000,000? (7 marks)
c) After the transaction in b what would BHP’s new WACC be? (5 marks)
d) What is the WACC used for and in what circumstances can it be used? (5 marks)
e) Is it better for a company to have a lower or higher WACC (cost of capital) for its projects? Why?
What issues might arise if the WACC used by the company is lower than it should be? (Hint: This question relates to finding the link between Lecture 8 and 9) (5 marks)
T
Total= 100 marks
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