FIN303
Financial Management
Assignment 2 - Individual Assignment / TMA 2
July 2014 Presentation
Individual Assignment
This assignment is worth 25% of the final mark for FIN303 Financial Management.
The cut-off date for this assignment is 20 October 2014, 2359hrs.
In this assignment, you are expected to:
• Compute and interpret financial ratios
• Evaluate investment proposals
• Apply knowledge to decide appropriate financing plan and dividend policy
• Demonstrate the essential knowledge and interpersonal skills to work effectively in a team
___________________________________________________________________________
Recently, you joined a local brokerage firm as an equity analyst. For your first assignment, you have been tasked to assist the research team to analyse Olam International Limited (“Olam”), a company listed on SGX and one of the 30 component stock in the Straits Times Index.
From your review of the latest available annual report, you noted that Olam is a leading agribusiness operating from seed to shelf in 65 countries, supplying food and industrial raw materials to over 13,600 customers worldwide. Their team of 23,000 employees has built a leadership position in many businesses including cocoa, coffee, cashew, rice and cotton.
Below are extracts of the financial statements for the financial year ended 30 June 2013:
During 2013, Olam issued US$750 million worth of 5-year bonds with a 6.75% coupon (paid semi-annually), which was issued at 95% of face value. One of the key priorities was to reduce its gearing to a target debt-to-equity ratio of 1.25.
The market risk premium for Singapore equity market and risk-free rate is 5.00% and 3.05% respectively. Also, you noted from Reuters terminal that Olam’s beta is 1.37.
Olam has been building an evolving upstream business, growing the raw materials themselves. Management believes that by doing so, they can build a significant cost advantage that could result in attractive returns.
Recently, Olam announced that it is evaluating an opportunity to cultivate a special gain of wheat. The following information relating to this potential investment is as follows:
• Initial investment in leasehold land = $20 million
• Initial investment in machinery = $10 million
• Selling price per metric ton = $320
• Expected selling price inflation = 5%
• Variable operating costs per metric ton = $200
• Fixed operating costs per annum = $2 million
• Expected operating cost inflation = 3%
The machinery would last for four years, at the end of which it could be sold for $0.5 million. Depreciation is computed on a straight-line method and this fixed asset will be fully depreciated at the end of its useful life. No depreciation or terminal value for leasehold land is expected.
1 2 3 4
35,000 80,000 150,000 120,000
The research and development division has prepared the following demand forecast:
Year
Demand (metric ton)
Net working capital is estimated to be 10% of sales, which is required at the start of the year. This will be fully recovered at the end of the four years. The company’s marginal tax rate is 17%.
You noted that Olam’s historical dividend and earnings per share data as follows:
Question 1
Analyse Olam’s financial performance and position for FY 2012 and 2013 and comment on its liquidity, profitability, asset utilisation and financial leverage.
(25 marks)
Question 2
Calculate Olam’s weighted average cost of capital.
(25 marks)
Question 3
Estimate the forecasted cash flows for the potential investment and calculate the net present value. Comment whether Olam should undertake this investment opportunity.
(35 marks)
Question 4
Identify the type of dividend policy undertaken by Olam over the last 5 years. Also, discuss and analyse factors that affect its dividend policy and whether it is sustainable.
(15 marks)
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