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ACFI2070 Business Finance

Individual Assessment

Semester 2, 2023

Weight: 25%

Total Marks: 50

Due time and date: 11:59pm (AEDT) on Monday, 9 October 2023

Submission Instructions:

1. Maximum word length: 2000 words.

2. You need to submit the assignment in PDF/MS Word format, with an assignment cover sheet included, via Turnitin by the due date.

3. In addition, an Excel file with supporting calculations (if any) must be submitted online to Assignment_Supporting Excel File link on Canvas by the due date. You will need to include your student ID and your name in the Excel file name (for example, cxxxxxxx_FirstName_LastName). The word file should be a stand-alone report which will be marked. The Excel spreadsheet will not be marked. It is only submitted so that your working steps can be checked as required.

4. You may make reasonable assumptions in solving the problem (if necessary).

5. Submission by other means (email/hard copy) or forms (scanned copy) will attract no marks.

Penalties:

1. In the case of late submission without an approved extension of time, a penalty of 10% will apply for each day the assignment item is late.

2. Penalties will also apply if academic misconduct is found (refer to the Course Outline for more information).

Capital Budgeting Case of Cooper Technologies Ltd

Cooper Technologies Ltd is a company that provides geospatial services for national governments, states, provinces, counties, municipalities, and commercial organisations around the world. The company’s geospatial services encompass the acquisition, analysis, integration, visualisation and management of geospatial data. To boost their competitive advantage against peer firms in the area of geospatial data acquisition, Cooper Technologies Ltd has decided to launch a new Earth observation satellite. After carefully considering sale proposals from a number of well-known aerospace companies, Cooper Technologies Ltd has narrowed their choice to two next-generation imaging satellites: RD-6 manufactured by Davis Group Ltd and MK-8 by Koshiba Aerospace Ltd. Both satellites are regarded as suitable to complete the required job. As the financial comptroller of Cooper Technologies Ltd, you have been requested by the management board to advise which one of the two satellites the company should purchase.

The cost of a single RD-6 satellite is $350 million. A MK-8 imaging satellite carries a price tag of $300 million. Another significant factor with satellites is the cost of the launch. In particular, launching a single RD-6 satellite into space is expected to cost the company $100 million. Due to its heavier weight, launching a MK-8 satellite warrants a heavy-lift launch vehicle instead of a medium-lift launch vehicle used in the case of a RD-6 satellite launch. As a result, the cost of a MK-8 satellite launch is estimated to be $185 million. Both satellites are to be depreciated straight line down to a book value of zero over their entire useful life. Further details of each satellite’s cash flows are tabulated below:

In addition to the cash flow information, you have also been provided with the following details:

· The corporate tax rate is 30%;

· Tax is paid on profits at the end of the year in which it is earned; and,

· The required rate of return for both investment opportunities is 9.8% p.a..

Question 1 (5 marks)

Calculate the net present value (NPV) for RD-6 satellite.

Question 2 (5 marks)

Calculate the NPV for MK-8 satellite.

Question 3 (9 marks)

Based on the equivalent annual cash flow and constant chain of replacement in perpetuity, which satellite, if any, do you recommend Cooper Technologies Ltd to proceed with ?

Question 4 (4 marks)

a. Calculate the internal rate of return (IRR) for each satellite. (2 marks)

b. Based on your IRR calculations, identify which, if any, of the satellites you would recommend that Cooper Technologies Ltd purchase:

1. If the projects are independent (1 mark)

2. If the projects are mutually exclusive (1 mark)

Question 5 (7 marks)

a. Calculate the payback period and discounted payback period for RD-6 satellite. (2 marks)

b. Calculate the payback period and discounted payback period for MK-8 satellite. (2 marks)

c. Identify which satellite the company would invest based on the discounted payback period, assuming the projects are mutually exclusive. (1 mark)

d. Discuss one limitation that both payback period and discounted payback period have in common. (1 mark)

e. Discuss one advantage of discounted payback period over payback period. (1 mark)

Question 6 (8 marks)

Assuming that Cooper Technologies Ltd has successfully negotiated with the tax office to pay tax in arrears (i.e., tax is paid on profits one year after it is earned),

a. Re-calculate the NPV for RD-6 satellite. (4 marks)

b. Re-calculate the NPV for MK-8 satellite. (4 marks)

Question 7 (6 marks)

To prepare funding for the investment project, Cooper Technologies Ltd issued 15-year bonds to the public exactly three months ago. These bonds would pay semi-annual coupons at a rate of 11% p.a.. The rate of return required by investors on these instruments has been estimated at 10% p.a.. Each bond has a face value of $100,000.

a. Calculate today’s price of each bond. (3 marks)

b. Consider the current term structure as follows: corporate bonds with maturity from 1 years to 5 years yield 8% p.a., corporate bonds with maturity from 6 years to 9 years yield 9% p.a., and 10-year bonds and longer-maturity bond yield 12% p.a.. Recalculate today’s price of each bond. (3 marks)

Question 8 (6 marks)

To further increase funding for the investment project, Cooper Technologies Ltd has decided to withdraw dividend payments for the next two years (i.e., year 1 and year 2). Thereafter, the company expects to maintain an annual dividend growth rate of 8.4% for five years (i.e., year 3 to year 7). Afterward, the company expects to have an annual dividend growth rate of 4.2% and maintain it forever. The expected rate of return on the company’s equity is 9.8% p.a.. The dividend per share in year 3 is $2. Calculate the price of each share in today’s dollar (i.e., share price in year 0).