ACC515 Accounting and finance assessment 3
Due Date: 19-May-2019
Return Date: 12-Jun-2019
Submission method options: Alternative submission method
This assessment is worth 15% of the total subject assessment and is marked out of 100.
Part A (50 marks) Capital Budgeting
This case is fictional and bears no relation to actual practice at Mars Australia New Zealand
Mars Australia and New Zealand manufacture a range of fast moving consumer goods (FMCG) including pet food and pet care products, chocolates, confectionery, ice cream, and a variety of food products and supplements. These products are largely sold through supermarkets and specialty retailers. The Head Office for Mars Australia is in Albury Wodonga on the New South Wales – Victorian border. The company opened its first manufacturing facility in Albury Wodonga in 1966. Since then they have expanded their manufacturing footprint to include other sites in regional Australia and New Zealand.
In the past two years Mars have launched their ‘Sustainable in a Generation’ plan which reflects their plan to “grow in ways that are good for people, good for the planet, and good for our business” (Mars, 2019: https://www.mars.com/global/sustainable-in-a-generation). A key focus to achieve these a goals is to focus on more efficient use of water and energy resources.
Mars has a large confectionery factory in Ballarat which first opened 40 years ago in 1979. Confectionery manufactured in Ballarat includes the eponymous Mars Bar, Snickers, Maltesers, M&Ms, Bounty and Dove chocolates. The factory that manufactures the ‘Nutty Nut’ chocolate bar has not undergone a major refurbishment in the past 20 years and product managers are concerned that the cost of operating and maintaining old technology has impacted the cost and quality of the product.
A full product market research analysis of the ‘Nutty Nut’ brand has been undertaken by external consultants at a cost of $500,000. The consultants found that by improving the quality of the product and lowering the cost, Nutty Nut can potentially become a market leader.
Facilities management have produced the following budget on a factory refurbishment and technology upgrade which will cost an initial capital outlay of AUD$17.5 million. The existing plant and equipment will be sold for salvage and is expected to have a salvage value of $400,000. The existing equipment has a zero written down value in the accounts having been fully depreciated over its life. The upgraded facility will be ready for use at the commencement of the 2019-20 financial year. The upgrade will result in a 20% cut in power usage which represents a saving in electricity costs of $25,000 per week and an annual saving of $600,000 in water costs. The use of advanced robotics mean that less direct labour is required and labour savings and on-costs will amount to $2.5 million per annum. It is estimated that the cost of training staff to operate the new production line will amount to $750,000 which will be incurred before the new facilities come on-line. This cost is expected to be recorded as labour costs in the 2019 financial year. Extra maintenance of the new information technology (IT) and robotics is estimated to cost approximately $4,000 per week.
The new production facility will be depreciated on a straight line basis over its 10 year life cycle to zero. Because of anticipated technology changes the production facility is expected to have a salvage value of $1 million at the end of 10 years. Mars are an international company and pay Australian tax at the rate of 30% on profits. The capital budgeting analysis should be conducted on an after tax basis. For the purpose of this analysis, tax should be recognised in the same year as the cash flow generating activity.
The upgrade will increase the production capacity of the original factory by 50% and all costs other than Raw Materials will now be fixed. Whilst the proposed refurbished facility will achieve many facets of the Mars sustainability agenda the project must still pass the company’s international benchmark for capital investment of achieving a return of 20%.
(i) Prepare an excel spreadsheet calculating whether this product will satisfy the investment parameters set by Mars. For the proposed ‘Nutty Nut’ capital investment calculate the following (using formula and worked out solutions):
- After-tax cash flows (15 marks)
- Payback period (3 marks)
- Net present value (5 marks)
- Profitability index (2 marks)
(ii) You are asked to present a report on your findings regarding the upgrade proposal. Make a recommendation to Management on whether they should proceed with the upgrade or not. Explain the criteria on which you have based your decision and ensure that you include an analysis of the strategic implications of some of the cost assumptions which underpin the budget. (10 marks)
(iii) The closure of a Mars product line at their Ballarat site has left the company with an unoccupied manufacturing facility. Two projects have been proposed to use the space and the following estimates of the present value of the competing project cash flows have been made:
|Net Present Value||$25,000||$32,000|
|Estimated useful life||6 years||9 years|
(a) Explain how financial managers may evaluate two mutually exclusive projects that are of unequal lives. (10 marks)
(b) Assuming a required rate of return on projects of this type of 12%, decide which project you think the company should accept (show all workings). (5 marks)
Part B (50 Marks) Cost of Capital
Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All of the shareholders of Cloudstreet are Australian residents for tax purposes. To fund a major expansion Cloudstreet Ltd needs to raise a $120 million in capital from debt and equity markets.
Cloudstreet Ltd’s broker advises that they can sell new corporate bonds to investors for $1030 with a coupon of 6% and a face value of $1,000. Issue costs on this new debt is expected to be 1.5% of face value. The firm can also issue new $100 preference shares which will pay a dividend of $8 and have issue costs of 5%. The company also plans to issue new Ordinary Shares at an issue cost of 3%. The ordinary shares of Cloudstreet are currently trading at $7.50 per share and will pay a dividend of $0.40 this year. Ordinary dividends in Cloudstreet are predicted to grow at a constant rate of 4% pa.
a. (i) Calculate how much debt Cloudstreet will need to issue to maintain their target capital structure. (2 marks)
(ii) What will be the appropriate cost of debt for Cloudstreet. (8 marks)
b. (i) Calculate how much Preference Share equity Cloudstreet will need to issue to maintain their target capital structure. (2 marks)
(ii) What will be the appropriate cost of Preference shares for Cloudstreet? (8 marks)
c. (i) Calculate how much Ordinary Share equity Cloudstreet will need to issue to maintain their target capital structure. (2 marks)
(ii). What will be the appropriate cost of Ordinary Equity shares for Cloudstreet? (8 marks)
d. Calculate how the Weighted Average Cost of Capital for Cloudstreet Ltd following the new capital raising. (10 marks)
e. Cloudstreet Ltd has a current EBIT of $1.5 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the company’s cost of capital by a full 1%. How will this change the value of the company? Support your answer using theory and calculations. (10 marks)
Please note: Online submission via Turnitin is required for this assignment. Please see details under Requirements after Marking Rubric.
This assessment task will assess the following learning outcome/s:
- be able to evaluate and explain the congruence of accounting, finance and treasury functions.
- be able to explain and critique the objectives of financial management in contemporary organisations.
- be able to critically evaluate mainstream financial theory and concepts.
- be able to discuss and evaluate ethical considerations in financial dealings.
- be able to demonstrate appropriate communication skills in the context of corporate finance.
- be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.
This assessment task covers Topics 6 through 10.
Marking criteria and standards
Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.
Use the following rubric as guidance:
|Problem types/criteria||HD( 85% to 100%)||
DI (75% to 84%)||CR (65% to 74%)||PS (50% to 64%)||FL (0% to 49%)|
|Be able to determine capital budgeting cash flows and calculate various measures relating to capital budgeting problems; Be able to identify and determine individual cost of capital and compute weighted cost of capital.||Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problem using appropriate finance methodology with no errors. Identify and determine the cost of capital and be able to compute the cost of capital correctly with no flaws.||Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with very few errors. Identify and determine the cost of capital and be able to compute the cost of capital correctly, with minor flaws.||Identify most of the incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with few errors. Identify and determine most of the cost of capital and be able to compute the cost of capital correctly, with minor errors||Identify a majority of the capital budgeting cash flows and calculate some of the measures relating to capital budgeting problems using appropriate finance methodology. Identify and determine some of the cost of capital and be able to compute weighted cost of capital, with substantial errors.||Fail to Identify the incremental capital budgeting cash flows and fail to calculate the measures relating to capital budgeting problems using appropriate finance methodology. Fails to identify and determine most of the cost of capital. Does not demonstrate the ability to compute weighted cost of capital, contains multiple and substantial errors.|
|Be able to analyse the elements in the business environment that at a particular time cause the cost of the individual source of capital to be high or low.||Explicit and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Analysis of elements demonstrates a very broad and deep knowledge of the topic||Clear and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low.||Clear analysis of most key elements in business environment that cause cost of the individual source of capital to be high or low. Analysis lack explicit detail.||Limited analysis of some elements in business environment that cause cost of the individual source of capital to be high or low.||No analysis of relevant elements, fails to make links to the specific business environment.|
|Use appropriate financial technology such as excel spreadsheet to analyse data and and gather information relevant websites to conduct financial analysis.||Data used skilfully and demonstrates explicit integration into the analysis. The correct answers are derived using multiple relevant sources and the results are presented in a clear and professional manner.||Data used competently and demonstrates integration into the analysis. The correct answers are derived using relevant sources and the results are presented in a clear and professional manner.||Data sources used competently. Most correct results are derived using relevant sources but they may be some minor errors||Data sources used competently. Most correct results are derived using relevant sources but they may be some major errors||Data sources are not used competently. Most results are incorrect and derived using irrelevant sources. Contains major errors|
|Analyse business situations|
|Reach reasonable conclusion and recommendations on an alternative capital structure to lower cost of capital.||Quantitative and qualitative analysis persuasively and explicitly supports the conclusion and recommendations incorporating all factors determining cost of capital.||Quantitative and qualitative analysis is use in a clear and concise manner to make reasonable conclusion and recommendations incorporating most of the factors determining cost of capital.||Quantitative and qualitative analysis is used to make reasonable conclusion and recommendations incorporating most factors determining cost of capital.||Quantitative and qualitative analysis is used to make reasonable conclusion and some recommendations.||Quantitative and qualitative analysis is too simplistic or convoluted.|
|Use of literature/market research/evidence of reading.||Has developed and justified own ideas based on a wide range of sources which has been thoroughly analysed, applied and discussed. Reference list of an extensive rant of resources used.||Literature is presented with soundly based criticisms, in a descriptive way and indicates a good understanding of the literature.||Literature is presented with some criticisms, in a descriptive way and indicates a few limitations of understanding.||Literature/market research is presented with some criticisms, in a descriptive way and indicates few limitation of understanding.||No evidence of literature or irrelevant to the research question|
|Effectively and appropriately present your material and results and clearly convey your understanding of the results to the reader. All references and resources acknowledged and professionally presented using APA (6th ed) referencing.||Output is logically argued, and well written in a manner that very effectively conveys the key outcomes and recommendations to the end user. All references and sources acknowledged and professionally presented.||Well written argument with references and sources acknowledged and output professionally presented.||Well written with a logical argument and with references and sources acknowledged and professionally presented.||Written in clear language with references and sources acknowledged and professionally presented.||Does not meet minimum (PS) expectations|
High level oral and written communication skill is consistently rated the most important attribute of finance and accounting professionals by the accounting professional bodies. It is important that text responses are well written and that the written work (including formulae) have a professional level of presentation and formatting. The CSU ALLeN team can provide guidance of a non-technical nature to assist students who are having difficulty composing grammatically correct text responses.
Each session a number of students in ACC515 are investigated for incorrect referencing and plagiarism. Unfortunately this can take many forms from simple cut and pasting to the practice of purchasing assignment solutions from third party providers. In this assignment you are encouraged to research widely however you must recognise and acknowledge when you are using the work of others including academic and public media sources. Many students find academic referencing challenging, however an academic reference list, properly formatted using hanging indent, must be provided. Please note that it is a submission requirement that you include a reference list and assignments which do not include a properly formatted reference list will incur a 5 mark penalty.
Review the rules regarding plagiarism and if you are not sure contact your lecturer or student learning skills advisor for advice. A reference list is mandatory for this assessment item. The CSU Library site provides an on-line guide to APA style referencing which is the referencing style adopted by the School of Accounting and Finance. The guide can be downloaded as a PDF from your student site (http://student.csu.edu.au/library/integrity/referencing-at-csu). This page also provides access to the Academic Referencing Tool (ART) which some students might find easier to use.
In the assignment students are expected to write out the appropriate formula that they have selected to solve specific finance problems and show all workings. In terms of presentation for formula it is recommended that students use the formula function available through MS Word which allows students to present complex formulae in a professional manner within a Word Document. The assignment is marked out of 100.
It is recommended that your name and student ID are included in the first page and the pages should be numbered.
This assignment must be submitted through Turnitin.