Trimester 1 2018

Due Date: Friday 11

th May 2018

Assessment weight: 30%

Instructions – Please read carefully

This assignment is marked out of 120 and will be converted to 30% of your final grade.

This assignment should be completed in a group of 4 students

There is no word limit per se. However, finance is a discipline where “less is more”.

The assignment can be either typed or handwritten, or both. Scan your handwritten work as a pdf copy for electronic submission purposes.

An electronic pdf copy of the assignment has to be uploaded to Cloud Deakin by 5pm on 11th May 2018. If you experience any problem in uploading the document, please contact the IT service help line on 1800 721 720 or go to the website at: http://www.deakin.edu.au/its/servicedesk/

The purpose of the assignment is to engage the students in an analysis of the nature of operations, financial positions, strategic planning and expansion opportunities of publically listed Australian or foreign companies. The assignment requires students to apply the theory, concepts and techniques covered in Applied Corporate Finance

(MAF703) in a practical situation. The assignment consists of 4 tasks:

Task1: Select 1 listed company on the ASX or any major international stock exchange. Provide an executive summary on the company’s nature of operations, industry, current financial positions, risk profile and strategic directions. (10 marks)

Expectation: Students should be able to describe the company’s profile in their own words. Extra marks will be given to students who can infer the unique opportunities available to the company, describe how the company positions itself within its own industry and how it compares with its peers, and outline its strengths and weaknesses.

Task 2: The CEO of the above company is looking for some expansion opportunities. He/she approaches the Corporate Finance Division within the company for advice. Suppose you are one of the analysts in the Corporate Finance team. Your job is to identify a potential takeover target for the company and outline the reasons why such

an acquisition is deemed to be beneficial. Complete a detailed analysis about the takeover deal. Your report should include but not be limited to the followings: a) Provide a brief summary of the target (5 marks) Expectation: Students are able to describe the target in their own words b) Classify the type of the takeover deal and describe the benefits associated with the deal (5 marks) Expectation: Students are expected to explain why the chosen company is a suitable target. Extra marks will be given to students who can elaborate on why the takeover will provide the parent company with a strategic benefit. c) In the context of Real Option analysis, outline the source of the synergy. (10

marks) Expectation: Not all synergies are related to real options. However, students are expected to explain in a real option context of how this takeover deal allows the parent company to take advantage of a unique and strategic benefit once market conditions change.

d) Calculate the market capitalisation of the target, the synergy and hence advise the management of the existing company on the offer price (10 marks)

Expectation: Calculate current market cap. Provide an estimated figure for the synergy benefits. In the real world, estimates of synergy involve many analysts from different departments across the firm, not just finance. However, the objective of this assignment, is to engage the students in an M&A deal from a finance point of view. Therefore, as long as the synergy estimate is reasonable given the benefits outlined above, and is consistent with the assumptions made, students should be awarded high marks for this question. Maximum marks are awarded to students who can reasonably calculate the synergy based on future opportunities that the real options provide. Synergy comes from revenue enhancement or cost reduction. Estimates of synergy should be based on either of these two reasons. Key point is that students will need to make assumptions, justify the assumptions, and come up with an estimate of synergy based on the assumptions.

e) How should the merger be paid for? Cash, stock or a combination of both? Give reasons. (10 marks)

Expectation: Average marks are given to students who can reasonably explain the appropriate ways for the parent company to pay for this takeover. High marks will be given to students who do extensive research on the M&A literature and are able to apply the findings of the research to work out whether cash or stock or a combination of the two is more appropriate for this particular takeover deal.

f) Estimate the cost, the NPV of the merger and the post-merger stock price. (10 marks)

Expectations: This question requires students to make assumptions about the synergy estimate and calculate the cost, the NPV and the post-merger price accordingly.

Task 3: If the company pays all or part of the acquisition by cash, how should the company finance the takeover?

Expectation: This question, again, requires students to do research and provide the reasons why, based on the company’s situation, a particular capital raising method might be preferred by the company.

a) Should the company raise the capital using internal funds, debt, equity, hybrid securities or a combination of the above? Give reasons. (10 marks)

Expectation: Average marks are awarded to students who can reasonably specify the pros and cons of using internal funds, debt, equity, hybrid or a combination method. These are all outlined in the workshop materials. Extra marks will be given to students who research on the various ways of raising capital and apply the concept in this specific situation. For example, if the company has quality assets, it may mean that it’s cheaper for them to borrow. If they have excess retained earnings, is it suitable to use retained earnings to fund the deal?

b) If the capital required is raised via a share issue, should the company engage in a right issue or private placement? (10 marks)

Expectation: Average marks are awarded to students who can provide the pros and cons of each method. High marks are given to students who can clearly explain why one method is preferred to the other for the given parent company and this particular deal.

c) How does the share issue affect the wealth of the existing shareholders in each of the scenarios specified in part b)? (10 marks)

Expectation: To answer this question, students need to make assumptions about the issue price, the amount needed to be raised, the appropriate discount compared to the market price and therefore work out the wealth of the existing shareholders in each scenario.

To answer the question of whether private placement or right issue is more appropriate, students should combine part b and c in their report.

Task 4: Outline the risk(s) involved with this takeover deal. State your assumptions and perform sensitivity analysis on the NPV of the merger and the wealth of the existing shareholders based on your synergy estimation. (30 marks)

Expectation: One of the most important risks in any takeover deal is the risk of incorrectly estimating the potential synergy, as the cost of the merger and the NPV of the merger are highly dependent on it. Therefore, students are expected to perform a sensitivity analysis of the NPV of the merger and the wealth of the existing shareholders based on synergy. Extra marks are awarded to students who also consider other risks associated with the takeover deal. As for synergy, high marks are given to students who can identify the factors that impact on the synergy estimates which are specific to the company and the takeover deal. For example, if the synergy stems from cost reduction or revenue enhancement, what are the factors that affect these benefits and how can they be used to enhance the synergy estimates?

Bottom line: Students can pass the assignment by following the materials in the workshop. However, to get high marks, students need to demonstrate their ability to apply the techniques, theory and relevant research in the situation unique to the chosen company.

Formulae Sheet

PV[An annuity of E(NCF)] = 𝐸(𝑁𝐶𝐹)

𝑘𝑜

[1 −

1

(1+𝑘𝑜)

𝑇

]

PV[Perpetuity of E(NCF)] = 𝐸(𝑁𝐶𝐹)

𝑘𝑜

PV[Perpetuity of growth series] = 𝑝0 =

𝐷1

𝑘𝑒−𝑔

𝑁𝑃𝑉 = −𝐼0 + ∑

𝐸(𝑁𝐶𝐹)𝑡

(1+𝑘𝑜)

𝑡

𝑇

𝑡=1 𝑁𝑃𝑉∞ = 𝑁𝑃𝑉 ×

(1+𝑘𝑜)

𝑇

(1+𝑘𝑜)

𝑇−1

NPV = 𝐸𝐴𝑉

𝑘𝑜

[1 −

1

(1+𝑘𝑜)

𝑇

]

𝐶𝐸𝑉 = −𝐼0 + ∑

𝛼𝑡𝐸(𝑁𝐶𝐹)𝑡

(1+𝑟𝑓)

𝑡

𝑇

𝑡=1 𝛼𝑡 = (

1+𝑟𝑓

1+𝑘𝑜

)

𝑡

𝑅 =

𝑁(𝐶−𝐼)

𝑁+1

𝑋 =

𝑁𝐶+𝐼

𝑁+1

𝑆𝑇

𝑑 =

𝑉𝑇

𝑀 + 𝑁

𝑀

𝑀 + 𝑁

(𝑋) < 𝑆𝑇

𝑑 < 𝑋

𝑃𝑎𝑦𝑜𝑓𝑓 (𝐶𝑎𝑙𝑙 𝐻𝑜𝑙𝑑𝑒𝑟) = max[(𝑆𝑇 − 𝑋), 0]

𝑃𝑎𝑦𝑜𝑓𝑓 (𝑃𝑢𝑡 𝐻𝑜𝑙𝑑𝑒𝑟) = max[(𝑋 − 𝑆𝑇

), 0]

𝑁 = max[

𝐼

𝑆(1 − 𝑑)

,

𝐼

𝑍

]