An analysis of the financial issue

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Reference no: EM13662703

Part -1:

In your group of two 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 the 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)

PART 2: Cost of Capital

Based on the information below calculate the cost of capital for Rio Tinto and state two reasons for why it may have declined since the GFC. Justify your answers using theory, calculations and research into current events.

In the years before the global financial crisis, Rio Tinto has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Rio Tinto's cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:

(1) The firm's tax rate is 30%.

(2) The current price of Rio Tinto's 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Rio Tinto does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

(3) The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Rio Tinto would incur flotation costs equal to 5% of the proceeds on a new issue.

(4) Assume Rio Tinto's last annual dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Rio Tinto's beta is 1.2, the yield on government bonds is 5.6%, and the market risk premium is estimated to be 6%.

(5) Rio Tinto's target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

(6) Suppose the firm has historically earned 15% on equity (ROE) and retained 35% of earnings, and investors expect this situation to continue in the future.

*Hint: You need to use a piece of live market data to solve the problem.

Layout and Content:

• Please provide calculations and justifications for how you calculated the cost of capital. This includes stating your assumptions clearly.

• If you are using excel to perform calculations you can submit your spreadsheet through the "Excel Calculations"

• The answer to this part can be presented in the form of a report with an introduction, methodology section and a conclusion or recommendation 

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Reference no: EM13662703

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