Reference no: EM13311635

QUESTION 1: CAPITAL EXPENDITURE DECISIONS

BezingaLtd is a highly profitable electronics company that manufactures a range of innovative products for industrial use. Its success is based to a large extent on the ability of the company's Strategic Development Department (SDD), which generatesnew ideasthat result in commercially viable products. The latest of these products is just about to undergo some finaltests and a decision has to be taken whether or not to proceed with an investment in the facilities required for manufacturing. You have been asked to undertake an evaluation of this investment.

The company has already spent $750,000 on the development of this product. The final testing of the product will cost about $40,000. The head of SDDis very confident that the tests will be successful based on the work already undertaken.

The company anticipates that the product will remain competitive for the next five years after which it is likely to be displaced by some new product that are constantly being introduced as the underlying technology evolves. In the first year it is anticipated that 20,000 units will be sold at a price of $160. From year two through to year five sales are expected to be 30,000 units per annum.

The product will be manufactured in one of the company's factoriesthathas considerable spare capacity:it is most unlikely that the space required by the manufacture of this product will be required for any other purpose over the next five years.The additional costs will be incurred by the company in the form of heating, lighting and power amounting to $30,000 per annum.

The machinery required for the manufacture of the product will cost $1,200,000. It will have to be depreciated for tax purposes on the basis of an annual 25 per cent, using diminishing value method (i.e. 25 per cent of the remaining book value of the asset, the initial purchase price lessthe sum of the allowances claimed in previous years). At the end of the five year period the machinery will be sold. The resale value of machinery of this nature after being used for five years is likely to be about 30 per cent of its purchase price.

The cost of the labour and components required for the manufacture of the product has been estimated at $120 per unit with labour accounting for 60 per cent of the cost and the componentsfor the other40 per cent. There are also fixed costs of $120,000 per annum stemming from the manufacturing process. The initial marketing of the product will cost $200,000 and thereafter from year two to four, the company plans to spend $100,000 per year on marketing.

It is anticipated that the company will have to invest in working capital - holding finished products equivalent to 20 per cent of next year's unit sales and 25 per cent of the components required for the next year. It is expected that debtors and creditors will just about offset each other. The tax rate is 30 per cent and the required post-tax rate of return on investments of this nature is 16 per cent.

1.1 Determine the investment's net present value, the internal rate of return, payback period and the discounted payback period. All key assumptions should be specified and explained and an interpretation provided of results for each of the investment criteriaspecified.

1.2 Assess how sensitive the calculated NPV is to the following three inputs employed in the analysis.
(i) Sales price per unit
(ii) Sales volume
(iii) Cos of labour and component per unit
(iv) Cost of machinery
Provide an interpretation of your results and comment on how valuable you think this analysis may be in taking a decision on the investment.

QUESTION 2: VALUATION OF COMPANY SHARES

You are required to:

2.1 Estimate the value the following company shares using an appropriate dividend valuation model. The companies are:
(i) Auckland International Airport Ordinary Shares - (AIA)
(ii) Ebos Group Limited Ordinary Shares - (EBO)
(iii) Restaurant Brands New Zealand LimitedOrdinary Shares -(RBD)
(iv) Ryman Healthcare Limited Ordinary Shares - (RYM)
(v) SKYCITY Entertainment Group Limited Ordinary Shares -(SKC)

2.2 Search the web for the current share prices of the above companies (i.e. on the date you completed the assignment question) and explain why there are differences between the actual prices and those computed using dividend valuation models.

To value the above companies, the following tasks need to be carried out:

A. Obtain dividend history
a. Access the following site through the AUT library website (search for finance data bases or directly click on the link below)
NZX Company Research-includes Capital Raisings Database
b. Follow the sequence given below:

== COMPANY SEARCH == "Enter company's code to search (top of page)"
== Dividend History Tool
c. Download dividend history of the company for the period from 2005 to 2013
d. Refer to the column "Nominal Amount Paid" and aggregate interim and final dividends paid for each year (disregard the dates paid).

B. Compute geometric growth rate implied in the dividend history of the above period.

C. Assume dividends paid in 2013 to be the current dividend (d0)

D. Value the company's shares assuming the following costs of equity:
a. AIA = 10%
b. EBO = 9.3%
c. RBD = 15%
d. RYM = 14.85%
e. SKC = 5.5%

QUESTION 3: RIGHTS ISSUES

The Argosy Property Ltd of New Zealand issued the following capital raising presentation document.
https://www.argosy.co.nz/sites/default/files/pdfs/2013%2007%2001%20-%20Argosy%20Market%20Announcement%20Presentation.pdf

The company also followed this with a formal Rights issue prospectus.
https://companyresearch.nzx.com.ezproxy.aut.ac.nz/deep_ar/newpage.php?pageid=event&default=ARG

Read the contents of both documents and answer the following:

3.1 Provide comments on the rationale provided for the issue.
3.2 Specify the terms of the issue, the anticipated ex-rights price and calculate the value of a right
3.3 The Prospectus suggests that for ‘eligible shareholders' there are four different
actions available:
3.3.1 Take up all Rights
3.3.2 Sell all Rights
3.3.3 Take up some of the Rights and sell the balance
3.3.4 Do nothing

Assuming you hold 7000 shares in Argosy Property Ltd, evaluate your wealth position if you opt for each of the actions suggested above

QUESTION 4: PORTFOLIO ANALYSIS

The attached file contains (Returns data S2, 2014) daily returns for twenty five securities drawnfrom the NZX50 Index for the period 26th June 2013 and 24th June 2014.

4.1 Choose any two securities at random and determine (using Excel functions) the average daily returns for each company for the 12 months along with the variance and standard deviation of these returns. Next construct an equally weighted portfolio made up of the same two securities, and determine the series of daily returns. On this basis determine the average return for the portfolio and the associated variance and standard deviation.

(The averages, variances, and standard deviations can be derived using the relevant Excel functions. Utilise the Excel specification for population variance and standarddeviation - STDEVP and VARP - in the calculations).

Verify your results using the two-factor portfolio equation recalculate the average return and standard deviation of the portfolio. Explain why the portfolio standard deviation is less than the average standard deviation of individual securities.

4.2 Choosing securities at random form equally weighted portfolios of 2, 3, 5,9, 15and 24 Securities and determine the standard deviation of these portfolios. Next plot your results for the standard deviations against the number of securities in the portfolios. Comment on your results and compare these with the results of the studies of naïve diversification. (In undertaking this analysis you can derive the results for each of the portfolios using the Excel spread-sheet).

Question 5: FINANCIAL STATEMENT ANALAYSIS

BRISCOES SAYS ANNUAL PROFIT ROSE AT LEAST 9%

Published: 11:09AM Thursday January 30, 2014 Source: BusinessDesk

Briscoe Group, the home-ware and sporting goods chain, expects its annual profit to rise by at least 9% after "particularly strong" Christmas sales and an overall steady fourth quarter.

Net profit will exceed $33 million in the 52 weeks ended January 26 from $30.5 million a year earlier, the Auckland-based company said in a statement. It had previously said it expected to exceed last year's earnings.

Fourth quarter sales were up 8.1% on the same quarter the previous year, totalling $162.7 million. Home-wares made up the majority of the group's sales, rising 7.3% to $111.9 million, while sporting goods sales rose about 10% to make up the remaining $50.7 million.

Annual sales rose 6.8% to $483.6 million, with the group's home-ware sales increasing 6.4% and sporting goods sales up 7.7%.

Managing director Rod Duke said performance in the final quarter had been driven by "aggressive promotional activity" and strong pre and post-Christmas sales had boosted fourth quarter profits.

The company also reported a near 100% lift in online sales over the past 12 months, with "no adverse impact on in-store sales".
"We are pleased with the growth we are generating in online sales across all three trading brands and especially with the significant lifts achieved during the fourth quarter," Duke said. "There is clearly considerable potential for strong on-going growth in our online sales for the foreseeable future."

On a same store basis fourth quarter sales increased 7.2% compared to the same quarter a year earlier. Fourth quarter home-ware sales increased 6.2%, and sporting goods sales rose 9.5% ahead of the same quarter a year earlier.
Shares in the retailer were unchanged at $2.37, and have declined 5.2% over the past 52 weeks.

The company expects to report its full year audited results on March 6.

5.1 Using the latest consolidated financial statements of Briscoes Ltd critically analyse the claims made by the company with supporting computations. Are the claims made in the report realistic?

5.2 Analyse the profitability of Briscoes Ltd by preparing a common-size income statement and by calculating any other ratios deemed necessary for the past two years.

5.3 Using the cash flow statements and all other relevant information contained in the annual report of Briscoe Ltd, evaluate the following :

5.3.1 The company's ability to generate cash flows in the future

5.3.2 Its capacity to meet obligations for cash

5.3.3 Its future external financing needs

5.3.4 Its success in productively managing investing activities

5.3.5 Its effectiveness in implementing financing and investing strategies

5.4 Assume you are a banker evaluating a loan request from Briscoes for $ 150 million. What would be your concerns when making a decision regarding approval or denial of the loan request? Justify.

5.5 Assume you are an investor in the shares of Briscoes Ltd and rely on receipt of regular cash dividends as part of your return on investment. You have $ 200,000 available for investment which is currently deposited in a term-deposit at an interest rate of 5.2% per annum which you would like to utilise to buy additional shares in Briscoe Ltd. The company's shares are trading at an average price of $3.30 per share. What would your decision be? Justify.

Attachment:- Returns data.xlsx