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Mar 26, 2024

Assignment Task

Objective

  • Learn to apply corporate finance concepts and techniques from past finance courses in a realistic business setting.
  • Communicate complex financial reasoning to a diverse audience, both in writing and in person.
  • Gain insight into how corporate finance teams work and the effective operation of collaboration and peer review in a team environment.
  • Gain insight into synthesising corporate finance theory and analysis of market data into corporate finance advice.
  • Work effectively in an online environment.

Role

You are performing the role of an independent external corporate finance advisory team whose client is the CFO of the company that you have selected to be the subject of this project.

Task

Your task is to provide corporate finance advice to a public company board. You will be applying your judgement and knowledge of corporate finance theory to live market data to provide the board with insights and recommendations.

It is recognised that you do not have the hands-on experience of corporate finance advice, but you should use the case study to explore the experience of developing such advice. Please remember that the corporate board deals with substantial issues and that your analysis and communication should reflect this.

Based on the categories above you are allocated 0, 1, 2, or 3 points in the relevant meetings. These are then summed over the relevant weeks and scaled to an overall mark out of 5 points for project participation. For those teams working online, it is very important that you keep your video on and your microphone live (mute only as needed). This makes it easier to engage effectively with your team members. It also means that the facilitators are aware of your engagement and contribution. Failure to have your camera turned on may mean that the facilitator is unable to recognize fully your contribution to the class session.

Some things you can do to benefit your team and aid in your assessment when working with facilitators are:

  • Ensuring that you are an active contributor
  • Asking insightful questions
  • Encouraging participation by others
  • Summing up key discussion points as appropriate

Introduction

It is on 26 February 2024. Your team was approached by the CFO of the selected ASX listed company to provide corporate finance advice.

The advice is sought ahead of the company’s annual strategy meeting where a range of initiatives will be discussed by senior management and the board. The CFO has emphasized the importance of this advice being independent and hence your team was chosen in preference to a number of full-service investment banks who have traditionally provided transaction and debt related services to the company. The CFO has requested that your analysis focus on material issues for the company. While you are not expected to perform detailed capital budgeting analysis, you are expected to provide some initial prospective estimates of the costs and benefits of your recommendations.

It is anticipated that the strategy meeting will review the current scope of the company’s operations and, in particular, consider the potential for divestments and/or acquisitions. However, the CFO first wants to address the broader corporate finance issues currently facing the company. Hence, the CFO needs a rigorous corporate finance review of the company in the form of CFO briefs providing detailed advice on the following corporate finance topics:

1. Capital structure

2. Leverage and liquidity

3. Environmental social and governance (ESG)

4. Payout policy

5. WACC for the main business activity

6. Scope of company’s operations – team analysis

Corporate finance topic

1. Capital structure (individual brief) To consider capital structure going forward, the company needs summarised advice in relation to the following points:

  • Based on academic theory and the specific characteristics of the company, what are the key factors or commercial issues that should be considered in determining a capital structure for the company?
  • How does the gearing of the company as reported in its most recent annual or interim report compare to its peer companies? Analysis should cover three to five comparable companies and the following metrics:
  • Net debt as a percentage of net debt plus equity (based on market values) o The ratio of net debt to EBITDA
  • To the extent that gearing varies across the peer group, what major factors appear to lead the companies to adopt different capital structures? What insights does this comparison provide to the company in considering capital structure policy?
  • Based on the above analysis, your brief recommendation in relation to the capital structure of the company.

2. Develop a summarised analysis of the company’s leverage and liquidity position. In doing so, make sure that you identify:

  • The firm’s net debt (or cash) position
  • The existing term structure of debt
  • The sources of existing debt – including the mix of bank and bond debt (if applicable)
  • The current level of credit facilities (detailing both drawn and undrawn amounts)
  • Relevant credit ratios/metrics that help to inform your analysis of leverage and liquidity

Compare and contrast to three-to-five comparable companies where appropriate. You should discuss your company’s leverage and liquidity position in the following context:

  • Is the current term structure of debt and the quantum of debt appropriate given your company’s operations, circumstances, and outlook? (Referencing appropriate credit metrics)
  • If you determine that the company needs to, or should, raise additional debt financing, how and where should that be done?
  • Alternatively, if the company were to receive a significant cash inflow, how should that cash be used?

3. The CFO is acutely aware that ESG is increasingly an area of scrutiny among major investors.

Based on the current activities of the company, provide a summary of up to three ESG risks which could materially affect the company’s performance.

Focus on material ESG issues; the three issues need not come from each of E, S, or G. For each current risk identified, provide recommendations for how the company could look to manage the risk over the short, medium and long term.

Review how the company currently reports these risks and consider any potential improvements in the way these risks are communicated to external stakeholders. Be sure that your analysis addresses substantial issues and that you provide some preliminary cost and benefit estimates (a detailed DCF analysis is not expected).

4. To consider future payout policy (i.e. the distribution of post-tax profits by way of dividends or buybacks), the company wants you to provide summarised advice in relation to the following points:

  • Based on academic theory and the specific characteristics of the company, what are the key factors that should be considered in setting future payout policy (and the mix of dividends and buybacks)?
  • How does the historical dividend and buyback policy of the company compare to its peer companies? Using three to five comparable companies provide analysis of:
  • Dividend as a percentage of post-tax profit
  • Buybacks as a percentage post-tax profit
  • Broad factors other than post tax-profit, which appear to have driven share buybacks (e.g. distribution of asset sale proceeds)
  • Extent of franking of dividends (Australian comparables only)
  • What major insights does the above comparable analysis provide in relation to the future payout policy of the company?
  • Based on the above analysis, what is your brief recommendation in relation to the future payout policy of the company?

5. The company requires a robust, documented analysis of the weighted average cost of capital for its main business activity (based on your assessment) expressed in its functional currency. The analysis should use the CAPM framework and should specifically address:

  • The estimated WACC at 26 February 2024, based on analysis of the company and comparable companies in its sector and typical gearing levels across the sector. Data for three to five comparable companies should be referenced for key inputs.
  • Whether – in the current interest rate environment – the spot ten-year government bond yield is an appropriate measure of risk-free rate in applying CAPM?
  • Estimates of market risk premium, beta and the cost of debt. Beta measures should be sourced from information providers and do not need to be calculated from underlying share price data.
  • How your estimate compares to other estimates of WACC for the company identified in broker reports? Comment briefly on possible reasons for variances between your estimate and those other estimates.

The CFO briefing on WACC is to be in the form of a summary calculation with key supporting analysis.

The CFO is familiar with the format used in calculations of WACC set out in independent expert reports and has suggested using a summarised version of that format. Based on your analysis, comment on the approximate terminal growth rate that would be consistent with your WACC estimate in preparing a discounted cash flow (DCF) valuation of the company

6. Ahead of the strategy meeting, the company needs a very preliminary review of the company’s operations to consider how to increase the company’s long-term value to stakeholders potentially through divestments, acquisitions or other changes to its current activities.

  • Addressing possible divestment/s of a current business activity / investment, you should consider any activities showing the following characteristics:
  • Absence of alignment with the core business – i.e. lack of strategic or operating synergies with the core business.
  • Relatively weak positioning or performance. Perhaps to free up capital for other investment opportunities.
  • Scope for sale to another strategic buyer to realise a significant premium over the current value to the company.

Make a clear recommendation to the company on whether a divestment/s should be considered (and summarise your reasoning and supporting analysis).

If a divestment is recommended, estimate the dollar amount of proceeds, and briefly identify the relevant division or activity. Addressing possible new activities or extension of existing activities, you should:

  • Consider the logical sector for any new activities or an extension of existing activities.
  • Consider the most effective method of achieving any suggested new activities or extension of existing activities (for example, capital expenditure, acquisitions, joint ventures, licensing or other methods).
  • Consider potential acquisition targets in sectors of interest drawn from either of the following groups - Australian listed companies or overseas listed companies.
  • For one potential target identified, consider the logic, practical issues and risks of a possible acquisition of that target.

Make a clear recommendation to the company on whether a new activity or an extension to current activities should be considered. Outline your reasoning if you recommend such a new activity or an extension, describe how you consider this should be achieved, and estimate the dollar amount of investment required. If an acquisition is recommended, briefly identify a potential target company or business.

Be sure that your analysis addresses substantial issues and that you:

  • Explain clearly the strategic reasoning for any proposed change in the scope of operations.
  • Provide a high-level financial analysis of the impact of your recommendation on the company (a detailed DCF analysis is not expected).
  • Consider risks and implications.
  • Use publicly available information to conduct your analysis. Therefore, only listed companies – either Australian or overseas listed - may be considered. If referring to a company, ensure you name the relevant stock exchange and ticker code (company listing code).
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