FINM4000 Assessment 2  • Answer the questions using the following two sources: Source 1: Wesfarmers Limited (WES) Annual Report 2021 Source 2: Yahoo Finance Document Classification: Public 1. Company Perspective (25 marks) a) Consider the 2021 Annual Report for Wesfarmers Ltd (WES). Briefly illustrate how WES governance is organized. Do you notice any strategies in place to align manager and shareholder interests at WES based on the Annual Report? Provide one example. (3 marks) b) What is the net working capital for WES in 2020 and 2021? What type of current asset management strategy is the company pursuing? Explain why, and what are the pros and cons of this strategy. (3 marks) c) Consider the WES 2021 Annual Report. Identify two of the major risks discussed in this report. Are these risks systematic or unsystematic? Why? (2 marks) d) You are trying to value WES shares today (end of 2021). Assume the current price of WES shares are $49.97. Assume that the total dividend paid by WES in 2021 was a lump sum. You also estimate that for the next two years dividends will grow respectively at 50% and 25% per year. After this (starting in time 3) you estimate dividends will grow at a constant rate of 3.5% forever. Assume that today the Australian 10 year government bond has a yield of 1.15%, the market risk premium is 4.55% and the beta of WES is 0.72. Based on this price would you purchase WES shares? Why or why not? (7 marks) e) What was the market capitalization of WES on the 31 January 2022, assuming that the total number of shares outstanding is the same as at the end of the 2021? (Use the closing price on that day). (2 marks) f) What source of funding (non-current) is WES primarily using to finance its operations? What are the advantages and disadvantages of this source of financing? (3 marks) g) Assume that WES would like to replace its non-current “lease liabilities” (in 2021) with a new issue of bonds. Assume that the issue will have a coupon rate of 5% with a 15 year maturity. Assume the bonds are semi-annual coupon bonds and each have a face value of $1,000 and the required rate of return for similar bonds in the market is 4.5%. What would be the issuing price of these bonds? How many bonds will WES have to issue in order to replace its non-current “lease liabilities”? (5 marks) 2. Capital Budgeting (25 marks) Consider the following information. In order to satisfy a sharp increase in demand, WES is evaluating investing in one of two “mega warehouse” projects in Australia (called Project A and Project B). WES has already identified two existing warehouses that might meet their needs. In order to mitigate risk and assess these facilities, WES asked Axiom Ltd to conduct technical due diligence. Axiom is asking $100,000 as a fixed fee for its consulting services. Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85 million. Project A will generate additional revenues of $45 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $1 million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of $25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $2 million immediately, this working capital will be recovered at the end of the project. The operating costs of both projects will be 30% of the revenues from years 1 to 10. Both investment projects will be depreciated on a straight line basis over ten years to zero book value. WES has estimated that the mega warehouse can be sold at the end of year 10 respectively for $125 million (Project A) and $100 million (Project B). The tax rate is 30%. All cash flows are annual and are received at the end of the year. The weighted average cost of capital for both projects is 6%. a) Calculate the FCFs for each project. (10 marks) b) What is the NPV for each project? (5 marks) c) What is the discounted payback period for each project? (2.5 marks) d) What is the IRR for each project? (2.5 marks) e) Assume that the risk of investing in these mega warehouses is higher than the overall risk of the company. What would happen to the discount rate and consequently NPV of the two projects if this was the case? Why? (2 marks) f) Suppose that WES has a payback rule of 7.5 years. Based on your analysis in b), c) and d) which project should be chosen? Justify your answer with reference to theory. What other factor might affect the final decision? (3 marks) Important Study Information Academic Integrity Policy KBS values academic integrity. All students must understand the meaning and consequences of cheating, plagiarism and other academic offences under the Academic Integrity and Conduct Policy. What is academic integrity and misconduct? What are the penalties for academic misconduct? What are the late penalties? How can I appeal my grade? Click here for answers to these questions: Word Limits for Written Assessments Submissions that exceed the word limit by more than 10% will cease to be marked from the point at which that limit is exceeded. Study Assistance Students may seek study assistance from their local Academic Learning Advisor or refer to the resources on the MyKBS Academic Success Centre page. Click here for this information.

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