Value: 20% Due Date: 08-May-2019 Return Date: 30-May-2019 Length: 1500 words Submission method options: Alternative submission method Task back to top Question 1 (25 marks) Fast Fitness Limited is a major retailer of fitness machines and accessories. It is currently considering investing in a new store in Brisbane. The Brisbane store will have a lifespan of 20 years and the new investment will require an initial investment of $30 million. It will be fully depreciated on a straight-line basis over the life of the store. The store is expected to generate annual sales of 5,000 fitness machines, and the price of each machine is $2,300. Sales of accessories will be another $500,000 per year. Operating expenses of running the store, including labour and rent, will amount to 60 per cent of the revenues from the fitness machines. The business will need to invest $2 million in additional working capital immediately, and recover it at the end of the investment. The company tax rate is 30%, and the opportunity cost of opening up the store is 10%. What are the incremental cash flows from this project at the beginning of the project as well as in years 1-19 and 20? Should the project be approved? Tabulate your answers clearly. Question 2 (25 marks) WRE Energy Limited is a major oil and gas exploration company in Western Australia. It currently has $300 million of market value debt outstanding, consisting of 9% coupon bonds with a maturity of 15 years. The bonds pay semi-annual coupons. The face value of each bond is $1,000 and are currently priced at $1,024.87 each. The company also has an issue of 2 million preference shares outstanding with a market price of $20 each, paying an annual dividend of $1.20. WRE Energy also has 14 million ordinary shares outstanding with a price of $25.00 per share. The company is expected to pay a $2.20 ordinary dividend 1 year from today, and that dividend is expected to increase by 7% per year forever. The relevant corporate tax rate is 30%. a. Outline the necessary steps required to estimate the company’s weighted average cost of capital (3 marks). b. Calculate the after-tax cost of each of the company’s current financing sources (9 marks). c. Using the information provided, calculate the market values for the financing sources for WRE Energy (7 marks). d. Using the information from b.) and c.) calculate the company’s after-tax weighted average cost of capital (6 marks). Question 3 (15 marks) AVER Ltd is considering short term financing for its working capital requirement. You are invited to provide a discussion on the risk-return trade-off that the company should consider in selecting different sources of short term financing. In your discussion, illustrate with an appropriate example where possible. Write between 1,200 – 1,400 words for this question.

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