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ACC00152 Business Finance

tag 2 Downloads 9 Pages / 2,131 Words tag 07-07-2021


Question 1: Cost of Capital 
Reconsider Widget Ltd in Assignment 1. Assume your boss Diane Jones has asked you to re-estimate the company’s cost of capital for capital budgeting purposes based on up-to-date information. If the re-estimated cost of capital is different to that used previously, she would also like a brief qualitative assessment (no calculations necessary) of the impact of the difference on (a) the NPV of the project and (b) the value of the firm. Also discuss briefly the appropriateness of using the Widget cost of capital as a discount rate for the project.

Question 2: Share valuation

Your textbook provides share valuation examples related to an ASX listed company called JB Hi-Fi. In late 2016 JB Hi-Fi purchased a large private home appliance retailing company called The Good Guys with sales in the 2016 financial year of about $2 billion. Your task is to value JB Hi-Fi’s shares and discuss the results. Collect all required data from Morningstar DatAnalysis. Answer each of the following:
(a) Assuming the same equity cost of capital as given on page 210 of the text, but using the total dividends per share paid by JB Hi-Fi in the 12 months to 31st December 2016, value the shares assuming constant dividend growth of (i) 5.69% and (ii) 7%. 
(b) Pages 298-299 of the text show an example of valuing JB Hi-Fi shares using free cash flow. You are required to update this valuation. Use calendar years for your updated valuation to keep things simple. Start your new valuation with an assumption of 2016 calendar year sales of $6 billion ($6,000 million) for the combined company and estimate the future calendar year free cash flows from 2017. Assume calendar year sales growth of 4% in 2017, 4% in 2018 and 3% thereafter. These are similar growth assumptions
as the example in your text. Make the same assumptions as the text example about the EBIT margin, net working capital changes, equivalence of capital expenditures and depreciation expenses, tax rate and cost of capital. Update the cash, debt and shares outstanding their 31st December 2016 interim balance sheet values. 
(c) Compare your valuations in (a) and (b) to each other and to JB Hi-Fi’s actual closing share price on 31 December 2016. Explain the differences and discuss whether you would recommend buying the shares.

Question 3: Capital Structure

Reconsider the information you have on Widget Ltd from Assignment 1 and Question 1 in the current assignment. Assume your boss Diane Jones is concerned about the firm’s heavy reliance on debt and has asked you to develop an argument based on trade-off theory for the need to shift the firm’s capital structure more towards equity. Further information on Widget that may help you in this task is:? Widget has traditionally had variable earnings and operating cash flows, although it has made a taxable profit each year ? The firm’s earnings are almost entirely related to software development. This highly competitive industry is subject to rapid technological change. 90% of the firm’s book value assets are intangible. 
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