Collect the company’s 5 year growth rate (CAGR) in operating revenue as at the end of the most recent financial year. (If the company has not been listed that long, use the 1 or 3 year rate – whichever is longer – as a proxy.) If this CAGR can be expected to continue, what is your prediction for operating revenue for the 2020/21 financial year?
Collect the company’s interest expense from the profit and loss statement for the year ending 30 June 2016 and divide this figure by average long-term debt in the balance sheet for the last two financial years. Use this as a very rough approximation of the quoted annual interest rate that the company would have to pay on new long-term debt. Now hypothetically assume that on 1 July 2016, the company took out a 20 year amortised loan of $800,000 to buy some equipment and that the rate of interest on that loan is fixed for the first 4 years at the rate you calculated above. The loan requires monthly payments, due on the last day of the month. How much interest will the company be able to claim as an annual tax deduction in the first financial year (1 July 2016 to 30 June 2017) and in the fourth financial year?
Assume that the company has just received a large amount of cash from selling assets and wants to use this cash to repay $2 million in debt maturing in three years. In the meantime, the necessary cash can be invested into one of the following investments:
(1) A fund with a quoted fixed rate of 4.20% compounded semi-annually;
(2) A fund with a quoted fixed rate of 4.14% compounded monthly; or
(3) Zero coupon bonds maturing in three years and currently trading at $88.45 per $100 face value. Which investment fund should be chosen: 1, 2 or 3? (Assume the investments have equivalent risk.) How much cash will be invested?
Hypothetically assume that on 27 January 2017 the company issued 10 year, semi-annual fixed coupon bonds at par, which are given a BB rating and have a spread of 325 basis points over the yield on an Australian government bond of equivalent maturity.
Australian Treasury bond as a proxy for the risk-free rate, assume the market risk premium is 6.80% and use the company’s current beta (thus assuming the beta has not changed since mid-2015).
Collect and evaluate the company’s FCF and ROIC for the two financial years ending 30 June 2015 and 30 June 2016. Assume that the company’s cost of capital (WACC) was the same as the required returns (costs of equity) you calculated in Question 5.
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