Finance-AW606

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Part 1: Group Written Assignment
 

Task Description
 

Length: 1500-3000 words (up to 500 words above 3000 permitted. Numbers and spreadsheets are not included in the word count)
Due: 25th May 2014, Week 10 by 5pm AEST
How to submit: Under “Assessments and Revisions” tab on the FINM4000 portal homepage.
 
• Please submit the Assignment Electronically.
• Please submit written answers and final numbers through “Written Report” link and submit any excel spreadsheets you used in calculating answers through “Excel Files for Report” link. Both of these sections will be marked.
 

Complete all five parts of the written assignment below.
 

1. Evidence of Group Work
 

Please see “FINM4000 Example of Group Meeting Record” on the portal under assessments and revcisions. Each group must provide 3 brief records of group meetings as part of the assignment. These briefly list who was present at meetings as well as tasks and contributions.
 
• Completing this table is worth 10 marks of your total score
• Please note that all group members need to contribute equally to the task.
• If a group member does not contribute to the task, the group’s meeting minutes can be used as evidence to demonstrate this. The student’s mark can be reduced by the lecturer if they consider that there is sufficient evidence that they did not contribute
 
2. Rio Tinto Annual Report Financial Analysis
 

a) Consider the 2012 Annual Report of Rio Tinto. Briefly explain how Rio Tinto’s governance structure/ company governance is organised. Do you notice any strategies in place to align manager and shareholder interests at Rio Tinto based on the Annual Report? Provide one brief example. (Use your own words)
 

b) Based on Rio Tinto’s 2012 Annual Report and Financial Statements has Rio Tinto taken on additional debt in 2012 compared to 2011? Justify your answer (Hint: Look at the Notes to the Balance sheet) Comment on whether most of Rio Tinto’s borrowings in 2012 are in the form of direct or indirect financing.
 

c) Assume the DSI for Rio Tinto in 2011 was 3.84 and 4.11 in 2012 and DPO was 94.43 in 2011 and 89.9 in 2012. Calculate the cash conversion cycle for Rio Tinto for 2011 and 2012 and interpret your result.
 

3. Capital Budgeting [35 marks]
 

Rio Tinto is considering opening a new iron mine today in 2014 (time 0). The mine will have a life of
5 years, after which it will be closed. The new mine requires the purchase of new mining equipment costing $400,000,000 today. The useful life of the mining equipment is 5 years, and will be depreciated to 0 over its five-year life. At the end of 5 years it has an estimated sale value of
$157,500,000.
 

The new mine will be developed on a site which already has an existing copper mine. The original mine is currently being rented to another company under a lease agreement that has 5 years to run and provides for an annual rental of $15,000,000. Under the lease agreement Rio Tinto can cancel the lease by paying the lessee equal to 1 year’s rental payment at the end of year 1. Rio Tinto plans to keep this mine, cancel the lease and use it in the development and operation of the new iron ore mine.
 

It is expected that the mine will require exploration expenses of $50,000,000 at the end of year 1 of the mine’s operations. Additions to current assets (working capital) will require $22,500,000 at the commencement of the project and are assumed to be fully recoverable at the end of the fifth year.
 

The new mine is expected to generate revenues as follows and operating expenses are 50% of revenues every year. (Assume all cash flows occur at the end of the year)
 

Year 1 $200,000,000

Year 2 $250,000,000

Year 3 $325,000,000

Year 4 $300,000,000

$150,000,000
The cost of capital is 10% and the tax rate is 30%.
 
You can read more about our case study assignment help services here.
 

 

a) Calculate the FCF’s and the NPV of this project. Use excel to undertake calculations and upload your spreadsheets to “Excel Files for report” together with your names and student numbers. The majority of the marks will be for your working out and formulas which will be shown in your spreadsheet.
 

b) What is the IRR for this project?
 

c) Based on your calculations in a-b, should we accept the project? Why? Which capital budgeting technique gives us the best answer for shareholder interests and why?
 

d) The CEO of Rio Tinto wants to know how the NPV and investment decision will be affected if the following three separate events happen.
i. If the exploration expense go up to $900,000,0000; or ii. If the mining equipment is depreciated over 4 years; or iii. If expenses become 70% of revenues for all 5 years

How would each event affect the NPV if each of the factors is changed in isolation? What type of analysis are you using to answer this question and why is this analysis useful for the CEO?
 

(Marks will be awarded for working out/ excel spreadsheets. Please upload these to the portal under “Excel files for report”).
 

4. Rio Tinto Share Valuation [30 marks]

a) If you purchased Rio Tinto shares in July 2012 and sell them in April 2013 what would be your holding period return? (Refer to market data and use monthly figures) (5 marks)
 

b) Imagine that over the period from July 2012 to April 2013 the yield on government bonds was 3% and Rio Tinto’s beta was 0.9. According to the CAPM what is the expected return to Rio Tinto shares over the period? Assume the expected return to the market is 21.6%.
 

c) Based on a) and b) where do Rio Tinto shares plot on the SML and are they overvalued or undervalued in April 2013? Draw a diagram to support your answer.
 

d) You are trying to value Rio Tinto shares today (April/May 2014). You decide to use the most recent dividend paid by Rio Tinto as Do. You also estimate that for the next three years dividends will grow at the same rate which they increased by from August 2013 to March
2014. After this (starting in time 4) you estimate dividends will grow at a constant rate of
12% forever. Assume that today the risk free rate is 3%, the expected return to the market is
15% and Rio Tinto’s beta is 1. What is the price of a Rio Tinto share today? Based on this price would you purchase the share?

 

5. Analysis of findings [30 marks]
 
a) What type of analysis were you conducting in Question 4 d)? How can this analysis be used to make abnormal (excess) returns? What do you need to assume about market efficiency to be able to make abnormal returns on share purchases?
 

b) Based on the article below and your own research apply scenario analysis to your answer in Question 3 a). Assume that three scenarios are possible 1) Chinese economic growth increases over the next 5 years 2) Chinese economic growth stays the same over the next 5 years and 3) Chinese economic growth decreases over the next 5 years. Indicate and justify how each scenario might affect the variables in your analysis from Question 3 a) and conduct excel calculations to estimate NPV values for each scenario. Based on this, advise the CEO of Rio Tinto whether the new iron mine should proceed and justify your answer with reference to your calculations and current events.
 

LONDON — Rio Tinto, one of the world’s largest mining companies, has big plans for pulling even more iron ore from the earth.
 

It is spending billions of dollars to expand its existing operations in the Pilbara region of Western Australia, where driverless trucks the size of three-story buildings haul iron ore out of 15 mines. The trouble is, the buildup comes just as Rio Tinto’s single biggest customer, China, is losing economic steam and global demand for raw materials like iron ore and copper has been cooling.
 

On a single day in early March, the spot market price of iron ore — the main ingredient in steel — fell by more than 8 percent, and it is down 12 percent for the year. The price of copper, another essential raw material for industry, has recently hovered near four-year lows.
 

Though mining executives tend to take the long view of their markets, where price cycles are part of the game, some analysts say that this time the industry may be staring at a deeper set of problems from which miners like Rio Tinto could have trouble extracting themselves. Even as China’s
decades-old appetite for steel may be abating, there is a potential iron-ore glut coming because so many mining companies increased production to chase prices that for years were alluringly high.

The stock fell by 13 percent from mid-February to mid-March and since then has regained only about half that ground, even as broader indexes have been on the rise.
 

Rio Tinto is “definitely the most exposed major mining company” to iron ore, said Richard Knights, an analyst at Liberum, a London-based investment bank. Iron ore accounted for about 85 percent of the company’s $3.7 billion in net earnings last year.
 

Rio Tinto’s’s chief executive, Sam Walsh, admits to no worries. He says costs at the Australian iron ore operation are so low that prices can fall much further before there will be cause to panic. And he insists that a slowdown in China is not the end of global growth….
 
Task Description

 

Description
 

• Present your answer to Question 5 a and b from the Written Assignment as a power point presentation
• Use no more than 10 slides and ensure the presentation is no more than 15 minutes long
• You can refer back to your excel analysis and briefly explain how you achieved your results
• All group members need to speak
• You will be assessed based on a rubric uploaded on the portal which emphasises
presentations style and how interesting and engaging the presentation is to the audience

 

Layout
 
• The presentation must be 10-15 minutes long
• Groups must present the lecturer with a hand-out of the slides.
• Slides need to be structured in a logical manner.
• A reference list should be included at the end of your slides and any sources you refer to in your analysis must also be referenced using in-text referencing. A referencing guide can be found on the portal under “Academic Success Centre/ Library” and is also uploaded under Assessments on the portal site.
 
product code: Finance-AW606
 
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