This assignment has a 50% weighting in your overall mark for this unit and focuses on content from Weeks 4, 5 and 6. The assignment will be marked out of 50. It consists of two main tasks and marks will be allocated as indicated in the rubric for each task below. Your total assignment submission should not exceed 2000 words (excluding cover sheet and reference list), plus a spreadsheet submission for Task 2.

Task 1: Capital Structure and Payout Policy Analysis (20 marks total)

For this task, you are required to describe and evaluate the capital structure and payout policies of your Bega Cheese, ASX code (BGA) by using its company financial information.

For each policy area, use the following broad analysis approach:

1. Describe the policy (which may or may not be explicit) based on current and historical data.

2. Evaluate the policy, drawing on theory and practical considerations covered in the unit and applied to the company’s current characteristics and situation.

Your analysis will be mostly qualitative but some basic quantitative measures should be used in describing the company’s policies from company financial sources.

Marks for this task will be awarded as per the Task 1 rubric (see below).

Task 2: Capital Budgeting Task (30 marks total)

This task is based on the hypothetical case information below, plus a separate excel spreadsheet submission.

You are helping Masters Limited with its capital budgeting decisions. The company has a 15% weighted average cost of capital and is subject to a 30% tax rate.

Masters has recently been subject to significant competition from overseas manufacturers with much lower costs. To combat this, Masters is considering a project that will see it move into a new product market considered riskier than its current operations. The CEO has asked you to undertake a financial analysis of the proposed project and present your recommendations in a short memo. As part of your financial analysis you will calculate NPV, IRR, payback period, discounted payback period and profitability index.

The project requires an upfront investment in plant and equipment of $10 million, which will be depreciated on a straight-line basis over the five-year life of the project. The equipment is not expected to have any significant salvage value at the end of its depreciable life.

Consultants, who were paid $10,000 in fees, have already performed a market analysis. Sales volume is expected to be 100,000 units in the first year, grow by 10% per year in years two and three, and fall by 15% in each remaining year as demand wanes. Selling price in the first year is expected to be $100 and grow by 4% each year after that.

Various experts within Masters have forecast costs and working capital requirements related to the project. Cost of goods sold will equal 50% of sales revenues. Selling, general and administrative expenses directly related to the project (excluding depreciation) will be $1.5 million in the first year and increase by 3% per year thereafter. An upfront investment in net working capital equal to 15% of the year 1 sales revenue forecast will be required. This investment in working capital will be fully recovered at the end year 5.

If Masters goes ahead with the project, the company will set up project operations in one of the buildings it owns. This building is currently leased to another company for $100,000 per year.

Prepare:

(1) a separate excel spreadsheet financial analysis of the proposed project, and

(2) a memo to the CEO that briefly explains and justifies your chosen methods and any assumptions made, summarises your findings, and presents your recommendations on the proposed project.