5089

Task

Assessment 3

This assessment is worth 15% of the total subject assessment and is marked out of 100.Part A (40 Marks)Saturn Petcare Australia and New Zealand is Australia’s largest manufacturer of pet care products. Saturn have been part of the Australian and New Zealand pet care landscape since opening their first manufacturing facility in Albury Wodonga in 1966. Since then they have expanded their manufacturing footprint to include other sites in regional Australia and New Zealand including a world-leading manufacturing site opened in Bathurst, NSW in 2015. Saturn Petcare Australia New Zealand manufactures both for the domestic markets as well as exporting products to more than 26 countries. Saturn Petcare is part of the larger overall Saturn Group which is globally one of the largest privately held manufacturing companies and operates in a range of different fast moving consumer goods (FMCG) sectors including manufacturing well-known chocolate, confectionary, and food brands as well as pet food and pet care products.Saturn have undertaken externally commissioned market research at a cost of $250,000 which has identified that a market exists for a new premium dog snack to be manufactured under their ‘Optimal’ premium pet food label. The Saturn marketing department have estimated that the new product will achieve sales of AUD$30 million in the first year and that sales will be expected to increase by 10% pa year on year for at least 10 years.If Saturn proceed with this product launch a manufacturing production line must be constructed at an estimated cost of $27.5 million. To house the new production line Saturn have the opportunity to construct a purpose built facility alongside its existing dry food factory in Bathurst for a cost of $8 million. Alternatively, the production line could be built within an existing vacant factory space at the Wodonga head office site. When operational the new production facility is expected to create full time employment for an additional 20 staff. In addition you are advised that the Bathurst City Council has decided to offer as an incentive if the new facility is built in Bathurst a 100% rebate of the council municipal rate on Saturn’s Bathurst site (valued at $500,000 per year). In addition, the Bathurst City Council has negotiated a one-off regional infrastructure grant from the NSW state government of $2.5 million payable when construction of the facility commences. The existing factory space where the plant is planned to in Wodonga, Victoria is unused and there is no opportunity cost associated with it. It is expected that the production line plant and equipment will be depreciated on a straight line basis over its expected useful life of 10 years. The new building in Bathurst will have a useful life of 25 years and will be depreciated on a straight line basis. Saturn are an international company and pay Australian tax at the rate of 30% on profits. The capital budgeting analysis should be conducted on an after tax basis.

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You have been asked by Nathan Quinlivan the Demand and Strategy Finance director for Saturn Petcare Australia New Zealand to conduct a capital budgeting analysis of the two options. Saturn have a global target return on investment of 22% pa. Margin after Conversion (MAC) for this new product is budgeted at 30% of gross sales.

Nathan Quinlivan advises you that he is concerned about three issues:

  1. That the possibility of product cannibalisation has not been considered;
  2. Marketing estimates of year on year sales increases are high; and
  3. He believes that the original $6 million cost of the vacant Wodonga factory space should be considered in the analysis.

Required:

For both the Bathurst and Wodonga production options calculate the following:

  • After-tax cash flows (6 marks).
  • Payback periods (4 marks).
  • Net present values (6 marks).
  • Profitability index (4 marks).

What recommendation would you make regarding the projects? Discuss any further information that you may require to help you make the accept/reject decision about either of these projects (5 marks).

Define ‘product cannibalisation’ in capital budgeting decisions and address Nathan’s concerns that it should be considered (5 marks).

Address Nathan’s concerns that Saturn’s marketing department’s budgeted sales estimates may be too high. What capital budgeting options are available to compensate for such an error? (5 marks)

Address Nathan’s concerns that the original value of the vacant Wodonga factory should be included in the analysis (5 marks).

Part B (60 Marks) Report

Guidelines:
For this assignment, you are encouraged to use the information provided on the firm’s corporate websites together with the following sources:

  • OneSource: Global Business Browser (available through Library Databases: http://library.csu.edu.au/services/find-books-and-other-resources/databases/subject/business)
  • Australian Stock Exchange http://www.asx.com.au/
  • Yahoo Finance https://au.finance.yahoo.com/
  • Reuters http://www.reuters.com/finance/markets
  • News sources such as those secured through the Library’s ANZ Newsstream and Factiva databases are also likely to be relevant (http://library.csu.edu.au/services/find-books-and-other-resources/databases).

Your report should include:

  • A brief executive summary.
  • Introduction.
  • Body (use appropriate headings and sub-headings as relevant sign-posts).
  • Conclusion

Required:

ARB Corporation Limited designs, manufactures, distributes, and sells off road motor vehicle accessories and light metal engineering works in Australia, the United States, Thailand, the Middle East, and Europe. The company operates approximately 61 ARB stores in Australia. ARB Corporation Limited was founded in 1975 and is headquartered in Kilsyth, Australia. ARB is listed on the Australian Stock Exchange and reported total revenue for the 2017 financial year of almost $385 million.
As part of the finance team of ARB Corporation you have been tasked with reviewing and preparing a report on the capital structure of the firm and critique whether the firm has been successful in maximising wealth generation for shareholders.
Your report should be 1000 words and cover the following areas:

(i) Using data from the firm’s 2017 financial year annual report and other sources assume that the firm ARB has a Beta of 0.89 (Reuters) and that capital return on the market for 2017 was 8.54%:

  • Categorise the firm’s current capital structure into debt and equity.
  • Calculate the firm’s after-tax Weighted Average Cost of Capital.
  • Using the CAPM calculate whether the firm is providing an appropriate return given its risk

(ii) Compare the firm’s capital structure with at least one other firm operating within a similar industry.

(iii) Critically analyse other key financial ratios for ARB.

(iv) Outline any significant changes to have occurred to the firm’s capital structure during the past three years.

(v) Critically evaluate the extent to which the firm has been successful in maximising wealth for shareholders in the past three years. In doing so discuss why it is important for the firm to minimise their cost of capital.

(vi) Recommend possible ways in which the firm could adopt an alternative capital structure and lower their cost of capital.

Rationale

This assessment task covers Topics 6 through 10. This will provide an opportunity to apply the concepts in an authentic scenario that you may encounter in the workplace and also:

  • be able to evaluate and explain the congruence of accounting, finance and treasury functions.
  • be able to demonstrate appropriate communication skills in the context of corporate finance.
  • be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.

Marking criteria

Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.

Use the following rubric as guidance:

Problem types/criteria HD( 85% to 100%) DI (75% to 84%) CR (65% to 74%) PS (50% to 64%) FL (0% to 49%) Quantitative problems Be able to determine capital budgeting cash flows and calculate various measures relating to capital budgeting problems; Be able to identify and determine individual cost of capital and compute weighted cost of capital. Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problem using appropriate finance methodology with no errors.Identify and determine the cost of capital and be able to compute the cost of capital correctly with no flaws. Correctly identify incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with very few errors.Identify and determine the cost of capital and be able to compute the cost of capital correctly, with minor flaws. Identify most of the incremental capital budgeting cash flows and calculate various measures relating to capital budgeting problems using appropriate finance methodology with few errors.Identify and determine most of the cost of capital and be able to compute the cost of capital correctly, with minor errors Identify a majority of the capital budgeting cash flows and calculate some of the measures relating to capital budgeting problems using appropriate finance methodology.Identify and determine some of the cost of capital and be able to compute weighted cost of capital, with substantial errors. Fail to Identify the incremental capital budgeting cash flows and fail to calculate the measures relating to capital budgeting problems using appropriate finance methodology.Fails to identify and determine most of the cost of capital. Does not demonstrate the ability to compute weighted cost of capital, contains multiple and substantial errors. Conceptual problems Be able to analyse the elements in the business environment that at a particular time cause the cost of the individual source of capital to be high or low. Explicit and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Analysis of elements demonstrates a very broad and deep knowledge of the topic Clear and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Clear analysis of most key elements in business environment that cause cost of the individual source of capital to be high or low. Analysis lack explicit detail. Limited analysis of some elements in business environment that cause cost of the individual source of capital to be high or low. No analysis of relevant elements, fails to make links to the specific business environment. Financial technology Use appropriate financial technology such as excel spreadsheet to analyse data and and gather information relevant websites to conduct financial analysis. Data used skilfully and demonstrates explicit integration into the analysis. The correct answers are derived using multiple relevant sources and the results are presented in a clear and professional manner. Data used competently and demonstrates integration into the analysis. The correct answers are derived using relevant sources and the results are presented in a clear and professional manner. Data sources used competently. Most correct results are derived using relevant sources but they may be some minor errors Data sources used competently. Most correct results are derived using relevant sources but they may be some major errors Data sources are not used competently. Most results are incorrect and derived using irrelevant sources. Contains major errors Analyse business situations Reach reasonable conclusion and recommendations on an alternative capital structure to lower cost of capital. Quantitative and qualitative analysis persuasively and explicitly supports the conclusion and recommendations incorporating all factors determining cost of capital. Quantitative and qualitative analysis is use in a clear and concise manner to make reasonable conclusion and recommendations incorporating most of the factors determining cost of capital. Quantitative and qualitative analysis is used to make reasonable conclusion and recommendations incorporating most factors determining cost of capital. Quantitative and qualitative analysis is used to make reasonable conclusion and some recommendations. Quantitative and qualitative analysis is too simplistic or convoluted. Financial research Use of literature/market research/evidence of reading. Has developed and justified own ideas based on a wide range of sources which has been thoroughly analysed, applied and discussed. Reference list of an extensive rant of resources used. Literature is presented with soundly based criticisms, in a descriptive way and indicates a good understanding of the literature. Literature is presented with some criticisms, in a descriptive way and indicates a few limitations of understanding. Literature/market research is presented with some criticisms, in a descriptive way and indicates few limitation of understanding. No evidence of literature or irrelevant to the research question A Output is logically argued, and well written in a manner that very effectively conveys the key outcomes and recommendations to the end user. All references and sources acknowledged and professionally presented. Well written argument with references and sources acknowledged and output professionally presented. Well written with a logical argument and with references and sources acknowledged and professionally presented. Written in clear language with references and sources acknowledged and professionally presented. Does not meet minimum (PS) expectations

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