Finance

 1. Company Perspective – Blackmores Group [28 marks]  

https://www.blackmores.com.au/

Source 1: Blackmores Group Annual Report 2019 https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports (Financial Year 2019 → Annual Report → View Online → Download) Source 2: Blackmores Group Governance & Board of Directors https://www.blackmores.com.au/about-us/investor-centre/corporate-governance 

Source 3: Blackmores Limited (BKL.AX) Yahoo Finance https://au.finance.yahoo.com/quote/bkl.ax/ 

a) What is the Net Working Capital for Blackmores both in 2108 and 2019. What type of current asset management strategy is the company pursuing? Explain why and what are the pros and cons of this strategy. (3 marks) 

b) Consider the Blackmores Group 2019 Annual Report. Identify three of the major risks discussed. Are these risks systematic or unsystematic? Why? (3 marks) 

c) You are trying to value Blackmores share today (End of 2019). Assume the current price of the share in the stock market is $88.16 and that you would like to hold the investment for 5 years. Assume that the total dividend paid by Blackmores in the 2019 year were paid as a lump sum (at once) today. You also estimate that for the next two years dividends will grow respectively at 30%, 25% per year. After this (starting in time 3) you estimate dividends will grow at a constant rate of 6% forever. Assume that today the Australian treasury notes 2.5%, the market risk premium is 8% and the beta of Blackmores is 1.16. Based on this price would you purchase the share? Why or why not? (9 marks) 

d) What was the market capitalization of Blackmores, on the 16 January 2020, assuming that the total number of share outstanding is the same as per the end of the 2019FY? (Use the closing price on that day). (2 marks) 

e) Consider the Blackmores Group 2017 Annual Report. Based on the note to financial statements about “Financing”, what type of source (non-current) is Blackmores primarily using to finance its long-term operations? Is Blackmores improving its financial position between 2018 and 2019? (4 marks) 

f) Assume that the Blackmores Group would like to replace its bank loan facilities (2019) with a new issuing of bonds. Assume that the issue will have a coupon rate of 1.5% with a 10 year maturity. Assume this are semi-annual coupon bonds and each have a face value of $1.000 and the required rates of return for similar bonds in the market is 2.5%.What would be the issuing price of these bonds? How many bonds Blackmores will have to issue in order to replace its bank facilities? (7 marks) 

 2. Capital Budgeting – Blackmores Group [32 marks] Answer the below questions in your word file and refer to your excel spreadsheet as a supporting document. Upload your excel spreadsheet under “Excel Submissions”. All amounts are in $AUD. 

Blackmores is evaluating between two manufacturing facilities projects in Asia. In order to mitigate the risk and assess the fit for purpose of these manufacturing plants Blackmores asked “SGS Ltd.” to conduct a technical due diligence on each of the two facilities. “SGS Ltd.” is asking $1 Million as a fixed fee for its consulting services. Project A has an initial outlay of dollars $500 million and Project B has an initial outlay of $950 million. Project A will produce 350,000,000 tablets ready for sale starting at the end of year 1 until the end of year 5 and 450,000,000 tablets starting at the end of year 6 until the end of year 10. It will also incur working capital expenses at the end of year 1 to 5 of $40 million (this working capital will not be recovered). Project B will produce 600,000,000 tablets ready for sale starting at the end of year 1 until the end of year 10. It will also incur working capital expenses at the end of year 1 to 3 of $90 million (this working capital will not be recovered). Assume that the average selling price of a single tablet is $1 over the ten years. The operating costs of both projects will be 30% of the revenues from year 1-10. Both investment will be depreciated on a straight-line basis over ten years to 0 book value. Blackmores has estimated that the manufacturing plants can be sold at the end of year 10 respectively for $100 million (Project A) and $150 million (Project B).The tax rate is 30%. All cash flows are annual and are received at the end of the year. The weighted average cost of capital for both projects is 10%. 

a) Asia is a very important market for Blackmores and the company is considering to buy a new manufacturing facility in the country. The company is currently evaluating two existing manufacturing plants which have different production capacities. Calculate the FCFs to each project (10 marks) 

b) What is the NPV for each project? (5 marks) 

c) Assume that the risk of investing in these manufacturing plants is higher than the overall risk of the company, what would happen to the discount rate and consequently NPV of the two projects? Why? (2 marks) 

d) What is the Discounted Payback Period for each project? (5 marks) e) What is the IRR for each project? (5 marks) 

f) Suppose that Blackmores’ management payback rule is 4 years. Based on your analysis which project should be chosen? Justify your answer with reference to theory. What other elements could be taken into consideration when selecting the project? (5 marks) 

2

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PART A

Example

PART A

s)

,000

0%

,000,000

/10 = $1,000,000

$1,000,000

0%

Year 0 1 2 3 4 5 6

9 10

$14,100,000 $14,100,000 $14,100,000 $14,100,000 $14,100,000 $14,100,000 $14,100,000 $14,100,000 $14,100,000

-$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000 -$8,460,000

DA

$5,640,000 $5,640,000 $5,640,000 $5,640,000 $5,640,000 $5,640,000 $5,640,000 $5,640,000 $5,640,000

-$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000

EBIT

$4,640,000 $4,640,000 $4,640,000 $4,640,000 $4,640,000 $4,640,000 $4,640,000 $4,640,000 $4,640,000

-$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000 -$1,392,000

$3,248,000 $3,248,000 $3,248,000 $3,248,000 $3,248,000 $3,248,000 $3,248,000 $3,248,000 $3,248,000

$1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000

$4,248,000 $4,248,000 $4,248,000 $4,248,000 $4,248,000 $4,248,000 $4,248,000 $4,248,000 $4,248,000

-$1,000,000 $1,000,000

$ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00 $ 4,248,000.00

$ 15,487,664

Lecture		9
	Key Variables	In the table there should be ONLY formulas referencing
•Life of the project (		Year			1		0	the key variables.
	•Number of new boxes				4
	•Annual incremental revenue per box		$400,000	Pressing F4 will make a term constant when you drag it
	•Number of new seats			5	accross
	•Annual incremental revenue per seat		$2,500
	•Incremental expense (% of revenue)			6
	•Construction cost (Cap exp)	$			10
	•Depreciation per year																										$1,000,000	=	$10,000,000
	•Working Capital
	•Tax rate			3
	•Cost of capital		10%
	•Inititial Outlay		$ 10,000,000.00
	7		8
	Revenue										$14,100,000
	-Operating Expenses										-$8,460,000
		EBIT										$5,640,000
	-Depreciation																						-$1,000,000
									$4,640,000
	-Tax										-$1,392,000
	NOPAT										$3,248,000
	+Depreciation
	Cash flow from operations										$4,248,000
	Capital expenditure		-$ 10,000,000.00
	Working capital
	FCF		-$ 11,000,000.00									$ 4,248,000.00	$ 5,248,000.00
	PV of FCF		-11000000	3861818.18181818	3510743.80165289	3191585.2742299	2901441.15839082	2637673.78035529	2397885.25486845	2179895.68624404	1981723.35113095	1801566.68284631	2023331.18292618
	NPV		$ 15,487,664		Adding up PV of FCF’s
	Using NPV Function

PART B

PART B
Key Variables

10

•Number of new boxes 4

•Annual incremental revenue per box $400,000

•Number of new seats

•Annual incremental revenue per seat $2,500

•Incremental expense (% of revenue)

•Construction cost (Cap exp) $10,000,000

•Depreciation per year $1,000,000

•Working Capital $1,000,000
•Tax rate

•Cost of capital 10%
•Inititial Outlay $ 10,000,000.00

Year 0 1 2 3 4 5 6 7 8 9 10

Revenue

$13,500,000 $13,500,000 $13,500,000 $13,500,000 $13,500,000 $13,500,000 $13,500,000 $13,500,000 $13,500,000

-Operating Expenses

-$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000 -$8,100,000

-$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00 -$ 75,000.00

$5,325,000 $5,325,000 $5,325,000 $5,325,000 $5,325,000 $5,325,000 $5,325,000 $5,325,000 $5,325,000

-Depreciation -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000

EBIT

$3,825,000 $3,825,000 $3,825,000 $3,825,000 $3,825,000 $3,825,000 $3,825,000 $3,825,000 $3,825,000

-Tax

-$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500 -$1,147,500

NOPAT

$2,677,500 $2,677,500 $2,677,500 $2,677,500 $2,677,500 $2,677,500 $2,677,500 $2,677,500 $2,677,500

+Depreciation $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000

Cash flow from operations

$3,677,500 $3,677,500 $3,677,500 $3,677,500 $3,677,500 $3,677,500 $3,677,500 $3,677,500 $3,677,500

Capital expenditure -$ 10,000,000.00
Working capital -$1,000,000 $1,000,000

FCF -$ 11,000,000.00

$ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00 $ 3,677,500.00

PV of FCF -11000000

NPV

Adding up PV of FCF’s

$ 11,982,189 Using NPV Function

Lecture 9 Example
The table should have no numbers in it
•Life of the project (Years)	just references to key variables and changes to key variables
Incremental Changes to key variables:
5,000	1. Reduction in EBIT years 1-10	$ 500,000.00
2. Reduction in revenue years 1-10	$ 600,000.00
60%	3. New expensesr in years 1-10	$ 75,000.00
30%
									$13,500,000
									-$8,100,000
Other expenses										-$ 75,000.00
EBITDA										$5,325,000
									$3,825,000
									-$1,147,500
									$2,677,500
									$3,677,500
								$ 3,677,500.00	$ 4,677,500.00
3343181.81818182	3039256.19834711	2762960.18031555	2511781.98210505	2283438.16555004	2075852.87777277	1887138.97979342	1715580.89072129	1559618.99156481	1803378.73630663
	$ 11,982,189

Sheet3