TREASURY AND FINANCIAL RISK MANAGEMENT III ASSIGNMENT SUBMISSION DATE: 21st OCTOBER 2013; 9:00 am Sam Carapella

is the treasury specialist for a major Australian company, Gourmet Delights Limited, one the largest independent specialist food providers in the world. Underlying Sams recommendation is his assessment of the viability of the various capital expenditure options the companys senior management are considering. At a recent briefing with the companys CEO and CFO the following projects were identified and the amount of internal rate of return they consider necessary from each project if implemented. Investment Project Alternatives Diversification into fast foods Opening new stores in Australia Refurbishment of existing Australia n stores Establishing stores in New Zealand Initial Investment Outlay $200,000,000 $125,000,000 $150,000,000 $275,000,000 IRR 22% 16 14 12

A. B. C. D.

The companys major customers are located in the Euro area (15% of sales), Japan (10% of sales) and the US (25% of sales). The remainder of the sales is split evenly between markets in Australia, Hong Kong, Singapore and Malaysia. Due to strong sales growth prior to 2012 the company has just started investment in a new higher-tech production facility. Funding of this i nvestment will require the firm to double its long-term borrowing over the next eighteen months. They are also going to need to build up stocks of components and other inputs so as to allow them to begin production immediately upon completion of the facility. This will require extension of their overdraft facility due to temporary shortfalls in working cash flow. Although they produce in Australia, they import a large number of raw materials. The cost of imported inputs currently constitutes 30% of total costs, with the remainder of the costs being divided between locally produced components (15%), wages (30%), interest costs (15%) and other administrative overheads (10%). The imported materials are mainly sourced from South America, with 40% of these coming from Brazil and 35% from Chile. The remaining imported materials are sourced from Thailand. The company aims to maintain a profit margin in line with historical actuals. However, competition is particularly fierce in the United States and the Euro area. The product is a mature product in a fairly mature industry in these two markets. The price elasticity of demand for the product is only 0.65 in Asia, but exceeds 2.25 in each of the markets in the United States and the Euro area. Due to some unforeseen economic shifts the company management are in the process of revisiting their policies in relation to risk management. They have decided that to avoid what has recently occurred in the future they wish to adopt generally risk averse low cost hedging practices. These practices should be aimed at avoiding some of the cash-flow variability the company has experienced in the last year. Senior Personnel CEO Mr Warton joined company as Chief Executive in 2002 and has overseen the successful growth of the Group to date. Prior to this, he worked for the Flood Food Group (FFG), which he founded with his father and partner in 1977. At FFG, he worked his way up through various positions to become Chief Executive Officer in 1987, and led FFG through significant turnover

growth. Mr Warton gained an Institute of Directors diploma in 1996, received an OBE in 2000 for services to the meat industry and in 2005 was accepted into the Entrepreneur Hall of Fame. CFO Mr Murdacan was appointed as Finance Director of Gourmet Delights in 2006. He joined Gourmet Delights after 11 years with Parmalat SpA, from 1995 until 2006. Prior to this as Finance Director for SDI, Poland. From 1990 until 1995, Mr Murdacan gained extensive meat industry experience at BM Pty Ltd, first as Financial Controller, then as Commercial Director for the then newly acquired leading poultry company in Australia. Mr Murdacan has also worked in various finance roles for a number of companies. He was a qualified Chartered Accountant. COO Mr Brill jo ined Gourmet Delights in 2000 as the Managing Director of the Groups Dutch facility, Gourmet Delights Zaandam. In 2003, he was appointed to the Groups executive board as United States operations director responsible for the start-up of operations in the USA. Prior to joining Gourmet Delights, Mr Brill worked for Arrond from 1987. Having joined as a logistics manager for Arrond, Mr Brill was later appointed as a general manager, responsible for the successful restructuring of subsidiary businesses in the fresh and processed gourmet foods industry, prior to being appointed a divisional operations manager in 1999. Mr Brill holds a BSc in Engineering. Chair of the Board Mr Dalton joined the Gourmet Delights Food Group in 2007 as a Non-Executive Director after retiring from the Chairmanship of Arka Asia Pacific and was elected Chairman in 2010. He is a past President of the National Farmers Federation and is currently Chairman of his family farming business. He is also a Non-Executive Director of Gourmet Investments Pty Ltd.

From a financial database Sam has obtained the following information about the company:
Industrial Template

Gourmet Delights Limited

CUSIP: Pref Share Price on latest trading day 12.55* Ord Share Price on latest trading day 15.60*

Exchange : Country: Sector: Industry: Company Status: Scaling Factor : 100,000 5 YR ANNUAL BALANCE SHEET Assets Cash & Equivalents Receivables Net Inventories Total Current Assets Long Term Receivables Investments in Unconsol Subsidiaries Other Investments Property, Plant & Equipment - Gross Accumulated Depreciation Property, Plant & Equipment - Net Other Assets Total Assets Liabilities Accounts Payable ST Debt & Current Portion Due LT Debt Income Taxes Payable Other Current Liabilities Total Current Liabilities Long Term Debt - Bonds Provision For Risks And Charges Deferred Taxes Other Liabilities Total Liabilities Shareholders' Equity Preference Equity Common Equity Total Liabilities & Shareholders' Equity Preference Shares Outstanding Ordinary Shares Outstanding

SYD AUS Consumer Retail Active

DCN: ISIN: PE Ratio 13.11

Tot Ret 1Yr 49.50%

Beta 1.38

*Currency: AUD 28/02/2013 28/02/2012 28/02/2011 28/02/2010 28/02/2009

16,522.00 8,161.00 947.00 25,630.00 311.00 9,042.00 3,439.00 114,716.00 49,221.00 65,495.00 9,407.00 113,324.00

15,088.00 12,010.00 960.00 28,058.00 418.00 9,773.00 1,069.00 113,280.00 47,241.00 66,039.00 9,382.00 114,739.00

21,649.00 11,376.00 882.00 33,907.00 435.00 10,054.00 1,442.00 107,454.00 45,066.00 62,388.00 9,424.00 117,650.00

15,624.00 8,735.00 800.00 25,159.00 450.00 8,966.00 1,271.00 98,420.00 40,334.00 58,086.00 9,158.00 103,090.00

13,459.00 6,538.00 657.00 20,654.00 506.00 1,731.00 3,470.00 83,778.00 33,622.00 50,156.00 1,737.00 78,254.00

4,832.00 7,839.00 943.00 16,197.00 29,811.00 34,814.00 216.00 5,255.00 843.00 70,939.00

5,571.00 4,261.00 2,129.00 23,050.00 35,011.00 36,025.00 281.00 4,977.00 0.00 76,294.00

5,546.00 3,890.00 2,475.00 15,483.00 27,394.00 32,490.00 268.00 6,771.00 0.00 66,923.00

4,617.00 6,180.00 2,902.00 11,123.00 24,822.00 25,792.00 170.00 6,600.00 0.00 57,384.00

3,019.00 3,617.00 2,527.00 8,416.00 17,579.00 18,892.00 72.00 6,460.00 0.00 43,003.00

1,470.00 40,915.00 113,324.00

1,470.00 36,975.00 114,739.00

1,470.00 49,257.00 117,650.00

1,470.00 44,236.00 103,090.00

1,470.00 33,781.00 78,254.00

98.00 3,933.84

5 YR ANNUAL INCOME STATEMENT Sales Cost of Goods Sold Depreciation, Depletion & Amortization Gross Income Operating Expenses Operating Income Extraordinary Credit - Pretax Extraordinary Charge - Pretax Non-Operating Interest Income Other Income/Expense - Net Earnings Bef Interest & Taxes Interest Expense on Debt Pretax Income Income Taxes Minority Interest Equity Interest Earnings After Tax Other Income/Expense Discontinued Operations Net Income Bef Extraordinary Items Extraordinary Items & Gain(Loss) Net Income Before Pref. Dividends Preference Dividend Net Income Available To Ordinary Ordinary Dividend PER SHARE DATA EPS Fully Diluted EPS

28/02/2013

28/02/2012

28/02/2011

28/02/2010

28/02/2009

66,978.00 57,015.00 5,684.00 4,279.00 2,940.00 1,339.00 3,198.00 116.00 522.00 1,254.00 6,197.00 1,311.00 4,886.00 283.00 170.00 261.00 0.00 0.00 4,694.00 0.00 4,694.00 161.70 4,532.30 2,266 28/02/2013 1.19 1.19

86,578.00 85,690.00 5,195.00 -4,307.00 3,299.00 -7,606.00 349.00 999.00 980.00 145.00 -7,131.00 1,810.00 -8,941.00 -1,337.00 224.00 -730.00 0.00 0.00 -8,558.00 0.00 -8,558.00 0.00 -8,558.00 0 28/02/2012 -2.18 -2.18

75,358.00 59,832.00 4,844.00 10,682.00 3,649.00 7,033.00 0.00 0.00 1,664.00 706.00 9,403.00 2,451.00 6,952.00 799.00 187.00 1,057.00 0.00 0.00 7,023.00 0.00 7,023.00 161.70 6,861.30 3,430.65 28/02/2011 1.78 1.78

60,783.00 48,425.00 4,295.00 8,063.00 3,308.00 4,755.00 0.00 0.00 1,353.00 463.00 6,571.00 1,818.00 4,753.00 782.00 184.00 301.00 0.00 0.00 4,088.00 0.00 4,088.00 161.70 3,926.30 1,964.15 28/02/2010 1.16 1.16

50,909.00 40,351.00 4,007.00 6,551.00 2,689.00 3,862.00 0.00 0.00 1,161.00 281.00 5,304.00 1,605.00 3,699.00 500.00 170.00 269.00 0.00 0.00 3,298.00 0.00 3,298.00 161.70 3,136.30 1,568.15 28/02/2009 0.98 0.97

From his research Sam has also ascertained the following: On the basis of investment return data for the past 90 years, Sam considers 12.5% is a reasonable estimate of the long-term average return for an Australian investor with a well diversified portfolio. Gourmet Delights Limited bonds on issue : Par A$1,000, average term to maturity 6 years, average coupon rate 5.05% p.a. paid semi-annually. As these issued bonds have recently been rated by Standard and Poor as A- the company can expect to have to provide a yield to maturity risk premium of 3% p.a. above the current risk free rate to attract investors to any new issue of company bonds expected to have the same credit rating. Management is confident that trading conditions will return in 2014 (and beyond) to trend experienced prior to the downturn in 2013. For the ordinary share equity component to fund new capital investment projects, Sam has estimated that the company will need to issue new ordinary shares by a rights issue will increase the cost to the company of new ordinary equity by 2 percentage points above the current cost of retained earnings. Although in the recent past the company has paid Australian income tax at less than the full marginal rate (resulting from claiming GFC tax incentives that are ceasing) the companys policy is to use the current Australian company income tax rate of 30 percent to evaluate its capital investment projects. 80% of Property, Plant and Equipment are located in Australia with the balance of the assets distributed across the globe generally in proportion to sales.

Requirements: You should form groups of between 4-6 students to complete this assignment. Try to ensure that your group has members that bring the following required skill sets into the group: a high level of ability with written communication; experience with/a high standard of Excel/spread sheet modelling; and experience with financi al analysis. 1. a) Your group should prepare a brief (less than 4,000 words) report in which you: identify the financial and operational risks to which the company is exposed to by using a relevant typology used in the course. (Note: you should tabulate the different risks to which the company would be exposed as it currently exists and after the construction of the new facility. Provide reasons to support your views.) discuss the degree of exposure the company has by geographic region. Use the companys financial statements to assist in discussing the size of the exposure. explain which of the financial risks are likely to be the most important a. over the next year? Your conclusions should be supported by logical argument based upon your assessments in part a), your knowledge of existing global financial characteristics and anticipated changes to global economic conditions. d) briefly explain how you would attempt to reduce the impact of the financial risk exposures associated with the present business structure of this organisation based on your views contained in a), b) and c).. Each group member is to prepare and submit a confidential peer assessment form (attached) assessing the performance of every other group member. Results of the assessments may affect an individuals mark by up to 10% of the total available mark. b. over the next three years of the companys operations?

b) c)

2.

Additional notes: The text of the document should be double spaced. All document margins must be at least of 2.5 centimetres, the font size must be 12 point, and use of the Times New Roman font (or an equivalent) is preferred. There is no minimum word count. Any assignment that is not referenced using Harvard style referencing to University standard will automatically receive a mark of zero. (Please refer to University of Adelaide guides on referencing to check your compliance.) Your word count must be provided on the assignment cover page. All assignments and peer assessment forms are to be submitted to the appropriate assignment box located in the Professions Hub.

Your assignments will be evaluated on the following basis:

HD

The critical evaluation of the question was excellent with the students demonstrating a clear understanding of the theory and bringing all elements into an unambiguous balanced argument of the facts. Calculations supporting the discussion are excellent with a clear understanding of the principles involved being demonstrated. Presentation of all relevant material is excellent and easy to follow. The critical evaluation of the question was very good with the students demonstrating a very good understanding of the theory and bringing various elements together in a balanced argument of the facts. Calculations supporting the discussion are very good with a good understanding of the principles involved being demonstrated. Presentation of all relevant material is very good and easy to follow. The critical evaluation of the question was sound with the students demonstrating a clear understanding of the theory and bringing various elements together in a balanced argument of the facts. Calculations supporting the discussion are appropriate with an understanding of the principles involved being demonstrated. Presentation of all relevant material is good and easy to follow. The critical evaluation of the question was adequate with the students demonstrating a basic understanding of the theory and has attempted to bring the elements together in an argument of the facts. Calculations supporting the discussion are of a quality that demonstrates an understanding of the principles involved. Presentation of all relevant material is adequate and able to be followed. The critical evaluation of the question was unsound with the students demonstrating no clear understanding of the theory. There was no clear evidence of bringing the elements together in a balanced argument of the facts. Calculations supporting the discussion are poor with no demonstration that there is an understanding of the principles involved. Presentation of material is of a poor standard and is not easy to follow.

As each part of the assignment (a, b, c, d) is inter-related the assignment will be assessed in its entirety based on the above criteria. Note: There is no right answer to this assessment (though there are wrong answers), therefore your appropriately evidenced supporting arguments will be pivotal in achieving a good grade.

CORPFIN 3504 Treasury and Financial Risk Management III Group Assignment
Peer Assessment Form: Please assess each group member for the following attributes displayed during the preparation of the assignment:
1. Reliability and intra-team cooperation: Cooperative, receptive to criticisms and suggestions, worked well with others, attended meetings and participated. Was considered reliable in that all tasks undertaken contributed to the team output. Preparation and initiative: Contributions of the member frequently showed that preparation of all necessary material had been undertaken in time for other group members to be able to appropriately perform their roles as agreed. All work was of a high quality which produced results as per the agreed schedule. Workload proportion: Shouldered a fair and equitable amount of the workload as agreed by all group members at the planning meeting.

2.

3.

Please put a score against each Group members name using a 1 - 10 Scale where:
1 = a free rider, contributions were well below my expectations of a team member and did not adequately do the work requested of them 5 = a sound contributor, met most of my expectations of a team member 10 = an outstanding contributor, exceeded many of my expectations of a team member

Your Name Your Student Number

________________________________ ________________________________
Attributes (Score 1 - 10) Comments
If you give a rating of 3 or less for any attribute you must provide reasons in this column, below or on the back.

Group member (List by name)

Reliability and team

Preparation, initiative

Workload

Additional comments (if any):