Assignment 2

This assignment has a 35% weighting in your overall mark for this unit and
focuses on content from Weeks 3 and 4. It will be marked out of 35 and consists
of two main questions. Marks will be allocated as indicated for each question
below. Your total assignment submission should not exceed seven A4 pages,
excluding cover sheet and reference list.
Question 1: Company analysis (17 marks total)
For this question you are required to further analyse the ASX listed company you
chose for Assignment 1. As in Assignment 1, use DatAnalysis to access the
required company financial data. Index data can be found at websites suggested
in the Web Links sectio of the uits MyCU site.
a) Analyse the historical market returns fo the opays shaes fo
Jue 5 to 30 June 2016 (the last trading day). The following gives you a
step-by-step guide to doing this analysis:
i) Calculate the monthly percentage retus fo the opays shaes
duig the peiod. (To keep it simple, ignore dividends for this analysis
and use adjusted monthly closing prices.) Then calculate the average
monthly percentage return and standard deviation of returns and, using
the procedure described in your text, annualise the returns and standard
deviation. (Assume that the shares are held for the entire period so that
no capital gain is realised during the period and consequently there is
no reinvestment and compounding.) (2.5 marks)
ii) Repeat the process in a) for the same period but this time for the market
as a whole, using the All Ordinaries price index as a proxy. (1 mark)
iii) Use CAPM to estimate the expected (required) etu o the opays
shaes as at 0 June 2015. To do this, use the yield to maturity on that
date of a 10-year Australian Treasury bond as a proxy for the risk-free
rate, assume the market risk premium is 6.4% and use the opays
uet eta (thus assuig it has ot haged sie the end of 2015).
(1.5 marks)
iv) Using the figures you have calculated, discuss and evaluate the risk
and return of the company in comparison with the market and
expected return, and in light of events. (4 marks)
b) Realulate the euied etu o the opays shaes as at June
2016. What has happened to the required return and why? How would the
required return change if you also knew that average risk aversion in the
market increased during 2016? What does theory predict would have
happened to share prices as a result of these combined changes? (3 marks)
c) Briefly describe a likely aeagee isk capital budgeting project for the
company. Consider its possible life, cash flow pattern and investment size
relative to the company. Also hypothesise the variables to which NPV might
be most sensitive and would therefore need the most focus in project
analysis. No quantitative analysis is needed to answer this question. Focus on
qualitative factors. If the company has several business divisions, choose one
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for this question. (5 marks)

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Question 2: Capital Budgeting Task (18 marks total)

You are helping Australopithecus Revenge Ltd (AR) with its capital budgeting
decisions. The business produces and retails skateboards and extreme sports
apparel, has a 17% cost of capital and is subject to a 30% tax rate. There are
two major areas on which Australopithecus Revenge would like your advice.
1.Project Cricket
Australopithecus Revenge is considering whether it should expand into cricket
apparel. The opportunity has arisen because the building next door has become
available for a five-year lease and trends suggest cricket apparel is a stable
sector of the market, however already dominated by major brands.
Plant and equipment will cost $250,000, which the business will depreciate for
tax purposes using a prime cost rate of 10% per annum. When the project is
wound up at the end of the five years, the general purpose equipment is
expected to be sold for an estimated $8,000.
Sales in the first year are expected to be $480,000, increasing at a high rate of
8% in the second and third years and then falling by 5% per year for the last
two years of the project as AR competition in the sector is continuous.
Consultants called in previously by AR, who were paid $30,000 in fees,
estimated that variable costs for the project will be 20% of its revenues.
Building rental, fixed salaries and other fixed costs directly related to the
industrial art project are expected to be
$210,000 in the first year and increase by 2% per year thereafter. The
investment in net operating working capital related to the project is expected to
be 12% of the folloig yeas sales eeues. This investment will be recovered
by the end of the project. It is also thought that the project will cannibalise after
tax profits of $55,000 per year for ARs existing extreme apparel business.
2.The Lighting System
Australopithecus Revenge needs to replace its warehouse lighting system as
soon as possible because the existing system is overloaded. Three different
systems are being considered. The first is a second generation incandescent
lighting system which will last 5 years and cost $8,000 to install. The second is
a fluorescent lighting system, which will last 10 years and cost 12,000 to install.
The third is a LED lighting system, which will last 20 years and cost $18,000 to
install. None of the systems will have any salvage value but all will be replaced
at the end of their lives.
After examining all costs, the net cash outflows for each system are: $900 per
year for the incandescent system, $650 per year for the fluorescent system; and
$60 per year for the LED system.
Requirements and marking criteria
Provide Australopithecus Revenge with a memo that provides your
recommendations on the issues outlined above. Your memo should also include

details of your analysis and briefly explain and justify your chosen methods and
any assumptions made. Table format for presenting figures is preferable.
Twelve marks will be allocated to analysis of the cricket project and six marks to
analysis of the lighting system. Marks for each will be awarded for demonstrated
understanding of the issues

through: justification of chosen analytical techniques, correct application of those

techniques, discussion of assumptions made, and appropriate and insightful
conclusions and recommendations.