Assessment Information

Subject Code: FIN203

Subject Name: Corporate Finance
Assessment Title: Group Written Assignment
Length: 1000-1500 words
Weighting: 20%
Total Marks: 100
Submission: On the portal through Turnitnin
Due Date: Monday Week 11, 19:55pm AEST

Assessment Description

• Complete this written group assignment (parts 1-3) by the due date above in groups of
4-5 people
• Please submit written answers and final numbers through the turnitin “Written Report”
link and submit ONE excel spreadsheet you used in calculating answers through “Excel
File for Report” link (you can use multiple sheets in your one file). Both of these
sections will be marked.
• The written part of your assignment will be put through Turnitin and any plagiarism will
be traced and penalised. Please refer to the policy https://www.kbs.edu.au/wp-
content/uploads/2016/07/KBS-Academic-Integrity-and-Conduct-Sept-2017-v2.pdf
• You will do a Group In-Class Case Study in Lecture in Week 11. For more information
see the assessment table on the portal.

Complete all three parts of the written assignment below.

1. Evidence of Group Work [5 marks]

Please see “FIN203 Example of Group Meeting Record” at the bottom of this document. Each
group must provide 3 brief records of group meetings as part of the assignment. These briefly list
who was present at meetings as well as tasks and contributions.
• Completing this table is worth 5 marks of your total score
• Please note that all group members need to contribute equally to the task.
• If a group member does not contribute to the task, the group’s meeting minutes can be
used as evidence to demonstrate this. The student’s mark can be reduced by the lecturer if
they consider that there is sufficient evidence that they did not contribute.

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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 2. Company Perspective- Fortescue Metals [50 marks]

Consider the sources below and answer the following questions.

Source 1: Fortescue Metals 2017 Annual Report

https://www.fmgl.com.au/docs/default-source/default-document-library/fy2017-annual-
report.pdf?sfvrsn=1f931875_2

Source 2: Login to Open Athens and select the “Morningstar” link.

Search for “FMG” (Fortescue Metals) and click on the company.

You will need to click on below tabs (on left hand side) and find relevant information to answer
following questions:
• Financial Data
• Dividend History
• Other tabs

See instructions for each question below.

Source 3:

Why Fortescue Metals Group Limited share price may

have further to fall
Brendon Lau | March 5, 2018 | BHP FMG RIO

The third force in our iron ore market is trapped between China and US President Donald Trump as
speculation mounts that Fortescue Metals Group Limited’s (ASX: FMG) share price could have more room
to drop.
[China's crackdown on pollution, "subdued" Chinese construction activity and global trade tensions have
forced Fortescue to lower its iron ore price guidance for fiscal 2018. Fortescue released the updated
guidance on Tuesday, saying there had been a “slower than anticipated recovery in contractual
realisations”. A spokesman for Fortescue metals said it now expected to receive prices for its iron ore
equal to about 65 per cent of a widely accepted industry benchmark price for fiscal 2018.]

This … discount on Fortescue’s lower quality and more polluting [iron] ore could extend well into 2018 or
even wider.
Fortescue has tanked over 26% over the past 12 months when rivals like BHP Billiton Limited (ASX: BHP)
and Rio Tinto Limited (ASX: RIO) have jumped ahead by 13% and 22%, respectively. In contrast, the
S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up around 2.5% over the same period.
Steel Falling: Fortescue’s (FMG) relative share price performance

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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Source: Yahoo Finance
https://www.smh.com.au/business/companies/twiggy-forrest-s-fortescue-hit-by-china-s-pollution-
crackdown-20180327-p4z6hy.html

a) Write a 200-word background on Fortescue Metals briefly describing the industry in which
the company operates in and its main areas of business. Identify one key opportunity and
two key threats to the company from competitors or other factors in 2017-18. Use Morningstar
and other sources in your analysis. (10 marks)

b) Calculate and discuss how Fortescue Metal’s cash conversion cycle has changed from 2016
and 2017. What is the cause of this change? Do we need any additional comparison data to
make our analysis more complete? (10 marks)

Hint: On Morningstar search “FMG”, click on “Financial Data” tab and refer to “Profit and
Loss” and “Balance Sheet” statements for 2016 and 2017.

c) Consider the Fortescue Metals 2017 Annual Report. Based on note to financial statements
about Capital Management (Note 9) what type of capital is Fortescue primarily using to
finance its operations? What are the advantages and disadvantages of this type of capital
financing? (4 marks)

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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 d) If Foretescue Metals issues 5-year annual coupon bonds with a face value of $1000 and a
coupon of 3% p.a. today and the yield to maturity on bonds of similar risk and maturity is 4%,
how much will each bond sell for? (6 marks)

e) If you purchased the Fortescue bonds from d), how would a downgrade in the credit rating
(from say BBB to BB) affect the price of these bonds? Would these Fortescue bonds be an
attractive asset for investors? Why or why not? (5 marks)

f) Assume the return to the market portfolio to be 9%, the risk-free rate is 0.25% and the
Fortescue share beta is 1.12. Assume also that Fortescue will pay a lump sum dividend in
the next period (2018) equal to the total Fortescue dividends per share paid in 2017.
Assume that dividends will grow at the same rate as the Fortescue 3-year operating revenue
grew in 2017 for the foreseeable future. Consider the below sources and answer the question:

• Go to Morning star>FMG> select the “Dividend History” tab to find most recent dividends

• Go to Morning star>FMG> select the “Financial Data” tab > select the “Growth Rates” tab to
find the operating revenue growth rate

• Go to https://au.finance.yahoo.com/quote/FMG.AX/ to see the most recent Fortescue share

price

Question: What is the current price of Fortescue shares based on the above information? Would
you purchase the share today? Why or why not? (15 marks)

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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 3. Capital Budgeting (45 marks)

Consider the following two sources and answer the following questions.

Source 1: Fortescue Yahoo Finance: https://au.finance.yahoo.com/quote/FMG.AX/

Source 2: Iron Ore Price is $USD/tonne

a) According to the sources above what is FMG current market capitalisation (use current
market data)? What does this number mean? How has it changed from 2017 to 2018 and
why? (5 marks)

b) Read the following case study and answer the questions with the aid of excel spreadsheets.
You also need to answer the below questions in your word file and refer to your excel
spreadsheets as a supporting document. Upload your ONE excel spreadsheet per group
separately under “Excel Submissions”.

All amounts are in $USD. Fortescue is deciding between two iron ore projects in March 2017. Project A has
an initial outlay of $13.75 billion and Project B has an initial outlay of $15.75 billion. Project A is projected
to sell 155 million tonnes of iron ore for the next 5 years and have cost of sales equal to 40% of iron ore
revenues. In addition to these cost of sales expenses Project A will use 40 million barrels of crude oil each
year with each barrel costing $100. Project B will sell 200 million tonnes of iron ore for the next 5 years
and have cost of sales equal to 45% of iron ore revenues. In addition to these cost of sales expenses Project
B will use 30 million barrels of crude oil each year with each barrel costing $100. Both Project A and B will
also incur additional working capital expenses at the beginning of the projects of $400,000 and recover
these at the end of year 5. Assume the iron ore will stay at the price it was in March 2017 for the next 5
years. Both mines have depreciation costs of $2,000,000,000 a year. The tax rate is 30%. All cash flows are
annual and are received/paid at the end of each year.

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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 i. Fortescue is deciding between two iron ore mining projects. Use an excel
spreadsheet to find the free cash flows for the following two projects A and B
described above from years 0-5. (15 marks)

ii. Calculate the NPV for Project A and B and advise which project should be
undertaken with a WACC of 12%. (5 marks)

iii. What is the Discounted Payback Period and IRR for Project A and B at a discount
rate of 12%? (10 marks)

iv. Based on your analysis above which project should be chosen? Justify your answer
with reference to theory. (5 marks)

v. If Project A could recover $100 million at the end of year 5 by selling off assets (no
change to Project B) would your decision change? Why or why not? (5 marks)

FIN203
Corporate Finance
FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT
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 Part 1: Group Meeting Record

Evidence of Group Work

• Please note that all group members need to contribute equally to parts 1-3 of the Written
Group Assignment
• Each group must provide at least 3 brief records of group meetings which list who was
present as well as tasks and contributions.
• Please keep your records using the below tables. Records can be brief
• If a group member does not contribute to the task, the group’s meeting minutes can be
used as evidence to demonstrate this. The student’s mark can be reduced by the lecturer if
they consider that there is sufficient evidence that they did not contribute.

Please complete tables below and paste at the beginning of your written assignment

Group Meeting record

• Each Group please fill in the below table and paste at the beginning of your written
assignment
• The notes can be very brief

Meeting Date Group Members Issues Discussed Tasks Allocated

Present
1. A list of Group A list of issues A brief list of tasks
Members who discussed: to be done before
attended meeting: next meeting and
who is going to do
the tasks:

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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2.

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 Important Study Information

Academic Integrity Policy

KBS values academic integrity. All students must understand the meaning and consequences of
cheating, plagiarism and other academic offences under the Academic Integrity and Conduct
Policy.

For details on academic integrity policies and penalties, the reassessment process, and the
appeals process, please refer to http://www.kbs.edu.au/current-students/student-policies/.

Word Limits for Written Assessments

Submissions that exceed the word count by more than 10% will cease to be marked from the point
at which that limit is exceeded.

Study Assistance

Students may seek study assistance from their local Academic Success Centre representative or
refer to the study help on the MyKBS Academic Success Centre page. You can find this by
clicking on the top page toolbar:

My Services>Academic Success Centre>Study Support Resources

FIN203 GROUP ASSIGNMENT- WRITTEN COMPONENT

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