1. Evidence of Group Work
"Example of Group Meeting Record" on the portal under assessments and revcisions. 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 10 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.
2. Rio Tinto Annual Report Financial Analysis
a) Consider the 2012 Annual Report of Rio Tinto. Briefly explain how Rio Tinto's governance structure/ company governance is organised. Do you notice any strategies in place to align manager and shareholder interests at Rio Tinto based on the Annual Report? Provide one brief example.
b) Based on Rio Tinto's 2012 Annual Report and Financial Statements has Rio Tinto taken on additional debt in 2012 compared to 2011? Justify your answer (Hint: Look at the Notes to the Balance sheet) Comment on whether most of Rio Tinto's borrowings in 2012 are in the form of direct or indirect financing.
c) Assume the DSI for Rio Tinto in 2011 was 3.84 and 4.11 in 2012 and DPO was 94.43 in 2011 and 89.9 in 2012. Calculate the cash conversion cycle for Rio Tinto for 2011 and 2012 and interpret your result.
3. Capital Budgeting
Rio Tinto is considering opening a new iron mine today in 2014 (time 0). The mine will have a life of 5 years, after which it will be closed. The new mine requires the purchase of new mining equipment costing $400,000,000 today. The useful life of the mining equipment is 5 years, and will be depreciated to 0 over its five-year life. At the end of 5 years it has an estimated sale value of $157,500,000.
The new mine will be developed on a site which already has an existing copper mine. The original mine is currently being rented to another company under a lease agreement that has 5 years to run and provides for an annual rental of $15,000,000. Under the lease agreement Rio Tinto can cancel the lease by paying the lessee equal to 1 year's rental payment at the end of year 1. Rio Tinto plans to keep this mine, cancel the lease and use it in the development and operation of the new iron ore mine.
It is expected that the mine will require exploration expenses of $50,000,000 at the end of year 1 of the mine's operations. Additions to current assets (working capital) will require $22,500,000 at the commencement of the project and are assumed to be fully recoverable at the end of the fifth year. The new mine is expected to generate revenues as follows and operating expenses are 50% of revenues every year. (Assume all cash flows occur at the end of the year)
Year 1 $200,000,000
Year 2 $250,000,000
Year 3 $325,000,000
Year 4 $300,000,000
Year 5 $150,000,000
The cost of capital is 10% and the tax rate is 30%.
a) Calculate the FCF's and the NPV of this project. Use excel to undertake calculations and upload your spreadsheets to "Excel Files for report" together with your names and student numbers. The majority of the marks will be for your working out and formulas which will be shown in your spreadsheet.
b) What is the IRR for this project?
c) Based on your calculations in a-b, should we accept the project? Why? Which capital budgeting technique gives us the best answer for shareholder interests and why?
d) The CEO of Rio Tinto wants to know how the NPV and investment decision will be affected if the following three separate events happen.
i. If the exploration expense go up to $900,000,000; or
ii. If the mining equipment is depreciated over 4 years; or
iii. If expenses become 70% of revenues for all 5 years
How would each event affect the NPV if each of the factors is changed in isolation? What type of analysis are you using to answer this question and why is this analysis useful for the CEO?
4. Rio Tinto Share Valuation
a) If you purchased Rio Tinto shares in July 2012 and sell them in April 2013 what would be your holding period return?
b) Imagine that over the period from July 2012 to April 2013 the yield on government bonds was 3% and Rio Tinto's beta was 0.9. According to the CAPM what is the expected return to Rio Tinto shares over the period? Assume the expected return to the market is 21.6%.
c) Based on a) and b) where do Rio Tinto shares plot on the SML and are they overvalued or undervalued in April 2013? Draw a diagram to support your answer.
d) You are trying to value Rio Tinto shares today (April/May 2014). You decide to use the most recent dividend paid by Rio Tinto as Do. You also estimate that for the next three years dividends will grow at the same rate which they increased by from August 2013 to March 2014. After this (starting in time 4) you estimate dividends will grow at a constant rate of 12% forever. Assume that today the risk free rate is 3%, the expected return to the market is 15% and Rio Tinto's beta is 1. What is the price of a Rio Tinto share today? Based on this price would you purchase the share?
5. Analysis of findings
a) What type of analysis were you conducting in Question 4 d)? How can this analysis be used to make abnormal (excess) returns? What do you need to assume about market efficiency to be able to make abnormal returns on share purchases?
b) Based on the article below and your own research apply scenario analysis to your answer in Question 3 a). Assume that three scenarios are possible 1) Chinese economic growth increases over the next 5 years 2) Chinese economic growth stays the same over the next 5 years and 3) Chinese economic growth decreases over the next 5 years. Indicate and justify how each scenario might affect the variables in your analysis from Question 3 a) and conduct excel calculations to estimate NPV values for each scenario. Based on this, advise the CEO of Rio Tinto whether the new iron mine should proceed and justify your answer with reference to your calculations and current events.