Case Study - Conservation, Flora and Transformative Power (CFTP)

Instructions: Attempt the following problems. All cash flows and present values are rounded to the nearest thousand dollars. All explanations are limited to a 50-word limit. Show all workings and/or explanation.

1. Calculate CFTP's company after-tax WACC, rounded to four decimal places.

2. Calculate TP Division WACC using the method in paragraph 6.

3. Was the business risk of TP Division higher than, lower than or equal to its industry competitors if industry equity beta and TP divisional equity beta were the same at 1.9? Explain.

4. Complete Table 1 fully, in accordance with the given assumptions, to show how the free cash flow in year 1 to year 6 is derived.

5. Calculate the terminal value as of year 5 using the constant-growth discounted cash flow formula.

6. Use an appropriate cost of capital, calculate the present value of the TP Division without expansion.

7. Calculate the NPVt=1 of the expansion in Table 2 with the appropriate cost of capital.

8. Calculate the value of the option for TP Division to expand as of year 0.

9. Calculate the value of the abandonment option at t=0 if TP Division could be sold to another company for $120 million, without any expansion undertaken, at the beginning of year 2.

10. Calculate the economic depreciation in year 1 based on the completed free cash flow in Table 1.

11. From the shareholders' viewpoint, what would be the major criticism on the STIP for 2017? Explain.

12. From the viewpoint of Botanica, what would be the worst feature of the long-term incentives? Explain.

13. Calculate the alternative divisional WACC using the 3-step procedures in paragraph 19.

14. Name only one specific source of finance from the balance sheet CFTP would use for the expansion project scheduled for next year? Assume CFTP's financial position next year would be the same as of 30/06/17 [General answer such as debt or equity will not be acceptable]

15. What should be the amount of the final dividend to be declared for financial year 2017?  Explain.

16. Use the cost of equity in Q1 and the dividend growth formula Price=DPS1/(re - growth rate) to work out the implied total dividend for year 2017. Assume a constant growth rate of 2.5%. Is this implied dividend amount for 2017 achievable? Explain.

17. Should CFTP increase the discount on the DRP for its 2017 dividends in order to attract a higher reinvestment rate? Explain.

Attachment:- Case Study.rar