Technical Interpretation; Analysis; Identification of relevant data; Analysis of data; Identifying the relevant elements of the problem; evaluating the relationship; Performing the applicable calculation; Justify any assumptions in interpreting the data in written format; Interpreting the result and recommending a course of action.
Instructions
1. The Case Study submission can be a Word document, an Excel file or a PDF file. You may submit more than one attachment if you wish. You are strongly urged to include all workings, so that you can receive partial marks if the answer is incorrect but some of the work you have done is correct.
2. There is no word limit. However, any form of professional writing should be concise, so if your Case Study is unnecessarily wordy, this could affect your mark.
Case Study Data
The following data relate to St. Kilda Mining Ltd.
St. Kilda Mining is considering undertaking a gold-mining project.
- The company has undertaken an environmental impact study into the project, at a cost of $1.8 million. This study has indicated that the project will meet the government's environmental regulations.
- The project will last for 5 years.
- The project will require the purchase of new equipment at a cost of $4 million. This equipment will be depreciated to a book value of zero. The company has the option of using straight-line depreciation or diminishing value depreciation.
- The mine will produce 69,000 ounces of gold in its first year. This will then decline by 10,000 ounces per year, as the resource is depleted, so that it will only be producing 29,000 ounces in the fifth year.
- The cost of gold is expected to remain constant at $113 per ounce over the life of the project.
- Incremental costs, equal to 41% of incremental revenue, will be incurred each year of the project.
- Clean-up costs of $2.35 million will be incurred after the end of the project (i.e. in the 6th year).
- The mining equipment is expected to have a salvage value of $1.5 million.
- The project will require additional net working capital of $5.6 million. This will be recovered in full after the completion of the project.
St. Kilda Mining has the following items on the Liabilities & Equity side of its balance sheet:
- Preference Shares
BUS5AFS - Accounting and Finance Case Study
2
o There are 4 million preference shares on issue
o These preference shares are currently trading at a price of $10.90
o They pay an annual dividend of $0.85
- Ordinary Shares
o There are 10 million ordinary shares on issue
o These shares have a beta of 0.9
o They have just paid a dividend of $1.62
o This dividend is expected to grow at a rate of 8.8% until the dividend in Year 2, and then at a rate of 3% in perpetuity
- Corporate Bonds
o The bonds have a total face value of $14 million
o They mature in 1 year
o They pay a quarterly coupon payment at a coupon rate of 6.6% p.a.
o The company's bond yield is 7.99%.
Additional data
- The historical return on the market portfolio is 9.3%
- The corporate tax rate is 30%
- The current yield on 10-year Australian Treasury Bonds is 3.47% in the most recent month
Case Study Questions
1. Determine the company's Weighted Average Cost of Capital.
2. Determine the NPV of the project.
(a) Use the company's WACC as the discount rate. However, explain any assumptions you are explicitly making by using the company's overall WACC in this way.
(b) Indicate which depreciation method you have used, and explain why you chose this method.
(c) If you have omitted any of the costs associated with the project from your analysis, explain why you have done so.
3. Should the company proceed with the project? Explain your answer.