Corporate Finance

Valuation Project

Your group write-up for the valuation project must not exceed five pages of reasonably sized text (at
least 11 points). Supporting appendices should be concise and clear.
1. Industry background (20 points)
? History and evolution of the industry
? Any past, ongoing, or anticipated merger wave?
? Industry concentration, C4 and C8
? Contribution to Turkish GDP and employment
2. Financing and valuation of firms in the industry (30 points)
? Leverage, interest coverage
? Market-to-book and price-to-earnings ratios
? Firm size (assets, sales, market value of equity)
? Stock price performance
3. DCF valuation analysis for one firm (50 points)
? What is the total (enterprise) value of the firm? What is the value of its equity?
? Is the stock currently under- or over-priced? Discuss why.
4. Optional commentary (extra points)
Propose and discuss potential real and/or financing strategies that in your opinion would increase the
firm’s value.

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Trimester 3, 2015
Assessment 2 Instructions
Assessment 2 consists of 2 parts:
1. Group Written Assignment (Due Friday Week 10, 2015 by 5pm AEST under Assignments
tab on the portal. Please submit the Assignment Electronically)
• It is due 5pm Australian Eastern Standard Time (AEST)- if you are in Adelaide you
need to make sure you submit at the right time. I.e. in Adelaide it is due 4:30pm.
• Please submit written answers and final numbers through “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.
2. Group Presentation (Due in Lecture, Week 11)
This file contains:
1. Part 1: Group Written Assignment Questions and Instructions
2. Part 2: Group Presentation Question and Instructions
3. Commonly asked questions about Assignment Part 1 and 2
Part 1: Group Written Assignment
Task Description
Length: 1000-3000 words (up to 500 words above 3000 permitted. Numbers and spreadsheets are
not included in the word count)
Due: Friday Week 10 by 5pm AEST
How to submit: Under “Assessments” tab on the FIN203 portal homepage.
• Please submit the Assignment electronically on the portal
• Please submit written answers and final numbers through “Written Report” link and submit
any excel spreadsheets you used in calculating answers through “Excel Files for Report”
link. Both of these sections will be marked.
As part of this assessment you will need to look up market and financial data online. Here are
some useful suggested links:
• https://au.finance.yahoo.com/q?s=RIO.AX
• https://au.finance.yahoo.com/q?s=%5EAXJO
• http://www.moneymorning.com.au/20131004/recession-alert-for-the-australianeconomy.html
• http://www.tradingeconomics.com/china/forecast
• https://ycharts.com/indicators/iron_ore_spot_price_any_origin
• For instructions on how to use excel to calculate NPV/IRR etc. please consult “Topic 7/8
Excel Instructions” from Topics 7 and 8
Complete all five parts of the written assignment below.
1. Evidence of Group Work [10 marks]
Please see “FIN203 Example of Group Meeting Record” on the portal under assessments. 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. Company Perspective [25 marks]
Consider the sources below and answer the following questions.
Source 1: Annual Report
Santos 2014 Annual Report: https://www.santos.com/media/2172/2014_annual_report.pdf (on
the portal)
Source 2: Santos end 2014
Santos shelves debt raising in oil price rout
December 4, 2014
Energy producer Santos has been forced to postpone a €500 million ($733 million) hybrid debt raising in Europe and will
slash capital and operating expenditure following a slump in oil prices below $US70 a barrel.
Chief financial officer Andrew Seaton said the company had decided to defer any hybrid issue until market conditions
improve, noting the oil market had experienced volatility following the decision by the Organisation of Petroleum Exporting
Countries not to cut output at a meeting in Vienna late last week.
Mr Seaton said Santos holds a “robust” funding position with $2 billion in available liquidity, but will review its spending
plans for 2015.
Santos already has outstanding hybrid capital securities in the European markets. But the yields on the securities have
come under pressure after the company flagged plans to issue more securities as oil prices plunged.
The yield on the securities has spiked by an enormous 40 per cent in two trading sessions to almost 5 per cent from 3.5
per cent at the start of the month.
While the outright yield may appear to suggest a low cost of funds, the costs associated with converting the funds into
Australian dollars and hedging the currency risk would have pushed the overall costs higher.
Santos could also be under pressure to protect its BBB+ Standard & Poor’s credit rating which is on negative outlook to
reflect the “”commissioning risk of the company’s two LNG projects” .
….The lower oil prices, if they persist, would eat into a forecast jump in Santos’s cashflows from its two, big-ticket LNG
projects, a venture in Papua New Guinea that started production earlier this year and the $US18.5 billion ($21.5 billion)
GLNG project in Queensland set to begin exports in the second half of 2015.
An earlier estimate by Santos that operating cash flows would double from 2013 to 2016 assumed oil prices of $US100 a
barrel.
But consensus estimates for crude prices have been pared back, to $US90 a barrel, reducing the expected lift in Santos’s
cash flows to 65 per cent by 2016.
Brent crude prices are currently much lower than that, at about $US69.
Source: http://www.smh.com.au/business/mining-and-resources/santos-shelves-debt-raising-in-oil-price-rout-20141204-
11zwxy.html#ixzz3ocFAswZA
Source 3: Santos in 2015
Santos in sale mode as pressure builds to cut debt
August 24, 2015
Angela Macdonald-Smith
Santos’s initiation of a no-holds-barred strategic review has stoked speculation over which assets may be sold or whether
the whole company may be targeted in a takeover.
Chairman Peter Coates made clear on Friday he would “turn over every stone” in seeking to restore shareholder value at
the indebted oil and gas player, meaning that even the most-prized assets will be considered for sale.
Given the size of Santos’s debt mountain, at $8.8 billion, a chunky divestment is expected to be required to make a
material difference, especially as the company would be selling in the trough of the cycle from a weakened negotiating
position.
Citigroup’s Dale Koenders said Santos would need to sell $2 billion to $3 billion of assets – or raise that amount in new
equity – to bring gearing (debt)( down to a more comfortable 30-35 per cent by 2017 or the company could cease all
growth.
He identified $10 billion of assets within Santos’s portfolio that either do not generate cash or are infrastructure assets and
suggested up to half of those could be sold. Among those he described as “possible” are the GLNG liquefied natural gas
export terminal in Gladstone and the Port Bonython pipeline and infrastructure in South Australia.
Others point to Santos’s 13.5 per cent stake in the ExxonMobil-led Papua New Guinea LNG venture, which cost $US19
billion to build, as the most attractive to buyers.
But Credit Suisse has questioned the sense of selling the interest in “world class” PNG LNG, which it calculates accounts
for 90 per cent of all Santos’s free cash flows…
“It would solve the balance sheet, but what is left behind wouldn’t be terribly appetising,” Credit Suisse analyst Mark
Samter said in a recent note
Standard & Poor’s (S&P) said an asset sale program “could repair Santos’ weak credit metrics, which are being pressured
by currently low oil prices and large capital expenditure required to complete its GLNG project”.
S&P kept Santos’s BBB rating on negative outlook on Friday, pending the outcome of the review, but it sounded cautious
on the ratio between funds from operations and debt, a critical measure it uses to assess creditworthiness.
The agency said it had previously expected Santos could improve the FFO-to-debt ratio toward 30 per cent in 2016,
before “consolidating” above that level in 2017. But it said on Friday that given Santos’s weak cash flows due to low oil
and LNG prices, that improvement was now unlikely to occur based on earnings alone.
“As a result, the cash inflows from the company’s initiatives will be key to protecting the BBB rating on the company [it was
downgraded to BBB in later 2014],” it said, advising the rating could be cut if the review outcome didn’t sufficiently improve
the credit metrics.
Source: http://www.smh.com.au/business/energy/santos-in-sale-mode-as-pressure-builds-to-cut-debt-20150821-
gj524u.html#ixzz3ocErEhOK
Source 4: Crude oil price and Australian Dollar
a) Evaluate the working capital efficiency of Santos in 2014 as compared to 2013 by referring
to Source 1. (10 marks)
b) In 2014 is Santos financing using predominantly long-term or short-term debt? Are they
using predominantly direct or indirect debt financing? How can you tell? What currency are
they predominantly borrowing in? Refer to Source 1. (5 marks)
c) Imagine you purchased a Santos $1000 face value bond at the end of 2008 when its yield to
maturity was 4%. This bond was issued in 2007 and has a fixed annual coupon rate of 4.5%
and matures at the end of 2020. Currently it is the end of 2015 and it has a yield to maturity
of 5% and you want to sell this bond. If you do sell it, what would be the holding period
return for your investment in this bond? (10 marks)
3. Capital Budgeting (35 marks)
Answer the following 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 supporting documents.
Upload your ONE excel spreadsheet separately under “Excel File for Report”. Consider Sources 1-4
above for some of the answers.
Imagine in 2015 Santos is evaluating whether to sell off its ExxonMobil-led Papua New
Guinea LNG venture project mentioned in Source 3. Assume in 2015 Santos’ total
incremental revenues from all their projects are equal to product sales year ended 31st
December 2014. Assume also that total incremental costs for all Santos projects in 2015 are
10% lower than total cost of sales year ended 31st December 2014. Assume that the
incremental depreciation for all projects in 2015 is the same as the “depreciation and
depletion” expense year ended 2014. Assume that the free cash flows for the ExxonMobil-led
Papua New Guinea LNG project will continue for 20 more years with the first cash flow
occurring at the end of next year and that the initial investment in the project being made
today. Assume incremental revenues will increase by 2% per year and all costs will decrease
by 3% per year starting at the end of year 2 for the life of the project. Assume depreciation
remains constant over 20 years. All values are in AUD. Assume the tax rate is 30% over the
20 years.
Using the above information as well as Sources 1-4 answer the following questions. (Hint:
Look at Sources 1 and 3 in particular)
a) Based on the above information and sources what are the free cash flows to the
ExxonMobil-led Papua New Guinea LNG Santos project mentioned in source 2? (10 marks)
b) Calculate the NPV for the ExxonMobil-led Papua New Guinea LNG Santos Project using the
below costs of capital and recommend whether at these two rates Santos should keep
investing in the project.
a. A WACC (cost of capital) of 5.94%?
b. A WACC (cost of capital) of 8%? (7 marks)
c) What is the Discounted Payback Period and IRR for the Papua New Guinea LNG Santos
Project with a discount rate of 5.94%? Is this ideal given the financing that Santos is using for
this project? (8 marks)
d) Consider the following variables: cost of capital, growth in revenue, depreciation. Conduct
sensitivity analysis to ascertain which variable has the biggest impact on NPV. Are there
disadvantages to this analysis? (10 marks)
4. Investor Perspective [10 marks]
a) You are trying to value Rio Tinto shares today. You decide to use the dividend paid in March
2014 by Rio Tinto as Do and assume that this will be the only dividend paid in the current
year. You also estimate that for the next three years dividends will grow at the same rate
which dividends 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?
(10 marks)
5. Analysis of findings [10 marks]
a) What type of analysis were you conducting in Question 4 a) and 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? Can we assume that
markets are efficient? (10 marks)
Total Marks (Part 1) = 90 marks or 15% of your final mark
Part 2: Group Presentation
Task Description
Length: 12 minute presentation, 5 minutes questions from class and lecturer. No longer than 12
minutes.
Due: Week 11, in Lecture time
Description:
• Present your answer to Question 5 a) from the Written Assignment as if you were
presenting these findings to a group of investors. ***Consider the needs of your audience
in your presentation.
• Use no more than 10 slides and ensure the presentation is no more than 12 minutes long
• You can refer back to your excel analysis and briefly explain how you achieved your results
• All group members need to speak
• You will be assessed based on a rubric uploaded on the portal which emphasises
presentations style, understanding your audience (a group of investors) and how
interesting and engaging the presentation is to the audience
Layout
• The presentation must be 10-12 minutes long
• Groups must present the lecturer with a hand-out of the slides.
• Slides need to be structured in a logical manner.
• A reference list should be included at the end of your slides and any sources you refer to in
your analysis must also be referenced using in-text referencing. A referencing guide can be
found on the portal under “Academic Success Centre/ Library” and is also uploaded under
Assessments on the portal site.
Assessment
• Please see “Part 2: Group Presentation Rubric” on the portal under assessments. You will be
marked according to this rubric.
• Feedback will be provided to students the week after the presentation (Week 12).
• The group will be given one mark which will apply to all group members
• Plagiarism or inadequate references will attract harsh penalties.
Total Marks (Part 2) = 100 marks or 15% of your final mark
See group presentation Rubric
Commonly asked Questions
For the written assignment, what if I am above the word limit? How much can I exceed the word
limit?
This is OK to a point. You have a 500 word lee-way, which means you can go to 3,500. However, this
is only if the additional words address the assessment task and are strictly necessary for your
analysis.
Can our presentation be longer than 12 minutes?
No- the lecturer will stop you after 12 minutes.
Can our group have less than 4 students or more than 6 students?
No. You need to stick to these parameters. If you cannot form a group of this size you can speak to
your lecturer and he will either combine a few groups or reach an alternate arrangement.
Do I need to reference sources such as the textbook, other finance textbooks and online sources?
Yes. Please use the referencing guide from the portal and uploaded under assessments and include
a reference list at the end of your written assignments and group presentations. Also please use intext
referencing.
Do I need to reference the lecture slides or tutorials from this course?
No you do not.
What is plagiarism and what are the consequences?
If you copy or reproduce someone else’s work without re-phrasing it or putting it in quotation
marks, this is plagiarism. Also if you rephrase some else’s ideas and do not include an in-text
reference this is also plagiarism. You will be penalised for this. The assignment will be put through
Turnitin so any plagiarism will be identified by the software.
Are references part of the word count?
No.
Will we be assessed on the quality of our group meeting records?
No- you just need to hand them up as part of both Part 1. They are designed to help you organise
your group- you will not be marked on these. Please make them very brief.
Does my written have to be in report form or do I just address each question?
No it does not have to be in essay or report form and you just need to address every question
directly with reference to theory, research or calculations depending on the question.
How do I integrate the excel spreadsheets in the discussion within my written assignment?
You need to submit your excel spreadsheet separately under assessments on the portal in the
relevant link and you also need to refer to your excel calculations in your written assignment.
However, you do not need to paste any tables from excel into your written assignment just refer to
the spreadsheets as you need in your discussion. Do not put your discussion in the excel file but
make sure it is in the word file.