FINM4000 Finance Trimester 2, 2016 Assessment 2 Instructions Assessment 2 consists of 2 parts and is 30% of the unit grade. 1. Assessment 2 is to be completed in groups, consisting of four members. Collaborating with the team members and managing this assignment as a project with specific learning outcomes will be beneficial. 2. Group Written Assignment is 15% (Due Sunday, Week 10, September 25th 2016 by 11 pm AEST) Please submit the Assignment Electronically. If you are using EXCEL for computations submit this file separately. 3. 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. 4.  It is due 11 pm 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 1030 pm.  The written part of your assignment will be put through Turnitin and any plagiarism will be traced and penalised. 5. Group Presentation is 15% (Due in Week 11) This document 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 4. Template for recording group meetings 5. Group written assignment marking rubricPart 1: Group Written Assignment Task Description Length: 2500 words Due: Sunday, September 25th 1100 pm AEST How to submit: Under "Assessments" tab on the FINM4000 portal homepage.  Please submit the Assignment electronically on the portal. Upload EXCEL spreadsheets that you used for computations as a separate file. As part of this assessment you are required to conduct your own research of market and financial data online. 1. Evidence of Group Work [10 marks] Please see template for group meeting. 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  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 [ 90 marks] Consider the sources below, access other relevant resources and answer the following questions. RESOURCES http://www.qantasnewsroom.com.au/media-releases/qantas-group-full-year-result- 2016/ https://www.qantas.com.au/infodetail/about/investors/2015AnnualReport.pdf http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpg yw/file/full-year-results/investorPresentation16.pdf http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpg yw/file/full-year-results/preliminaryFinalReport16.pdf http://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspxThe following chart shows how Qantas has turned around the earnings before interest and tax (EBIT) of its 3 big divisions: Domestic, International and Jetstar over the past 18 months This following chart shows where Qantas spends its revenues and how the falling oil price has translated into big savingsQantas share prices vs Brent oil price Qantas share price movements Sept 2015 – to date $ 3.35 closing, August 26, 2016A$ currency exchange rates 2015 - 2016 Qantas ends seven-year dividend drought https://au.finance.yahoo.com/news/qantas-ends-seven-dividend-drought-040317146.html Qantas will pay a dividend to its long-suffering shareholders for the first time in seven years after the airline's full-year profit rose by 85 per cent to $1.03 billion, underpinned by a major operational overhaul and low oil prices. Chief executive Alan Joyce said the airline was now "a more agile business" and had a platform to invest for the future as a result of the transformation program that has cut thousands of jobs, revised the airline's fleet and unlocked $1.66 billion in cost and revenue benefits since early 2014. "Our transformation program is paying dividends for our shareholders, our customers and our employees," Mr Joyce said on Wednesday. After a turbulent few years and a capacity war with Virgin Australia and cashed-up international carriers, Qantas has declared a fully franked final dividend of seven cents a share, its first since 2009. The dividend, costing $134 million, will be part of a $500 million capital return announced on Wednesday, with the remaining $366 million committed to an on-market share buyback. Qantas will also give its 25,000 employees - who have been subject to a wage freeze under the transformation program - a cash bonus of up to $3,000 each. Qantas's underlying pre-tax profit jumped 57 per cent to $1.53 billion, its best result in its 95- year history.Around two-thirds of earnings came from its domestic operations and loyalty business, and the rest from its international unit. Domestic unit underlying earnings lifted 20 per cent to $578 million as cuts to flights limited the impact of weaker demand at the end of the year, while Qantas Loyalty signed up 580,000 new members. Improved margins and falling costs helped its budget carrier, Jetstar, increase earnings by 97 per cent to $452 million. International earnings rose 92 per cent to $512 million, helped by cost cutting and revenue growth as planes were added. Qantas booked a gain of $664 million on the back of lower global fuel prices. Mr Joyce expects the strong performance to continue in the first half of 2016/17 with total capacity growth of two to three per cent, driven by strong international demand from China and Japan. Domestic capacity is forecast to be flat or down one per cent. Facing intense competition, particularly from Virgin Australia and Emirates, Qantas plans to roll out wifi on some domestic services next year and is looking to live-stream cricket over summer. QANTAS PROFIT SOARS * Net profit up 85pct to $1.03b * Revenue up 2.4pct to $16.2b * Final dividend of 7 cents, first in seven years 2016 Full Year Results were released on August 24, 2016. Highlights  Record underlying profit before tax: $1.53 billion, up 57%  Record statutory profit before tax: $1.42 billion, up 80%  Record results for Qantas Domestic, Qantas International, Jetstar Group, Qantas Loyalty  Near-doubling of earnings per share: 49c, up 24c  Return on invested capital: 23%, up 6.5 points  Operating cash flow: $2.8 billion, up 38%  Net free cash flow: $1.7 billion  $500m shareholder return: fully-franked 7c per share ordinary dividend and on market share buy-back  Additional cash bonus totalling $75 million for 25,000 non-executive employees  Continued investment in aircraft cabins and wi-fiQuestions After many years of substantial losses Qantas has returned profits in 2016. Maximising shareholder wealth has been a strategic priority of the senior leadership of Qantas. Note that Qantas share price was at its highest in 2007 ($ 6.40) and lowest in 2012 ($1.03) and is currently trading at $ 3.35. 1. A) On Page 24 of the 2016 Preliminary Final Report shows a Return on Invested Capital (ROIC) of 16.2% in FY15 and 22.7% for FY16 (calculations showing how these figures have been derived is detailed in subsequent pages). What are the main contributing factors to this improved operating result? Explain in detail (10 marks) B) Using information available within the 2016 Preliminary Final Report consolidated financial statements computing average debt-levels for 2016 and calculate the cost of debt? Show all relevant calculations.( 5 marks) C) Using information available within Qantas 2016 Preliminary Final Report consolidated financial statements compute average equity-levels for 2016 and calculate the average total equity. Using your knowledge of either the Capital Asset Pricing Model (CAPM) or alternative calculate beta and market risk premium, clearly stating any assumptions you may make, and derive an appropriate cost of equity? (15 marks) D) Drawing on your answers for (B) and (C) calculate the weighted average cost of capital for 2016? ( 5 marks) E) A financial-analyst friend working with Credit Suisse reviews Qantas results for 2016 and says, 'hypothetically, if one was to apply company tax of 30% on Qantas's ROIC of 22.7% the ROIC reduces to 15.9%.' Using WACC calculation in (D) as the basis explain whether 15.9% is an acceptable ROIC? As a student of finance, do you judge as appropriate for Qantas to declare the fully-franked 7c per share ordinary dividend? Should Qantas continue to buy back shares, pay dividends or follow an alternative strategy? Give reasons and show relevant calculations to support your judgement.(10 marks) 2 A) Assume that Qantas is exploring raising $20m through the issue of corporate bonds for financing the aircraft cabins and wi-fi. Qantas bonds, face value $1000, a coupon rate of 5.5% paid semi-annually, and maturity period of 10 years. If yield to maturity is 8% calculate the value of the bond? ( 5 marks) B) Assuming all other factors remain the same what impact would the issue of bonds in (A) have on the Weighted Average Cost of Capital calculated in 1 (D). Show calculations and compute the new WACC. (5 marks) Qantas's wishes to further develop their frequent flyer loyalty program by introducing a range of leisure facilities to their members. It is considering investing in one of two projects, developing a golf course on the Gold Coast or purchasing a Casino in Perth.Golf course on the Gold Coast requires  an initial investment now of $ 1.8m and further investments at the end of years 1, 3 and 5 of $ 1.2 m each.  In addition, it will also incur working capital expenses at the beginning of the project of $0.4 m and recover these at the end of year 8.  The Golf course will generate cash inflows of $ 0.8 m starting the end of year 1, $1.6m each in years 2, 3 and 4 and $ 1.8m each through years 5 to 8.  At the end of year 8 the course will be sold for $ 0.6m.  Qantas is able to claim an annual depreciation of $0.15m from years 1 to 5 and pays tax at 30%. The Casino in Perth requires  one-off initial investment of $ 5m now  will generate cash inflows of $0.6m starting end of year 1, $1.8m each in years 2, 3 and 4 increasing to $ 2m every year for the next 4 years.  The Casino will be sold at the end of this for $ 0.4m;  Qantas will not qualify for any depreciation on this project and will pay tax at 30%. (C) Calculate the Net Present Value for each of the two investment options - using the weighted average cost of capital of 1 (D) and - the new weighted average cost of capital of 2 (B) (10 marks) (D) Which of the two investments and the appropriate financing will you recommend for Qantas? Clearly indicate reasons for your choice (13 marks) 3. On a night out with friends to a Casino in Canberra you won $ 50,000. You have recently read an article on Qantas shares being one of the cheapest in the Airline industry. On the 26th of August the shares closed at $ 3.35. Considering the risk and return would you buy Qantas shares, buy their issue of bonds or return to the Casino to gamble with the $50,000? Give reasons and show relevant calculations.(12 marks) Part 2: Group Presentation Task Description Length: 15 minute presentation, 5-10 minutes questions. Due: Week 11 Description:  Use no more than 10-12 slides; ensure the presentation is no more than 15 minutes.  You can refer back to your 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 and how interesting and engaging the presentation is Layout  The presentation must not exceed 15 minutes  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" Assessment  Please see on the portal under assessments. You will be marked according to this rubric.  Plagiarism or inadequate references will attract harsh penalties. Commonly asked Questions For the written assignment, what if I am above the word limit of 2500? How much can I exceed the word limit? This is OK to a point. You have a 500-word lee-way. 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 15 minutes? No- the lecturer will stop you after 15 minutes. Can our group have less or more than 4 students? No. You need to stick to these parameters. If you cannot form a group of four you can speak to your lecturer and he will either choose a group for you to be a member of 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 in-text 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 intext 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. Group Meeting record  Each Group please fill in the table for a minimum of three meetings and paste into your written assignment  The notes can be brief Meeting Date Group Members Present Issues Discussed Tasks Completed and tasks Allocated A list of Group Members who attended meeting: A list of issues discussed: A brief list of tasks to be done before next meeting and who is going to do the tasks:1. Name Signature Date 2. Name Signature Date 3. Name Signature Date 4. Name Signature Date Assessment Marking Rubric Criteria HD (High Distinction) 85%-100% DN (Distinction) 75%-84% CR (Credit) 74%-65% P (Pass) 50%-64% NN (Fail) 0%-49% Score Knowledge, comprehension and application In addressing the economic issues, the assignment clearly identifies, defines and critically applies relevant theories and concepts sourced from more than 3 quality sources. Correct graphs and charts are applied and correct analysis is undertaken with reference to the graphs/charts. In addressing the economic issues in the case study, the assignment 1 clearly identifies, defines and applies relevant theories and concepts sourced from more than 3 quality sources. Correct graphs and charts are used, but minimal explanations are given with reference to the charts. In responding to the economic issues in the case study, the assignment defines and applies relevant theories and concepts sourced from at least 3 sources. In responding to the economic issues in the case study, the assignment identifies and defines relevant theories and concepts with little application in response to the case questions. At least 3 sources used in assignment . Key concepts not identified or defined. No, or unclear, application of concepts to the case study. Less than 3 sources used in assignment .Analysis, evaluation and judgment Analysis and evaluation supported by comprehensive discussion and argument and leading to a supported judgment which addresses the case study questions. Student is able to link analysis with the data - making informed judgment by combining data and theory in coming up with their conclusions. Copious evidence in the work of critical reasoning and synthesis. Analysis and evaluation supported by comprehensive discussion and argument and leading to a clear judgment which addresses the case study questions. Copious evidence in the work of critical reasoning. Analysis and evaluation supported by broad discussion and argument. Much evidence in the work of critical reasoning. Analysis and argument supported in part by some discussion and argument. Some evidence in the work of critical reasoning. Analysis and argument not apparent. Lacks argument and discussion. Little or no evidence in the work of critical reasoning. Conclusion and written assignment Assignment written in a cohesive manner, by addressing questions directly and comprehensively. Sound and convincing conclusions and judgements drawn from the discussion. Appropriate citation and references given to support the discussion to help draw a sound well-argued conclusion. Assignment written within the word limits. Assignment written in a cohesive manner, by addressing questions directly. Sound and convincing conclusions and judgements drawn from the discussion. Appropriate citation and references given to support the discussion to help draw a sound conclusion. Assignment written within the word limits. Assignment written in a somewhat cohesive manner, by somewhat addressing the questions. Sound conclusion drawn from the discussion. Appropriate citation and references given to support the discussion to help draw a conclusion. Assignment written within the word limits. Assignment written with structure but reads awkwardly. Assignment question answers draw a conclusion but not necessarily drawn from the discussion. Some missing references and citations. Assignment written exceeding the word limits. Assignment reads piecemeal with no proper structure given. No or limited conclusion draw from the discussion. Missing references and citations. No attempts to stick to the word limits. Comments: Assignment Mark/Grade: Total score