A2 ACC00152 S1 2015
ACC00152 Business Finance Assignment 2
The assignment has a 20% weighting in your overall mark for this unit. It will be marked out of 20 and
consists of three main questions. Marks will be allocated as indicated for each question below. Your total
assignment submission (excluding your reference list) should not exceed five (5) A4 pages.
Question 1: Cost of Capital (8 marks)
You are to estimate the cost of capital for Boral Ltd, an Australian listed company, at its half year ended
(31 December 2014). Boral manufactures and supplies building and construction materials mainly in
Australia but also in the USA and Asia. Boral uses both debt and equity financing.
Before you ...view middle of the document...
Boral’s tax rate is 30%.
Set out full workings in a clear and logical manner. Label all input figures and reference their source.
Marks for Question 1 will be awarded for: appropriate choice of input figures (up to 3.5 marks); correct
choice and application of method (up to 4 marks); and referencing of data sources (up to 0.5 marks).
Moody’s Investors Service 2015, Boral Limited, Ratings, https://www.moodys.com/credit-ratings/Boral-Limitedcredit-rating-600052768, accessed 14 February 2015.
Specific types of debt securities issued by Boral may have different terms, currencies, credit ratings and yields.
However, we will assume that the average rate Boral would have to pay on new debt would be the same as Baa
rated debt and, to stay within the scope of this unit, that the debt is in Australian dollars. We also assume that,
although Boral might borrow for shorter terms than 10 years, the purpose of calculating the cost of capital is to
assess long-term cash flows (e.g. projects, company value) and hence we want to match the duration of capital and
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A2 ACC00152 S1 2015
Question 2: Share valuation (7 marks total)
Boral Ltd had sales for the year ending 31 December 20143 of $4,388.4 million. At that time, the
company had cash and investments of $1,310.7 million. Suppose you forecast sales to increase at 7% per
calendar year for the next 5 years. After this, you forecast free cash flows to grow at a constant rate of
4% per calendar year. Based on Boral’s last 5 years and with some adjustment for trends over that time
as well as predicted future trends, you have the following expectations:
EBIT will be 5% of sales
On average, capital expenditures will equal depreciation
Changes in net working capital will be 7% of changes in sales
Boral’s tax rate will remain at 30%
Boral’s WACC will remain the same as calculated in Question 1.
Answer each of the following:
(a) Based on the data above, along with relevant data you collected or calculated in Question 1,
what is your estimate of the value of a share in Boral at 31 December 2014?(4 marks)
(b) Compare your valuation in (a) to the share price at 31 December 2014. Assuming you are
confident in your valuation...