QUESTION 1: (20 marks) (LO1) Presentation:
Share buybacks (also known as open-market repurchases — aka “stock buybacks)
a. Research the nature of share buybacks.
Explain their purpose, their role in managing the capital structure of a company and identify any ethical challenges presented by this practice by companies citing relevant examples. (10 marks)
b. From your research of Woolworths Groups recent buyback offer (Source 2) and other sources, present a case from the point of view of an investor for or against participating in this particular buyback. Ensure that you take into consideration the effect on capital structure and the goal of shareholder wealth. (10 marks)
Source 1: Share buybacks
https://www.canstar.com.au/online-trading/share-buyback/ https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy
Source 2: Woolworths Share buyback
Woolworths Group Limited (Woolworths Group) announced an off-market buy-back of Woolworths Group ordinary shares (Buy-Back) on Thursday, 26 August 2021.
https://www.woolworthsgroup.com.au/content/Document/Buy%20Back%202021/Buy-Back%20Infromation%20Flyer.pdf
https://www.woolworthsgroup.com.au/content/Document/Buy%20Back%202021/Buy-Back%20Booklet%20WOW%202021.pdf
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QUESTION 2 (20 marks) (LO4)
In class, there has often been debate as to the validity and success of capital budgeting techniques employed by firms and also government.
Analyse the key assumptions involved in the capital budgeting process to explain why firms and governments may inadvertently choose to undertake a project, that in hindsight, failed to deliver its value proposition. Use specific examples to justify your position.
For Questions 3 and 4 choose one of the companies below and answer the questions:
Companies:
1.Ausnet (ASX Code: AST)
2.Downer (DOW)
3.Stockland (SGP)
QUESTION 3 (20 marks) (LO2):
i)Based on past five years’ (2017-2021) financial results, calculate the debt-to-equity ratio, gearing ratio and interest cover ratios, and provide an evaluation of the company’s capital structure policy. (8 marks)
ii)Do you find the capital structure risky for the company? Do you consider the company’s capital structure policy optimal? Why or why not? Explain. (3 marks)
ii)Using 2021 FY results, estimate the company’s weighted average cost of capital (WACC) and explain what the WACC you have found means for the company and for its stakeholders. (5 marks) (Show your workings)
iii)How does trade-off theory, signalling theory and the pecking order theory influence company’s capital structure? (4 marks)
QUESTION 4 (20 marks) (LO3)
i)Using end-of-the month closing share prices (from Yahoo Finance) for the past three years (2018 – 2021) calculate the beta coefficient for the company of your choosing. Describe the importance and implications of the beta for the business and shareholders. (Show your workings) (6 marks)
ii)Using Capital Asset Pricing Model (CAPM) determine the expected rate of return. Explain what the rate of return you determined mean for the management of the company and shareholders (show your workings). You are suggested to use Excel for beta computations. (6 marks)
iii)Provide an evaluation of systematic and unsystematic risks of the company. (4 marks)
iv)Suppose you have $1000 savings you set aside for investment. Would you consider investing your entire savings in the shares of your chosen company? Discuss. (4 marks)
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Additional helpful websites and resources
Australian Stock Exchange: https://www2.asx.com.au/
Calculating beta: https://www.investopedia.com/ask/answers/102714/how-do-you-calculate-beta-excel.asp
DatAnalysis Premium: https://datanalysis-morningstar-com-au.ezproxy1.acu.edu.au/af/dathome?xtmlicensee=datpremium
IBISWorld Australia Company Profiles: https://my-ibisworld-com.ezproxy1.acu.edu.au/au/en/company-reports/home Investing.Com: https://www.investing.com/ Morningstar: https://www.morningstar.com.au/
Reuters Business: https://www.reuters.com/business/
Yahoo Finance: https://au.finance.yahoo.com/
