Reflection.
Both Freddy May and Peter Parker are keen to know how the company’s
new Project-finance team is
getting on. They have asked each member of your team to provide a
brief reflection on the
performance of the team. This reflection will be kept anonymous and
will help senior management of
Plastitubes determine the size of the performance bonus that will
be awarded to team members
should the investment project proceed successfully.
TASK:
Prepare a brief summary/reflection on the performance of your
project-finance team’s preparation of
this assessment. This reflection should be no more than 300
words.
- Part 3 Plastitubes Limited Project Finance Team Reflection Both Freddy May And Peter Parker Are Keen To Know How The 1 (289.17 KiB) Viewed 13 times
a project-finance manager, working
with a small team of project-finance experts.
Plastitubes is based in Auckland’s south-eastern industrial area of
Penrose and manufactures a variety
of Fibre Reinforced Polymer (FRP) pipes and containers used for
transporting and storing corrosive liquids.
Plastitubes supplies customers in New Zealand and the Pacific
Islands who are mainly involved in the
petrochemical and wastewater (sewage) treatment industries.
Their main product, FRP pipe, has an exceptional strength to weight
ratio, and weight for weight is
stronger than steel. The pipes also have good shock and impact
resistance and excellent flow
characteristics as a smooth glass-like interior finish reduces
material build-up and improves fluid
transmission.
Plastitubes is a medium sized company listed on the NZX and has 35
million shares on issue - the current
share price is $2.50. In addition, Plastitubes issued 10 million
preference shares 5 years ago. These
preference shares have a $1 face value and a fixed dividend of
11%p.a. The preference shares are
currently trading at $1.75 each. The company's equity beta (β) is
1.30, the New Zealand market risk
premium is estimated at 6.0% p.a., the yield on 10-year New Zealand
government bonds is 2.30% p.a.,
and the company tax rate is 28%.
The company’s long-term debt consists entirely of 25,000 10-year
bonds issued exactly 4 years ago (these
are listed on NZDX). Each bond has a face value of $1,000 and an
annual coupon rate of 8% (paid annually).
The bonds are currently trading at a yield to maturity of 6%
p.a.
- Part 3 Plastitubes Limited Project Finance Team Reflection Both Freddy May And Peter Parker Are Keen To Know How The 2 (432.19 KiB) Viewed 13 times
- Part 3 Plastitubes Limited Project Finance Team Reflection Both Freddy May And Peter Parker Are Keen To Know How The 3 (322.02 KiB) Viewed 13 times
Extracts from Plastitubes' latest financial statements show the following: Balance Sheet of Plastitubes as at 31 March 2022 ($000) 5,000 Current Liabilities Current Assets 6,000 Non-Current Assets 80,000 Non-current Liabilities (Loans) 25,000 Preference Shares 10,000 Ordinary Shares 35,000 9,000 Retained Earnings Total L & OE Total Assets 85,000 85,000 Your project-finance team has just received a memo (see following page) from the company's Chief Executive Officer, Freddy May, and you have decided you all need to prepare thoroughly for any questions that might arise from your colleagues in the meeting mentioned in the memo. On first glance you are a little concerned with some of the CEO's calculations and feel you might have to talk briefly with Mr May before the meeting as well.
Amount ($000) % of total Rate Bonds 25,000 35.7% 8.00% Preference Shares 10,000 14.3% 11.0% Ordinary Shares 35,000 50.0% 15.0% From these data I have estimated Plastitubes' weighted average cost of capital as: WACC = (0.357 x 0.080) + (0.143 x 0.11) + (0.50 x 0.15) = 0.1193 or approx. 12% Therefore the official hurdle rate for this and all future CAPEX decisions is 12%. If you have any further questions about these calculations please direct those to our new project-finance manager and their team who are more than qualified to explain things to you.