FINC3600 Finance in Practice S1 2022 Project 1: Corporate Finance Brief February 21, 2022 Corporate Finance Scope of Company’s Operations Environmental Social and Governance Debt Financing & Cash Management Payout Policy Capital Structure WACC for Main Business Activity 2022 The University of Sydney Business School 2 Project Learning Objectives By completing this assignment you will: Learn to apply corporate finance concepts and techniques from past finance courses in a realistic business setting. Communicate complex financial reasoning to a diverse audience, both in writing and in person. Gain insight into how corporate finance teams work and the effective operation of collaboration and peer review in a team environment. Gain insight into synthesising corporate finance theory and analysis of market data into corporate finance advice. Work effectively in an online environment. Project Learning Activities By completing this project, you will: Integrate corporate finance theory with corporate finance practice. Work in a project setting with team members in a cooperative and collaborative fashion. Develop and peer review financial models. Develop and peer review executive briefing reports. Develop and peer review board level written presentations. Present and communicate in senior executive and board settings. Unit Learning Outcomes At the completion of this unit you should be able to: LO1. demonstrate and integrate finance knowledge, concepts, and principles in a range of business contexts. LO2. identify, analyse, and solve business challenges reaching conclusions using fundamental concepts, principles and knowledge from the finance arena. LO3. communicate effectively and professionally using a range of communication modes in business contexts. LO4. recognise the need for, locate, evaluate and use information effectively. LO5. use different strategies to explore opportunities and construct new ideas, solutions, or products. LO6. evaluate issues relating to business ethics, sustainability and social responsibility in addressing business challenges. LO7. make a positive contribution to a team-based structure. 2022 The University of Sydney Business School 3 Groups This assignment is a group activity. Students will be asked to form teams through Canvas (see Canvas announcements for details and updates). These teams will be confirmed during the Week 3 workshop. You will work in this group for the remainder of the semester (Weeks 3 through 12). Role You are performing the role of an independent external corporate finance advisory team whose client is the CFO of the company that you have selected to be the subject of this project. Task Your task is to provide corporate finance advice to a public company board. You will be applying your judgement and knowledge of corporate finance theory to live market data to provide the board with insights and recommendations. It is recognised that you do not have the hands-on experience of corporate finance advice, but you should use the case study to explore the experience of developing such advice. Please remember that the corporate board deals with substantial issues and that your analysis and communication should reflect this. Your task has been broken down into the following steps: Steps When Assessment 1 You will begin researching a publicly listed company while working online via Zoom. Review and complete the Preliminary Research Checklist document available on Canvas. You will find the resources on the Researching Companies and related Canvas pages helpful. This allows for effective participation in a “brain storming” session with your team as assigned / confirmed in the Week 3 workshop. Week 2 2 Review the project brief and the Persuasive Communication Handout. Complete / finalize the Preliminary Research Checklist document available on Canvas to allow effective participation in “brain storming” in the workshops in Weeks 3 and 4. Be sure that you have thoroughly reviewed the Canvas support materials and videos for each brief topic. Weeks 2,3,4 3 Team assignments are finalized. Select comparable companies as a team. Allocate topics / issues covered by the brief to team members. Weeks 3,4 Individual 4 Develop and maintain a project plan. Weeks 3-7 Individual 5 Analyse and evaluate the areas discussed in the project brief. Weeks 4,5 Individual 2022 The University of Sydney Business School 4 6 Prepare team and individual CFO briefing papers in line with suggested formats. Depending on team size you will each cover one of the six specific areas where advice has been requested. Group collective task: The group must undertake a team analysis of the scope of the company’s operations (Topic 1). This team topic report is submitted by the group. Individual member task: Each group member selects just one of the remaining topic issues and takes primary responsibility for that CFO brief. This individual topic report is submitted individually. Group involvement: Participate in the initial brainstorming meeting and peer review of all CFO briefing content prior to submission. The scope of operations review is done (and submitted) as a team. Due Monday 09:00 am 28/03/2022 (Week 6) Individual and Group 7 Based on your six CFO briefs and revisiting your analysis using the feedback you received, identify your most important findings and recommendations to be presented to the board. To the extent that recommendations are made, the broader corporate finance implications should be explained (for example if a divestment were recommended, how would the realised funds be used and what are the implications for capital structure, payout and debt policy ) Week 7 Individual 8 Prepare the slides and appendices for the board presentation which summarises the most important findings of your work including recommendations for future action. Due 09:00 am Monday 11/04/2022 (Week 8) Group 9 Present to the Board a summary of the most important findings of your work including recommendations for future action. Details of presentation times are provided on Canvas. Week 8 Group and Individual 2022 The University of Sydney Business School 5 Task Assessment Your task will be assessed as follows (given as a percent of the total unit marks): Participation CFO Briefing Paper Slides for Board Presentation Oral Board Presentation Total Individual 5.0% 5.0% 5.0% 15.0% Group 5.0% 3.0% 7.0% 15.0% Total 5.0% 10.0% 3.0% 12.0% 30.0% Participation (team contributions) is 5% per project and will be reviewed and assessed by facilitators during project workshops using the following scale: Did not contribute at all (e.g. camera off during online facilitation) Quiet contributor – limited interaction Active contributor – contributed but did not draw other team members into discussions Effective interaction – contributed and drew other team members to contribute 0 1 2 3 Based on the categories above you are allocated 0, 1, 2, or 3 points in the relevant meetings. These are then summed over the relevant weeks and scaled to an overall mark out of 5 points for project participation. When working online with your team it is very important that you keep your video on and your microphone live (mute only as needed). This makes it easier to engage effectively with your team members. It also means that the facilitators are aware of your engagement and contribution. Failure to have your camera turned on may mean that the facilitator is unable to recognize fully your contribution to the class session. Some things you can do to benefit your team and aid in your assessment when working with facilitators are: Ensuring that you are an active contributor Asking insightful questions Encouraging participation by others Summing up key discussion points as appropriate 2022 The University of Sydney Business School 6 Task Timeline Week (USYD Number and Commencement date)1,2 Activities Updates / Assessments 2 28/02/22 Please sign up for your team ensuring all members are registered in the same stream. Project brief made available to students. Tentative company assignments are made. Begin work on research checklist in online class session. 3 07/03/22 Teams are formally allocated and confirmed. Team building exercise. Communications skills review. Initial brainstorming session. 4 14/03/22 Focus on Project 1. Individual (participation). 5 21/03/22 Focus on Project 1. Individual (participation). 6 28/03/22 Completion and submission of CFO briefs, both individual and group reports. Reflection and review of key insights into company. Individual and group (CFO brief). 7 07/04/22 Focus on key insights from analysis in Project 1. Build upon the group component of the CFO brief. Reflect on feedback from the facilitators. Develop presentation materials. Individual (participation). 8 11/04/22 Submit presentation slides. Present findings to board. Individual and group (presentation and slides). MID SEMESTER BREAK 1 All streams meet online through Zoom at regular, scheduled times. Once formed, teams will be working in Zoom using breakout rooms. You will be moved to your breakout room at the start of each Zoom session as required. 2 You might want to download the University’s Student Wall Calendar to help manage these dates. 2022 The University of Sydney Business School 7 List of Companies The following companies will be used for the case study in this semester. ASX Code Company Name GICS Sector Broker Research* BSL BlueScope Steel Limited Materials BofA & MQG A2M The a2 Milk Company Limited Consumer Staples BofA & MQG FMG Fortescue Metals Group Limited Materials BofA & MQG COL Coles Group Limited Consumer Staples BofA & MQG SEK SEEK Limited Communication Services BofA & MQG In Week 2 you will be tentatively allocated a company to begin to study and to complete the Preliminary Research Checklist. In Week 3 your selected team allocation will be confirmed before the class meeting. In anticipation of this team meeting all team members should ensure that (before the Week 3 workshop) they have reviewed and completed the Preliminary Research Checklist document available on Canvas so that they can participate fully in initial brainstorming. You will also be working with your team on assigning responsibility for topic sections of the CFO brief. *We are grateful to Bank of America Securities (BofA) and Macquarie Group (MQG) for providing research regarding the companies listed above. Please note that these research reports have been provided for the requested educational purpose only. They are ‘historical’ in nature and should not in any way be viewed as entailing the provision of advice and ‘current’ research that students may look to trade on. Please refer to important disclosures at the end of the reports. All copying, redistribution, retransmission, republication and any other unauthorized dissemination or use of the contents of the report are prohibited. Project Brief Introduction 2022 The University of Sydney Business School 8 It is 7 March 2022. Your team was approached by the CFO of the selected ASX listed company to provide corporate finance advice. The advice is sought ahead of the company’s annual strategy meeting where a range of initiatives will be discussed by senior management and the board. The CFO has emphasized the importance of this advice being independent and hence your team was chosen in preference to a number of full-service investment banks who have traditionally provided transaction and debt related services to the company. The CFO has also explicitly noted that your analysis must be of material and consequential issues. While you are not expected to perform detailed capital budgeting analysis you are expected to provide some initial, prospective estimates of the costs and benefits of your recommendations. It is anticipated that the strategy meeting will review the current scope of the company’s operations and, in particular, consider the potential for divestments and/or acquisitions. However, the CFO realises that there are a number of strategic issues facing the company at this time. Hence, the CFO is concerned that any future restructuring be considered in the context of a rigorous framework and hence has requested your team provide detailed advice on several key corporate finance topics: 1. Scope of company’s operations (potential divestments and acquisitions) – team analysis 2. WACC for the main business activity 3. Environmental, social and governance (ESG) 4. Capital structure 5. Debt financing and cash management 6. Payout policy Following submission of the CFO briefs and receiving feedback on the CFO briefs, you should develop a presentation for the Board. The objective of the presentation is to make specific corporate finance recommendation(s) for future action that will be accepted by the board of directors. The recommendation(s) need to address the most important matters identified by your review of the six Corporate finance topics. The justification of the recommendation(s) need(s) to incorporate: the most important findings of your work and why you have developed this view. the main financial implications of your recommendation(s), including some initial, prospective estimates of cost and benefit as needed. The CFO will not provide any internal financial information and – at this stage of the advice – has requested that you base your work solely on publicly available information up to 7 March 2022. You have had detailed discussions with the CFO and have received the following brief for the advice. Deliverables The CFO has requested that your team provide three types of deliverables for this project: 2022 The University of Sydney Business School 9 CFO briefing papers – Recognising that the board presentation may not cover all components of the advice brief, the CFO has requested that succinct CFO briefing papers be prepared in relation to the specific areas covered by the advice. The scope of company’s operations topic (Corporate finance topic 1) should be undertaken collectively by the group. Each team member will select one of the other five issues and take primary responsibility for analysis, preparation, and submission of the advice.3 Hence, each team will produce and submit (up to) 5 individual topic reports, as well as a combined group report. These (up to) 5 individual reports and one group report are to be submitted electronically by 9:00 am Monday 28/03/2022 (Week 6). Board presentation slides – Presents a summary in the form of succinct slide pack of your recommendation(s) for future action and your justification for these recommendation(s). The slide pack will be circulated to board members before the presentation and needs to be submitted electronically by 09:00 am Monday 11/04/2022 (Week 8). You must use the slides as submitted in your presentation. Presentation to the board – Ten (10) minute stand-up board presentation followed by a ten (10) minute question and answer session. The presentation will summarise the most important findings of your work including recommendations for future action. Presented in the regular Week 8 workshops (i.e. on 12/04/2022, 13/04/2022 and 14/04/2022). Assessment will be done on both an individual and a team basis. There will also be scheduled time for feedback from the facilitators during these sessions. In addition to the above deliverables you should retain all working papers u
sed to prepare the advice so that you are able to respond to any detailed queries by the CFO. Corporate finance topic 1 – Scope of company’s operations (team brief) Ahead of the strategy meeting, the company needs a very preliminary review of the company’s operations to consider how to increase the company’s long-term value to stakeholders potentially through divestments, acquisitions or other changes to its current activities. Addressing possible divestment/s of a current business activity / investment, you should consider any activities showing the following characteristics: Absence of alignment with the core business – i.e. lack of strategic or operating synergies with the core business. Relatively weak positioning or performance. Perhaps to free up capital for other investment opportunities. 3 If your team has fewer than 5 members, then your individual briefs will cover a subset of these 5 topic areas. I.e. each member is responsible for managing one topic area for the individual report. Every team is responsible for providing a Scope of company’s operations group report). 2022 The University of Sydney Business School 10 Scope for sale to another strategic buyer to realise a significant premium over the current value to the company. Make a clear recommendation to the company on whether a divestment/s should be considered (and summarise your reasoning and supporting analysis). If a divestment is recommended, estimate the dollar amount of proceeds, and briefly identify the relevant division or activity. Addressing possible new activities or extension of existing activities, you should: Consider the logical sector for an acquisition or extension of activities. Consider most effective method of achieving any suggested extension of current activities (e.g. acquisition, capital expenditure, joint venture, licensing or other method). Within that sector consider potential acquisition targets drawn from either of the following groups – Australian listed companies and overseas listed companies. For one potential target identified, briefly outline the logic and risks of a possible acquisition of that target. Make a clear recommendation to the company on whether a new activity or an extension to current activities should be considered. Outline your reasoning if you recommend such a new activity or an extension, describe how you consider this should be achieved, and estimate the dollar amount of investment required. If an acquisition is recommended, briefly identify a potential target company or business. Be sure that your analysis addresses substantial issues and that you: Provide a high-level financial analysis of the impact of your recommendation on the company (a detailed DCF analysis is not expected). Consider risks and implications. Use publicly available information to conduct your analysis. Therefore, only listed companies – either Australian or overseas listed – may be considered. If referring to a company, ensure you name the relevant stock exchange and ticker code (company listing code). Corporate finance topic 2 – WACC for the main business activity (individual brief) The company requires a robust, documented analysis of the weighted average cost of capital for its main business activity (based on your assessment) expressed in its functional currency. The analysis should use the CAPM framework and should specifically address: The estimated WACC at 7 March 2022, based on analysis of the company and comparable companies in its sector and typical gearing levels across the sector. Data for three to five comparable companies should be referenced for key inputs. Whether – in the current very low interest rate environment – the current ten-year government bond rate is an appropriate measure of risk-free rate in applying CAPM 2022 The University of Sydney Business School 11 Estimates of market risk premium, beta and the cost of debt. Beta measures should be sourced from information providers and do not need to be calculated from underlying share price data. How your estimate compares to other estimates of WACC for the company identified in broker reports Comment briefly on possible reasons for variances between your estimate and those other estimates. The CFO briefing on WACC is to be in the form of a summary calculation with key supporting analysis. The CFO is familiar with the format used in calculations of WACC set out in independent expert reports and has suggested using a summarised version of that format. Based on your analysis, comment on the approximate terminal growth rate that would be consistent with your WACC estimate in preparing a discounted cash flow (DCF) valuation of the company. Corporate finance topic 3 – Environmental, social and governance (individual brief) The CFO is acutely aware that ESG is increasingly an area of scrutiny among major investors. Based on the current activities of the company, provide a summary of up to three ESG risks which could materially affect the company’s performance. Focus on material ESG issues; the three issues need not come from each of E, S, or G. For each current risk identified, provide recommendations for how the company could look to manage the risk over the short, medium and long term. Review how the company currently reports these risks and consider any potential improvements in the way these risks are communicated to external stakeholders. Be sure that your analysis addresses substantial issues and that you provide some preliminary cost and benefit estimates (a detailed DCF analysis is not expected). Corporate finance topic 4 – Capital structure (individual brief) To consider capital structure going forward, the company needs summarised advice in relation to the following points: Based on academic theory and the specific characteristics of the company, what are the key commercial issues that should be considered in determining a capital structure for the company How does the gearing of the company as reported in its most recent annual or interim report compare to its peer companies Analysis should cover three to five comparable companies and the following metrics: o Net debt as a percentage of net debt plus equity (based on balance sheet values) o Net debt as a percentage of net debt plus equity (based on market values) 2022 The University of Sydney Business School 12 o The ratio of net debt to EBITDA To the extent that gearing varies across the peer group, what major factors appear to lead the companies to adopt different capital structures What insights does this comparison provide to the company in considering capital structure policy Based on the above analysis, your brief recommendation in relation to the capital structure of the company. Corporate finance topic 5 – Debt financing and cash management (individual brief) Develop a summarised analysis of the debt (leverage) and cash (liquidity) position of the company – and relate it to your primary strategic recommendation identified in Topic 1. In doing so, make sure that you identify: The existing term structure of debt The sources of existing debt – including the mix of bank and bond debt The current level of credit facilities (detailing both drawn and undrawn amounts) The level of cash and liquid securities held Relevant credit ratios / metrics which help to inform your analysis of leverage and liquidity Compare and contrast to three-to-five comparable companies where appropriate. You should discuss debt and cash management of your company in the following context: You should relate all elements of this analysis to the primary strategic recommendation(s) for your company. Is the current term structure of debt and the quantum of debt appropriate given your company’s operations Based on the primary strategic recommendation(s) for your company, how will the debt structure of your company change Will any additional funding be required to execute your primary recommendation If so, how and where would you complete this funding How much would be required How will proceeds from any disposals be used Will excess liquidity be distributed to shareholders If so, how Corporate finance topic 6 – Payout policy (individual brief) To consider future payout policy (i.e. the distribution of post-tax profits by way of dividends or buybacks), the company wants you to provide summarised advice in relation to the following points: Based on academic theory and the specific characteristics of the company, what are the key factors that should be considered in setting future payout policy (and the mix of dividends and buybacks) How does the historical dividend and buyback policy of the company compare to its peer companies Using three to five comparable companies provide analysis of: Dividend as a percentage of post-tax profit 2022 The University of Sydney Business School 13 Buybacks as a percentage post-tax profit Broad factors other than post tax-profit, which appear to have driven share buybacks (e.g. distribution of asset sale proceeds) Extent of franking of dividends (Australian comparables only) What major insights does the above comparable analysis provide in relation to the future payout policy of the company Based on the above analysis, what is your brief recommendation in relation to the future payout policy of the company Rules and Guidelines You may assume the current date is 7 March 2022. Advice should be based on financial statements as based on the most recent annual or interim report and publicly available information – including ASX announcements – up to 7 March 2022. Kick-starting your project Prior to the first workshop, it is essential that every team member performs preliminary research on their selected company, so they can contribute fully to the group brainstorming sessions in Weeks 3 and 4. Please review and follow the Preliminary Research Checklist document available on Canvas. CFO briefing paper In preparing for each of the CFO briefing paper, please be aware of the following: The CFO briefing papers should be in portrait PDF format. The CFO briefing papers must be at most two pages. No more than one page of text (e.g. bullet points) and at most one page of clearly presented supporting charts and tables, including references. Do not provide any appendices. The report should have a minimum font size of 12 with standard spacing as has been used in this project brief. All CFO briefing papers need to be submitted through Canvas by 9:00 am Monday 28/03/2022 (Week 6). The individual topic reports are to be submitted on an individual basis. The group summary document is to be submitted by the nominated group contact person on behalf of the entire team. Hence, there will be 6 documents submitted from a team of 5 persons. Prior to uploading your .pdf file to Canvas ensure that the file is of a reasonable size. If your file is large please use the “reduce file size” feature of Acrobat before submitting. The following additional guidance is provided for the CFO Briefing Papers (other than that in relation to WACC): CFO brief guidance 2022 The University of Sydney Business School 14 Contents Page 1 1. Corporate topic – One line 2. Advice / recommendations – Maximum three bullet points (ie. dot points) briefly setting out the key advice to the company (which may be retaining the status quo). Focus on the key message not the detail 3. Key implications – Maximum five bullet points setting out how the recommendation would be implemented and the broad implications for the financial structure and performance of the company. 4. Key findings / evidence – Maximum of five bullet points summarising the analysis performed that led to the recommendation (this is likely to link to analysis presented in section 5). Page 2 5. Analysis performed – Provide tables, graphs or other summarised information that was critical to your findings and supports the advice being provided to the company. 6. Academic / professional guidance referenced – At least two. The CFO briefing on WACC topic section is to be in the form of a summary calculation with key supporting analysis. It is suggested you refer to the format used in calculations of WACC set out in independent expert reports (available on Canvas) and apply a summarised version of that format. The maximum length for the WACC CFO briefing is also two pages. Board presentation In preparing for the Board presentation, please be aware of the following: An electronic copy of your presentation needs to be submitted through Canvas by 09:00 am Monday 11/04/2022 (Week 8). Your presentation must use the slides as submitted. Presentations slides need to be shared while in Zoom as appropriate. Please arrive to the specified Zoom breakout room / boardroom at the allocated time. Presentations can be an online version of what would be a stand-up presentation (a setting where slides would typically be projected onto a large screen). Presentations must be no more than 10 minutes in length. The Board has the option to disregard any overruns. There will be an additional 10 minutes of Q&A. Please ensure that all team members participate in the Q&A portion of the presentation. Presentation slides should be in PowerPoint format and must not be longer than 15 slides in length (excluding title page, introduction page and appendices). Any additional materials and/or supporting analysis should be contained in Appendices. The introduction page is one slide introducing your team members, including photos and names. This is typical of a corporate finance presentation. State your main message/request at the start of your presentation. This is also known as Bottom Line Up Front (BLUF). Be sure to review the Persuasive Communication Guide (PCG) and relevant videos on Canvas for detailed recommendations on creating presentations. 2022 The University of Sydney Business School 15 Your presentation should primarily be focused on your recommendations, conclusions, and higher-level insights. Be wary of presenting detailed information to a senior audience. Please remember that the corporate board deals with substantial management issues and that your analysis and communication should reflect this. As a corporate finance advisory team, the objective of the presentation is to convince the Board that your recommendations are sound and are based on strong logic, facts, and analysis. Remember to justify and communicate clearly your recommendations. Wear suitable business attire to your presentation. You are playing the role of your company’s finance advisory team and are expected to dress appropriately. Project management Here are some guidelines as to how to manage the project with your colleagues: Working methods must facilitate a high level of collaboration to use fully the skill mix across your team. We recommend having one person chair each meeting, as well as another taking notes on action items. The team will work collectively in preparing the assessment of the scope of company’s operations issue (Corporate finance topic 1). In addition, each team member is responsible for preparing the topic section for just one of the Corporate finance topics. While individual responsibilities are assigned for different topic sections, CFO briefing papers can only be released after peer review of draft papers by all members of the team and discussion at a team meeting. This is to assure consistent quality and integration of the sections within the report. To the extent that additional ideas or worthwhile changes are suggested in a particular topic section, it is at the discretion of the team member(s) preparing the topic section whethe