Rubric N D C B A 49 50 69 70 Conceptual Interprets the problem, Identifies the Interprets the problem correctly Skills correct means of solving the problem, and Applies appropriate principles of finance to Frequent errors or unacceptable mistakes explains the solution to the problem in a identify the correct means of solving the Work applies principles of indicative of a lack of understanding of manner which demonstrates an problem finance correctly in the core principles of finance understanding of the principles of finance, Explains the solution to the problem in a interpreting the problem, though affected by some errors and or manner which demonstrates a thorough discuss ing results, conclusions, in completeness understanding of the principles of finance and or recommendations Quantitative Identifies, calculates and or sources the Skills Frequent errors or unacceptable mistakes correct inputs required to solve the Work demonstrates on indicative of a lack of understanding of Sources inputs and calculates a solution to problem the problem, though subject to some aptitude to analysing and the quantitative methods and financial Calculates the solution to the problem mistaken inputs, calculation and or misuse without error solving problems technologies required to solve quanti tative problems of financial technology Demonstrates skills in being able to solve mathematically, with the problems with the use of financial assistance of financial technology technology Critically reflects on the strength and Reflective Skills weaknesses of alternative conceptual Work demonstrates on ability None or insufficient critical reflection of interpretations of the fact set, the Some limited critical reflection of to critically reflect on financial quanti tative solutions, alternative problem and alternative solution methods quanti tative solutions, alternative do to, problems, solutions and interpretations and options for advice interpretations and options for advice Critically reflects on quantitative solutions in light of client needs advice Critically reflects on any advice flowing from the solutions Some but not all formulas and calculations Correctly presents formulas and all Communicative An absence of, or frequent errors in the are correctly presented calculations on which the solution to the presentation of, formulas and calculations The interpretation and explanation of problem is based Skills Interpretations and explanations are either findings and methods is not clearly Clearly and accurately interprets findings Writing demonstrates ability to missing, in complete, or suffer from poor expressed and includes some poor and explains methods with few or no clearly and accurately grammar and or spelling errors grammar and or spelling grammar and or spelling errors communicate financial Little or no arguments and or evidence is Arguments and evidence in support of any Convincingly presents the arguments and analysis, solution and advice provided in support of any advice given advice provided is provided but not evidence in support of anyadvice sufficiently convincing provided Scenario You work as a financial analyst in the Finance division of the Rural Services Ltd an Australian agribusiness company Rural Services Ltd provides a range of products and services, across rural Australian towns, through a common distribution channel, including beef cattle feedlots, agricultural retail products, agency services, real estate services and financial services A deposit of lithium ore has been discovered recently on rural property owned by the company Lithium is a critical element used in various applications, especially in the production of rechargeable batteries, which are used in a wide range of devices such as electric vehicles, smartphones, laptops, and energy storage systems Additionally, lithium is also used in other industries, including aerospace, ceramics, glass, and pharmaceuticals The company is in the process of deciding whether or not to develop a mine on the property to extract the lithium to supply the rechargeable battery market in light of the increasing demand for rechargeable batteries Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with such a project, notwithstanding the significant diversification such an investment would represent for the compamy from its core activities Inorder to analyse the financial viability of the project you obtain the 2023 Income Statement and Balance Sheet for Rural Services Ltd Moreover, in order to analyse the risk and return of this project, which is so different from the current activities of Rural Services Ltd, you also obtain the 2023 Income Statement and Balance Sheet for Core Lithium Ltd, a small lithium miner listed on the ASX These financial statements are provided on pages 4 and 5 You calculate some financial ratios to compare the financial performance of the two companies, which are presented on page b You also collect some interest rate information, which is presented on page 7 Rural Service Ltd 2023 Financial Accounts INCOME STATEMENT million Sales Revenue 1,000 0 Cost of Sales 800 0) Gross Profit 200 0 Selling, General and Administrative Expenses (100 0) EBITDA 100 0 Depreciation (50 0) Interest Expense (7 5) Pre Tax Profit 42 5 Tax (12 8) Net Profit 29 8 BALANCE SHEET million ASSETS Cash 10 0 Accounts Receivable 200 0 Inventory 150 0 Property Plant and Equipment 250 0 Total Assets 610 0 LIABILITIES Accounts Payable 200 0 Bank Loan 25 0 Corporate Bonds 150 0 Total Liabilities 375 0 SHAREHOLDERS' EQUITY Ordinary Shares 400 0 Retained Earnings (165 0) Total Shareholders' Equity 235 0 Total Liabilities and Shareholders' Equity 610 0 Notes 1 The interest rate on the bank loan is 6 00 p a 2 The corporate bonds have a credit rating of BB and have 5 years to maturity They make quarterly coupon payments at a coupon rate of 4 p a 3 The ordinary shares are shown on the balance sheet at their book value of $1 per share They have a beta of 0 51 In 2023, they paid a dividend of $0 03 per share The dividend is expected to grow at 5 pa for the next 3 years, after which it will grow at a constant 3 p a in perpetuity Core Lithium Ltd 2023 Financial Accounts INCOME STATEMENT Sales Revenue Cost of 5ales Gross Profit Interest Income Selling, General and Administrative Expenses Other Non operating Income, (Expense) EBITDA Depreciation Interest Expense Pre Tax Profit Tax Met Profit BALAMNCE SHEET ASSETS Cash Accounts Receivable Inventory Property Plant and Equipment Other Assets Total Assets LIABILITIES Accounts Payable Bank Loan Other Liabilities Total Liabilities SHAREHOLDERS' EQUITY Ordinary Shares Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity million 50 6 15 8) 34 8 3 0 (21 0) 1 5) 15 4 (3 9) (2 3) 92 1 6) 7 6 rriliowm 152 8 6 7 289 241 2 73 6 503 1 310 836 33 6 148 2 3709 (16 0) 354 9 503 1 Financial Analysis of Rural Services Led and Core Lithium Ltd 2023 Rural Core Services Lithium FINANCIAL ANALYSIS Ltd Ltd Sales Revenue Average PPE Margin 164 31 Cost of Sales Revenue Ratio 80 31 Gross Margin 20 69 Tax Rate 30 17 Net Margin 3 15 Net Working Capital Sales Revenue Ratio 15 9 Net Profit Equity Return 13 2 Debt Equity Ratio 74 24 Credit Rating BB BB Beta 0 51 2 31Interest Rates Based on the current yields at which the 5 year and 10 year Government bonds are trading you assume that the 5 year risk free rate is 3 974 and the 10 year risk free rate is 4 315 The current corporate credit spreads are as presented in the table below Rating Aaa AAA Aa2 AA A2 A Baa2 BBB Ba2 BB B2 B Caa2 CCC Ca CC Maturity 1 8 28 52 80 201 319 352 1,207 IN 22 33 59 87 201 319 852 1,207 3 35 39 65 93 201 319 852 1,207 48 44 71 100 201 319 852 1,207 5 45 46 76 108 201 319 852 1,207 6 42 48 82 117 201 319 852 1,207 7 49 53 88 123 201 319 352 1,207 57 57 94 129 201 319 852 1,207 9 65 62 100 135 201 319 852 1,207 10 63 63 99 135 201 319 852 1,207 11 61 63 99 136 201 319 852 1,207 12 60 64 99 136 201 319 852 1,207 13 58 64 98 136 201 319 852 1,207 14 57 65 98 136 201 315 852 15 1,207 55 65 97 137 201 319 852 1,207 16 53 66 97 137 201 319 352 1,207 17 52 56 96 137 201 319 852 1,207 18 50 67 96 138 201 319 852 1,207 19 49 67 95 138 201 319 352 1,207 20 47 68 95 138 201 319 852 1,207 21 45 68 94 139 201 319 852 1,207 22 44 69 94 139 201 319 852 1,207 23 42 69 93 139 201 319 852 1,207 24 40 69 93 139 201 319 852 1,207 25 39 70 92 140 201 319 852 26 1,207 37 70 92 140 201 319 852 1,207 27 36 71 91 140 201 319 852 1,207 28 34 71 91 141 201 319 852 1,207 29 32 72 90 141 201 319 852 1,207 31 72 90 141 201 319 852 1,207 Average 45 61 89 129 201 319 852 1,207Project Information You estimate the investment required to undertake the project will be equal to 20 of the Property Plant and Eguipment (PPE) shown in the Core Lithium Ltd 2023 Balance Shest (page 5) You are also aware that Rural Services Ltd has budgeted to spend 52 million in professional, geotechnical and legal fees appraising the project before making its final decision You estimate that the revenues in the first year of the project will egual the 2023 Revenue Average PPE margin you have calculated for Core Lithium, shown on page 6, multiplied by the investment Rural Services will need to undertake the project Further you are advised that the size of the resource is estimated to provide a five year life for the project and that revenues will grow by 35 inyear 2, 25 inyear 3, 15 in wear 4 and 5 in its fifth and final year You decide to be guided by the Cost of Sales Revenue Ratio you have calculated for Core Lithium, as shown on page , which you will apply through the entire five year life of the project Depreciation will be calculated using the diminishing value method with the aim of fully depreciating the investment by the end of the life of the project You decide to apply the tax rate you calculated for Rural Services Ltd, shown on page B During the life of the project, you estimate that the firm will need to provide for an annual increase in net working capital comprising an increase in Receivables and Stock, less an increase in Payables You have calculated the Net Working Capital Sales Revenue Ratio of Rural Services Ltd and Core Lithium shown on page 6 You decide to use the 2023 MNet Working Capital Sales Revenue Ratio of Rural Services Ltd to estimate the annual additional amount of Net Working Capital that will be required to service the Incremental Sales Revenue of the project, estimated each year You also assume that in the year after the final yvear of the project's life the firm will recover in full this net increase inworking capital In the yvear after the five year life of the project, you are advised that the compary would need to spend 53 million in cleaning up the site and replanting Your research also shows that the equity risk premium on the ASY is between 4 6 , 50 you decide to apply a 5 equity risk premium in your estimation of CAPM Tasks You are required to complete the following tasks e Show the formula and complete calculations for each answer you calculate o Define all variables of each formula used and show any calculations required to adjust them for use in applying the formula to solving each problem e Format your answers as defined in each task e 'When incorporating an answer to a prior task in a subsequent task, use the value as it has been formatted For example, if a task required you calculate and format as a percentage to 3 decimal places, the answer should be formatted as 1 234 If this value is subsequently included in the calculation of the answer to a subsequent task, then the value you must use is 1 234 or 0 01234 Part 4 Review and recalculate the project''s NPV, IRR and Profitability Index (20 marks a) Based on the analysis of the financial metrics you calculated on page 5 for Rural Services Ltd and Core Lithium Ltd What, if any, concerns might you have with the parameters you have used above to estimate the financial viability of the project (5 marks) If Rural Services Ltd could only proceed with the project, if it proves to be finandally viable AND if it is totally financed by share capital, costed based on the estimated cost of a lithium mining company's share capital, what would be the discount rate youwould apply to evaluating the finandal viability of the project (5 marks) Recalculate the NPV, IRR or Profitability Index of the project using this revised discount rate Note, you need only recalculate ONE of these measures (5 marks) Based on this revised project evaluation, if Rural Services Ltd could only proceed with the project, if it proves to be financially viable AND if it is totally financed by share capital costed based on the estimated cost of a lithium mining company's share capital, would you recommend that the projectis financially viable

Question

Rubric N D   C B   A  49  50  69  70    Conceptual Interprets the problem, Identifies the Interprets the problem correctly  Skills correct means of solving the problem, and Applies appropriate principles of finance to   Frequent errors or unacceptable mistakes explains the solution to the problem in a identify the correct means of solving the Work applies principles of indicative of a lack of understanding of manner which demonstrates an problem  finance correctly in the core principles of finance  understanding of the principles of finance, Explains the solution to the problem in a interpreting the problem, though affected by some errors and or manner which demonstrates a thorough discuss ing results, conclusions, in completeness  understanding of the principles of finance  and or recommendations  Quantitative Identifies, calculates and or sources the Skills Frequent errors or unacceptable mistakes correct inputs required to solve the Work demonstrates on indicative of a lack of understanding of Sources inputs and calculates a solution to problem  the problem, though subject to some aptitude to analysing and the quantitative methods and financial Calculates the solution to the problem mistaken inputs, calculation and or misuse without error  solving problems technologies required to solve quanti tative problems  of financial technology  Demonstrates skills in being able to solve mathematically, with the problems with the use of financial assistance of financial technology  technology  Critically reflects on the strength and Reflective Skills weaknesses of alternative conceptual Work demonstrates on ability None or insufficient critical reflection of interpretations of the fact set, the   Some limited critical reflection of to critically reflect on financial quanti tative solutions, alternative problem and alternative solution methods  quanti tative solutions, alternative do to, problems, solutions and interpretations and options for advice  interpretations and options for advice  Critically reflects on quantitative solutions in light of client needs  advice  Critically reflects on any advice flowing from the solutions  Some but not all formulas and calculations Correctly presents formulas and all Communicative An absence of, or frequent errors in the are correctly presented calculations on which the solution to the presentation of, formulas and calculations  The interpretation and explanation of problem is based Skills Interpretations and explanations are either findings and methods is not clearly Clearly and accurately interprets findings Writing demonstrates ability to missing, in complete, or suffer from poor expressed and includes some poor and explains methods with few or no clearly and accurately grammar and  or spelling errors  grammar and   or spelling  grammar and or spelling errors  communicate financial Little or no arguments and or evidence is Arguments and evidence in support of any Convincingly presents the arguments and analysis, solution and advice provided in support of any advice given  advice provided is provided but not evidence in support of anyadvice sufficiently convincing  provided Scenario You work as a financial analyst in the Finance division of the Rural Services Ltd an Australian agribusiness company  Rural Services Ltd provides a range of products and services, across rural Australian towns, through a common distribution channel, including beef cattle feedlots, agricultural retail products, agency services, real estate services and financial services  A deposit of lithium ore has been discovered recently on rural property owned by the company  Lithium is a critical element used in various applications, especially in the production of rechargeable batteries, which are used in a wide range of devices such as electric vehicles, smartphones, laptops, and energy storage systems  Additionally, lithium is also used in other industries, including aerospace, ceramics, glass, and pharmaceuticals  The company is in the process of deciding whether or not to develop a mine on the property to extract the lithium to supply the rechargeable battery market in light of the increasing demand for rechargeable batteries  Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with such a project, notwithstanding the significant diversification such an investment would represent for the compamy from its core activities  Inorder to analyse the financial viability of the project you obtain the 2023 Income Statement and Balance Sheet for Rural Services Ltd  Moreover, in order to analyse the risk and return of this project, which is so different from the current activities of Rural Services Ltd, you also obtain the 2023 Income Statement and Balance Sheet for Core Lithium Ltd, a small lithium miner listed on the ASX  These financial statements are provided on pages 4 and 5  You calculate some financial ratios to compare the financial performance of the two companies, which are presented on page b  You also collect some interest rate information, which is presented on page 7  Rural Service Ltd 2023 Financial Accounts INCOME STATEMENT million Sales Revenue 1,000 0 Cost of Sales 800 0) Gross Profit 200 0 Selling, General and Administrative Expenses (100 0) EBITDA 100 0 Depreciation (50 0) Interest Expense (7 5) Pre Tax Profit 42 5 Tax (12 8) Net Profit 29 8 BALANCE SHEET million ASSETS Cash 10 0 Accounts Receivable 200 0 Inventory 150 0 Property Plant and Equipment 250 0 Total Assets 610 0 LIABILITIES Accounts Payable 200 0 Bank Loan 25 0 Corporate Bonds 150 0 Total Liabilities 375 0 SHAREHOLDERS' EQUITY Ordinary Shares 400 0 Retained Earnings (165 0) Total Shareholders' Equity 235 0 Total Liabilities and Shareholders' Equity 610 0 Notes 1  The interest rate on the bank loan is 6 00  p a  2  The corporate bonds have a credit rating of BB and have 5 years to maturity  They make quarterly coupon payments at a coupon rate of 4  p a  3  The ordinary shares are shown on the balance sheet at their book value of $1 per share  They have a beta of 0 51  In 2023, they paid a dividend of $0 03 per share  The dividend is expected to grow at 5  pa  for the next 3 years, after which it will grow at a constant 3   p a  in perpetuity Core Lithium Ltd 2023 Financial Accounts INCOME STATEMENT Sales Revenue Cost of 5ales Gross Profit Interest Income Selling, General and Administrative Expenses Other Non operating Income, (Expense) EBITDA Depreciation Interest Expense Pre Tax Profit Tax Met Profit BALAMNCE SHEET ASSETS Cash Accounts Receivable Inventory Property Plant and Equipment Other Assets Total Assets LIABILITIES Accounts Payable Bank Loan Other Liabilities Total Liabilities SHAREHOLDERS' EQUITY Ordinary Shares Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity million 50 6  15 8) 34 8 3 0  (21 0)  1 5) 15 4 (3 9) (2 3) 92  1 6) 7 6 rriliowm 152 8 6 7 289 241 2 73 6 503 1 310 836 33 6 148 2 3709 (16 0) 354 9 503 1 Financial Analysis of Rural Services Led and Core Lithium Ltd 2023 Rural Core Services Lithium FINANCIAL ANALYSIS Ltd Ltd Sales Revenue Average PPE Margin 164  31  Cost of Sales Revenue Ratio 80  31  Gross Margin 20  69  Tax Rate 30  17  Net Margin 3  15  Net Working Capital Sales Revenue Ratio 15  9  Net Profit Equity Return 13  2  Debt Equity Ratio 74 24  Credit Rating BB BB Beta 0 51 2 31Interest Rates Based on the current yields at which the 5 year and 10 year Government bonds are trading you assume that the 5 year risk free rate is 3 974  and the 10 year risk free rate is 4 315   The current corporate credit spreads are as presented in the table below  Rating Aaa AAA Aa2 AA A2 A Baa2 BBB Ba2 BB B2 B Caa2 CCC Ca CC Maturity 1 8 28 52 80 201 319 352 1,207 IN 22 33 59 87 201 319 852 1,207 3 35 39 65 93 201 319 852 1,207 48 44 71 100 201 319 852 1,207 5 45 46 76 108 201 319 852 1,207 6 42 48 82 117 201 319 852 1,207 7 49 53 88 123 201 319 352 1,207 57 57 94 129 201 319 852 1,207 9 65 62 100 135 201 319 852 1,207 10 63 63 99 135 201 319 852 1,207 11 61 63 99 136 201 319 852 1,207 12 60 64 99 136 201 319 852 1,207 13 58 64 98 136 201 319 852 1,207 14 57 65 98 136 201 315 852 15 1,207 55 65 97 137 201 319 852 1,207 16 53 66 97 137 201 319 352 1,207 17 52 56 96 137 201 319 852 1,207 18 50 67 96 138 201 319 852 1,207 19 49 67 95 138 201 319 352 1,207 20 47 68 95 138 201 319 852 1,207 21 45 68 94 139 201 319 852 1,207 22 44 69 94 139 201 319 852 1,207 23 42 69 93 139 201 319 852 1,207 24 40 69 93 139 201 319 852 1,207 25 39 70 92 140 201 319 852 26 1,207 37 70 92 140 201 319 852 1,207 27 36 71 91 140 201 319 852 1,207 28 34 71 91 141 201 319 852 1,207 29 32 72 90 141 201 319 852 1,207 31 72 90 141 201 319 852 1,207 Average 45 61 89 129 201 319 852 1,207Project Information You estimate the investment required to undertake the project will be equal to 20  of the Property Plant and Eguipment (PPE) shown in the Core Lithium Ltd 2023 Balance Shest (page 5)  You are also aware that Rural Services Ltd has budgeted to spend 52 million in professional, geotechnical and legal fees appraising the project before making its final decision  You estimate that the revenues in the first year of the project will egual the 2023 Revenue Average PPE margin you have calculated for Core Lithium, shown on page 6, multiplied by the investment Rural Services will need to undertake the project  Further you are advised that the size of the resource is estimated to provide a five year life for the project and that revenues will grow by 35  inyear 2, 25  inyear 3, 15  in wear 4 and 5  in its fifth and final year  You decide to be guided by the Cost of Sales Revenue Ratio you have calculated for Core Lithium, as shown on page  , which you will apply through the entire five year life of the project  Depreciation will be calculated using the diminishing value method with the aim of fully depreciating the investment by the end of the life of the project  You decide to apply the tax rate you calculated for Rural Services Ltd, shown on page B  During the life of the project, you estimate that the firm will need to provide for an annual increase in net working capital comprising an increase in Receivables and Stock, less an increase in Payables  You have calculated the Net Working Capital Sales Revenue Ratio of Rural Services Ltd and Core Lithium shown on page 6  You decide to use the 2023 MNet Working Capital Sales Revenue Ratio of Rural Services Ltd to estimate the annual additional amount of Net Working Capital that will be required to service the Incremental Sales Revenue of the project, estimated each year  You also assume that in the year after the final yvear of the project's life the firm will recover in full this net increase inworking capital  In the yvear after the five year life of the project, you are advised that the compary would need to spend 53 million in cleaning up the site and replanting  Your research also shows that the equity risk premium on the ASY is between 4 6 , 50 you decide to apply a 5  equity risk premium in your estimation of CAPM  Tasks You are required to complete the following tasks  e Show the formula and complete calculations for each answer you calculate  o Define all variables of each formula used and show any calculations required to adjust them for use in applying the formula to solving each problem  e Format your answers as defined in each task  e 'When incorporating an answer to a prior task in a subsequent task, use the value as it has been formatted  For example, if a task required you calculate and format as a percentage to 3 decimal places, the answer should be formatted as 1 234   If this value is subsequently included in the calculation of the answer to a subsequent task, then the value you must use is 1 234  or 0 01234  Part 4  Review and recalculate the project''s NPV, IRR and Profitability Index (20 marks a) Based on the analysis of the financial metrics you calculated on page 5 for Rural Services Ltd  and Core Lithium Ltd  What, if any, concerns might you have with the parameters you have used above to estimate the financial viability of the project  (5 marks) If Rural Services Ltd could only proceed with the project, if it proves to be finandally viable AND if it is totally financed by share capital, costed based on the estimated cost of a lithium mining company's share capital, what would be the discount rate youwould apply to evaluating the finandal viability of the project  (5 marks) Recalculate the NPV, IRR or Profitability Index of the project using this revised discount rate  Note, you need only recalculate ONE of these measures  (5 marks)  Based on this revised project evaluation, if Rural Services Ltd could only proceed with the project, if it proves to be financially viable AND if it is totally financed by share capital costed based on the estimated cost of a lithium mining company's share capital, would you recommend that the projectis financially viable

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Question: Rubric N D - C B - A <49% 50 -69% 70% < Conceptual Interprets the problem, Identifies the Interprets the problem correctly. Skills correct

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