.

FIN203 Corporate Finance

Subject Code: FIN203
Subject Name: Corporate Finance 
Kaplan University     

Consider the sources below and answer the following questions.

Complete all three parts of the written assignment below.

1. Evidence of Group Work

2. Company Perspective-Woodside Petroleum and Shell

Source 1: Annual Report

Table 1: Woodside Petroleum Ltd’s income statement

Consolidated Income StatementUS$ million
201620152014
Revenue4,0755,0307,435
Cost of revenue(2,234)(3,073)(2,883)
Gross profit18411,9574,552
Other income613131
Sales, General and administrative(514)(1,547)(911)
Profit before tax and net finance costs1,388441367
Finance income8415
Finance income8415
Finance costs(56)(89)(178)
Profit before tax(56)(89)(178)
Petroleum Resource Rent Tax (PRRT) benefit/expense177(131)88
Income tax expense(544)(112)(1081)
Profit after tax9731132516
Profit attributable to:
Equity holders of the parent868262414
Non-controlling interest10587102
Earnings per share
Basic104.03.2293.4
Diluted104.03.2293.4

Table 2: Woodside Petroleum Ltd’s Balance Sheet

Consolidated Income StatementUS$ million
Dec 31, 2016Dec 31, 2015Dec 31, 2014
Current Assets
Cash and cash equivalents2851223,268
Receivables446489478
Inventories149170247
Tax receivable2106-
Other assets184749
Disposal group held for sale-145-
Total Current Assets9001,0794,042
Non-current Assets
Receivables1729363
Inventories51912
Other financial assets303030
Other assets882
Exploration and evaluation assets3,2282,5281,268
Oil and gas properties19,37619,2361,268
Other plant and equipment697679
Deferred tax assets9657701,052
Total non-current assets23,85322,76020,040
Total assets24,75323,83924,082
Current liabilities
Payables546813605
Interest-bearing liabilities7677629
Other financial liabilities1712
Other liabilities314276
Provisions202215189
Tax payable91-440
Liabilities associated with disposal group held for sale-156-
Total current liabilities9631,3041,941
Non-current liabilities
Interest-bearing liabilities4,8974,3641,957
Deferred tax liabilities1,5781,3901,637
Other financial liabilities201110
Other liabilities7292123
Provisions1,5611,6531,755
Total non-current liabilities8,1287,5105,482
Total liabilities9,0918,8147,423
Net assets15,66215,02516,659
Equity
Issued and fully paid shares6,9196,5476,547
Shares reserved for employee share plans(30)(27)(38)
Other reserves979963920
Retained earnings6,9716,7438,447
Equity attributable to equity holders of parent company14,83914,22615,876
Non-controlling interest823799783
Total equity15,66215,02516,659

Industry : Table 3: Market Share of Oil and Gas Companies in Australia

Oil and Gas Companies in AustraliaMarket Share
Shell Energy Holdings Australia Ltd10.30%
Santos Ltd11.80%
ExxonMobil Australia Pty Ltd12.10%
Chevron Australia Holdings Pty Ltd12.40%
BHP Billiton Ltd13.20%
Woodside Petroleum Ltd13.50%
Other26.70%
Total100.00%
(source: data sourced from IBISWorld)

Table 4:

Peer Comparison: Cash Conversion Cycle20162015
Santos Ltd18.3-63.7
ExxonMobil Australia Pty Ltd18.411.5
Chevron Australia Holdings Pty Ltd7.40.8
BHP Billiton Ltd-100.8-70.8

Table 5: Synthetic debt rating

For large manufacturing firms

If interest coverage ratio is
&glt;≤ toRating isSpread is
-1000000.199999D2/D14.00%
0.20.649999C2/C10.50%
0.650.799999Ca2/CC8.00%
0.81.249999Caa/CCC6.50%
1.251.499999B3/B-5.50%
1.51.749999B2/B4.50%
1.751.999999B1/B+3.75%
22.2499999Ba2/BB3.00%
2.252.49999Ba1/BB+2.50%
2.52.999999Baa2/BBB1.60%
34.249999A3/A-1.25%
4.255.499999A2/A1.10%
5.56.499999A1/A+1.00%
6.58.499999Aa2/AA0.80%
8.5100000Aaa/AAA0.60%

Chart 1: Global Price of Natural Gas

Global Price of Natural Gas

Chart 2: Global Price of Oil

Global Price of Oil

Source
https://fred.stlouisfed.org/series/PNGASUSUSDA
https://fred.stlouisfed.org/series/DCOILWTICO
https://www.m.youtube.com/watch?v=iZ4buiMwvWY
https://www.m.youtube.com/watch?v=0Cp8-lVo2A8

a) Write a 300-word background on Woodside Petroleum Ltd briefly describing the industry in which the company operates in and its main areas of business. Identify one key opportunity and two key threats to the company from competitors or other factors in 2016-17.

b) Calculate the cash conversion cycle for Woodside Petroleum for the financial year 2016. How does this compare with the cash conversion cycle in 2015? Comment the company’s working capital efficiency relatively to its industry peer.

c) What is one example of a short-term debt financing instrument and one example of a long term debt financing instrument? In 2016, did Woodside predominantly use short term debt or long term debt financing? (Refer to balance sheet and note C2 & C3 of the annual report below)

C.3 Financing facilities

Details of loan facilities at the reporting date are as follows

Medium Terms Notes

On 28 August 2015, the group established a US$3,000 million Global Medium Terms Notes Programme on the Singapore Stock Exchange. Two notes have been issued under this program as set out below:

  • The 2022 US$200 million medium term note has a floating three month USD LIBOR rate and matures on 15 July 2022; and
  • The 2023 CHF175 million medium term note has a fixed rate coupon of 1.00% p.a. an matures on 11 December 2023.

The unutilised program is not considered to be an unused facility.

Bonds

The group has four unsecured bonds issued in the United State of America as defined in Rule 144A of the US Securities Act as set out below:

  • The 2019 US$600 million bond has a fixed rate coupon of 8.75% p.a. and matures on 1 March 2019;
  • The 2021 US$700 million bond has a fixed rate coupon of 4.60% p.a. and matures on 10 May 2021;
  • The 2025 US$1000 million bond has a fixed rate coupon of 3.65% p.a. and matures on 5 March 2025; and
  • The 2026 US$800 million bond has a fixed rate coupon of 3.70% p.a. and matures on 15 September 2026;

C.2 Interest-bearing liabilities

2016 US$m2015 US$m
a) Interest-bearing liabilities (current)
Debt facilities7677
b) Interest-bearing liabilities (non-current)
Medium term notes366-
Bonds3,0872,289
Debt facilities1,4442,075
4,8974,364

d) Consider the information below concerning a 2.25% p.a. coupon, semi-annual US$100 bond issued by Royal Dutch Shell (Shell) on 6/12/2012. Assume the maturity date of this bond is 6/12/2023.

bond price calculation
  1. If today is 6/12/2018, calculate the price of the bond today based on the above information.
  2. How does your figure compare to the price in the above source? Why is this bond selling below par?

e) Consider the two source below for Royal Dutch Shell:

  • Shell Shares Data: (in Euros) https://au.finance.yahoo.com/quote/RDSA.AS?p=RDSA.AS
  • Euro and USD conversion: http://www.xe.com/currencyconverter/convert/?Amount=1&From=EUR&To=USD

Assume the market returns to be 9% and the risk-free rate to be 1.25%. Assume also that shell has just paid an annual dividend of $1.41 and that dividends will grow at 5% for the foreseeable future. What is the current price of Shell A shares in euros based on the dividend discount model and the information above? What type of analysis have you used and would you purchase them today? Why?

3. Capital Budgeting

Answer the following questions with the aid of excel spreadsheets. You also need to answer the below questions in your word file a nd refer to your excel spreadsheets as supporting documents. Assume all figures are in USD.

Imagine that in 2016 Shell is evaluating whether to undertake a gas project in a country which is highly risky. The annual total incremental revenues for the gas project is $3,633,300,000. The total incremental costs project are 30% of the incremental revenues for this project. Assume that the incremental depreciation for the gas project is $889,200,000 per year. Assume that the free cash flows for the project will continue for 20 more years with the first cash flow occurring at the end of next year and that the initial investment in the project being made today. Assume that the initial outlay for this project is $27 billion USD. Incremental revenues will increase by 2% per year and all costs will decrease by 3% per year starting at the end of year 2 for the life of the project. Assume depreciation remains constant over 20 years. All values are in USD. Assume the tax rate is 30% over the 20 years.

  1. Based on the above information and sources what are the free cash flows to the Shell’s gas project?
  2. Calculate the NPV for project using the below costs of capital and recommend whether at these two rates Shell should invest in the project.
    1. A WACC (cost of capital) of 5.94%?
    2. A WACC (cost of capital) of 8%?
.