FINM7402: Corporate Finance Semester 2 2024R

Java Python FINM7402: Corporate Finance

Semester 2, 2024

Individual Case Study Assignment: SEEK LTD (ASX: SEK)

Course Assessment Weight 20%

(Total Marks: 40)

In this assignment, you will analyze the corporate governance, cost of capital, capital structure and payout policy of SEEK Limited (ticker code: SEK), which is a company listed in the Australian Securities Exchange (ASX).

The submission will comprise of two parts:

(a) Report (PDF): discussing corporate governance, cost of capital, optimal capital structure and payout policy (using the report template).

(b) Spreadsheet (EXCEL): Showing all the calculations relating to cost of capital, capital structure and payout (using the spreadsheet template).

REQUIREMENTS OF THE SUBMISSION

1. Corporate Governance (8/40)

a.   Monitoring:  Discuss about the  features of the board  (refer to  aspects that we covered in the class: size, independence, classified, etc.) (3)

b.   Incentives/Compensation: Discuss about the compensation policies of the firm (2)

c.   Your overall view of the firm’s corporate governance: Discuss how severe is the agency problem in the firm and whether the board and compensation policies are helping to mitigate the problem (3)

2. Cost of Capital (8/40)

a.   Estimate the firm’s cost of debt (1)

b.   Estimate the firm’s cost of equity (estimating beta using the regression). Comment on your selection of time period, use of risk-free rate, and market returns when calculating cost of equity using the CAPM approach (5+1)

c.   Estimate the firm’s WACC (1)

3. Capital Structure (14/40)

a.   Discuss the firm’s current capital structure (2)

b.   Discuss the firm’s cost and benefits of using debt for the following factors: Tax, financial distress, and financial flexibility. You will need to discuss each of these factors in relation to the firm and not in general (3)

c.   What is the  firm’s optimal capital structure using cost of capital approach  (Use MM-Proposition II with taxes to calculate the cost of equity)?  What is the firm’s optimal capital structure using regression analysis?  Discuss the strengths and limitations of your estimates of the optimal capital structure. What should the firm do with respect to its level of debt and equity given your estimate of the optimal capital structure? (4 + 4 + 1= 9)

Assume: Cost of debt increases by 0.10%for every 10% increase in debt to capital ratio above 50%; it remains constant up to 50% debt to capital ratio.

4. Payout Policy (6/40)

a.   Discuss the firm’s current payout policy (cash dividends and share buyback). (2)

b.   How is the firm’s dividend policy different from that of its peers or the market? (2)

c.   Would you suggest any changes to the firm’s current dividend policy? (2)

5. Presentation of the report (4/40)

a.   Sequence/Structure  (Is  the  writing  a  logical  sequence  of ideas,  organised  into paragraphs that works to establish a clear line of argument for the reader?) (1)

b.   Language/Mechanics/Professionalism   (Has    the   vocabulary   and    expression appropriate for formal academic writing within this discourse been used? Has the work been edited fo FINM7402: Corporate Finance Semester 2, 2024R r lapses in spelling, grammar, or sentence construction? (1)

c.   Referencing (Has broad research been conducted, in order to achieve a synthesis of personal ideas and those of the extant literature? Have the researched sources been referenced correctly, both within the document, and in the Bibliography?) (2)

SUBMISSION FORMAT AND GUIDELINES

The report should be named in the following format StudentNO._Report_FINM7402'.

The excel workbook should be named as 'StudentNO._Calculation_FINM7402'.

Report format:  The report should be in “Times New Roman”, 12 font size, 1.5 spacing, and “justified” text alignment. Please try to keep your report brief.  Consider the following:

a.   This  assignment  is  not  only about performing  calculations. It is also about making qualitative judgments and recommendations based on the results of your analysis.

b.   You should also keep in mind that there is no single right or wrong answer. It all depends on your views. All I am looking for are good arguments based on your views and assumptions. If you make a decision without justification, the  submission might be marked down even if the decision appears to be valid.

c.   So, clearly articulate your assumptions that you made to get to your conclusion.

d.   Remember, do not show any calculation in the report (all calculations should be shown in the spreadsheet). Onlyinclude summary tables and graphs in the report.

Excel workbook format: The Excel workbook should contain 5 worksheets that are named   respectively as ‘Beta Regression’, ‘Cost of Capital’, ‘Capital Structure -1’ Capital Structure 2’ and “Payout Policy’.

‘Beta Regression’ sheet:  Include the data you use to estimate stock beta, the regression plot and the estimated beta value.

‘Cost of Capital’ sheet:   Show computation of cost of debt and cost of equity/capital/discount rate

‘Optimal Capital Structure -1’ sheet: Show all the calculation relating to optimal capital structure using WACC.

‘Optimal Capital Structure -2’ sheet: Show all the calculation relating to optimal capital structure using the regression analysis.

‘Payout Policy’ sheet: Show all data and calculations relating to dividend payouts and other forms of payout to shareholders.

Time Period to Consider: Assume that we are at the beginning of July 2023  (Using data available as of the end of June 2023).

Submission: Both the files must be submitted through Turnitin – The link will be provided closer to the due date.

Data Sources (Available in the Data folder) & References

1.   Corporate Governance:

a.   Data: Annual report 2023

b.   References: Slides Topic 1 and Chapter 29 of the Berk & DeMarzo textbook)

2.   Cost of capital:

a.   Data: Market Data

b.   References:  Slides Topic 2  and Chapter  12  of the Berk & DeMarzo textbook (Chapter 12 Appendix very useful)

3.   Capital Structure

a.   Data: Financials & Data for Optimal Leverage

b.   References: Slides Topics 4 & 5 and Chapters 15 & 16 of the Berk & DeMarzo textbook

4.   Payout Policy

a.   Data: Financials & Data for Optimal Leverage

b.   References: Slides Topic 6 and Chapter 17 of the Berk & DeMarzo textbook

Page limits: please adhere to the following page limits. The markers will not mark any content that goes beyond the following page limits. Remember it is the quality not the quantity that counts