125732, Advanced Corporate Finance, 2025 S1
Case Study, 20% of assessment
Due date (time): 14 April (23:59 pm)
Total 7 questions
The chosen NZ firm for the case study is Fletcher Building Limited. The company’s financial statements, historic (stock) prices and market index (NZ50) are in the same file (FBU Statements and others), which is available in the Stream. You can also find the required risk-free rate (we use secondary market government bond closing yields, 10 years, in Wholesale Interest Rates sheet) in the file as well.
Your tasks:
1) Work out the answers for the following questions in Excel work sheets. You are required to use the formula to do the calculation (so that I can keep track of your calculation steps). You may fail to get the marks if the required formula is not provided. (You should talk to me if you don’t know how to use Excel formula.)
2) You can provide your answer in the same Excel file (such as in the Workings sheet). For an excellent result, you need to discuss the implied assumption(s) used in answering each question.
3) Submit your Case Study via Stream Drop Box before due date.
7 Questions to be answered in your study:
(Q1) Transform. the “official” two years’ (ending 2020 and 2021) Balance Sheet (or Financial
Position in the worksheet of FBU, in the file: FBU Statements and others. The simple version (in Workings sheet) is provided to help you organizing the transforming process) into “finance version” which should include four parts: Net Operating Assets, Other investments, Debt and Equity (See lecture notes of M1-2 for the steps).
(Q2) Provide the Statement of Cash Flows (in indirect version, as shown in the textbook) for the
last two years (2020 and 2021). The procedures are explained in the Week 2 workshop and later lecture notes. Notice the difference between the indirect form (used in US and discussed the textbook) and direct form (used in New Zealand). The case is of a NZ firm and you are required to produce the statement in indirect form.
(Q3) Calculate the company’s FCFs for the last two years (2020 and 2021). (using the contents in
US version of balance sheet (created in Q1) to do the calculation to avoid the possible error of inconsistency).
(Q4) Estimate the beta value (with market model explained below) for the company using the information provided:
● Using the market model to estimate the equity beta:
Re = Alpha + Beta * Rm + ε
Using historic data to run the above regression: Re is for FBU historic share returns (end-of-month or last trading date in a month, monthly returns from 3/1/20 to 1/7/22) and Rm is the same period NZ50 index monthly returns (as market return rate). The market prices of the stock are provided in the same file for financial statements. You are required to calculate the returns with the formula for the company and market index: Rt(Firm)=(Pt-Pt-1)/Pt-1, Rt(Index)=(It-It-1)/It-1 (for the month of t) where Pt is the Last price of the stock and It is the Open value of the market index.
(Q5) Estimate the WACC for the company:
Estimate the expected debt return with the following steps:
● Calculate the last two years (2020 and 2021) actual interest rate for the debt:
Debt Rate 2021= interest expense 2021/(D(2020) + Debt(2021))
Note: We use the “Average” level of Debt in the above rate calculation.
Use this average debt rate in the following WACC calculation for future years (after 2021).
Estimate the expected equity return:
● Using the CAPM method to calculate the expected equity return:
Re = Rf + (Rm-Rf) *Beta
Beta: obtained from the above Q4 regression result
Rf: Use recent (June 2021) Secondary Market Government Bond 10-years yields (in the sheet of Wholesale Interest Rates) as a proxy for future risk-free rate in the case study.
Rm: we find the average return of NZ50 index is close to zero, which is not the case for the next future years (Explain this). we use 4% as the market index return for all future years in this case study.)
Calculate the WACC
● Calculate the equity market value (Ve):
Ve= number of shares * share price (1 July 2021)
(The number of shares is calculated from the form.: Net earnings/Net earnings per share, both values are provided in the “SUPPLEMENTARY DISCLOSURES: EARNINGS PER SHARE” in the sheet of Financial Statements)
● Using the debt book value as the current debt value (Vd) and the above calculated equity market value (Ve) to calculate the weights:
We=Ve/(Ve+Vd), and Wd=Vd/(Ve+Vd)
● Calculate the WACC=We Re + Wd Rd (1-T), using T=28% for this case.
(Q5 end)
(Q6) Forecast future three years (2022 to 2024) annual cash flows for the New Zealand case
company: (The following procedures will be discussed in the lectures)
● Estimate the growth rate of sales (using the average annual sales growth in the past years (of 2018-2021, data is available in the sheet of Financial Summary in this case).
● Estimate the future costs and investments (make your assumption, if necessary, e.g. constant ratio of W.C./sales). You need to make some assumption on how the fixed assets might be changed in the forecasting period.
● Calculate the next three years (2022-2024) FCFs.
(Q6 end)
(Q7)
Calculate the Present Value (discounting the FCF by the WACC of the operating assets, which is calculated in the above question) of the Net Operating Assets (assuming 2% of growing in FCF after 2024 and then get the firm value (which is the sum of Net Operating Assets and other investments) and equity value.
Do a simple risk analysis (write a paragraph about 200 words). You may use the information provided in the annual report.
(List and describe two risk factors that, you think, are important and discuss their possible influence on the firm value. For example, if the sales growing rate is 1% less than the planned, what will happen to the firm value? To get more ideas of this, you may read the contents of the annual report provided in the Stream.
(Q7 end) (and end of the case study)