Finance & Investment Case Study Assessment
70 marks
Weighting : 20%
Gazal Agricultural Ltd
Consider the following information about a company known as “Gazal Agricultural Ltd”. The Australian Stock Exchange (ASX) code for this company is ‘GAZ’.
GAZ is a publicly listed company that that operates agricultural production, supply and commercial outlets in New South Wales and Victoria, as well as a newly opened subsidiary in New Zealand. In 2019, the company recorded $50 million in revenue and a total net profit of $15 million. $10 million of this profit was taxed in Australia at the company tax rate of 30% and Gazal can provide ‘dividend imputation’ to Australian shareholders from the Australian tax it pays.
On 24th July 2019, GAZ purchased a new building in outer Sydney NSW to house its headquarters in, paying $3 million dollars including costs.
You are providing advice to Gazal through the Commercial Division of Northpac Bank, with whom Gazal currently conduct their banking. You are to answer the following questions, and where references are used, ensure all work is appropriately referenced using Harvard Referencing system.
Question 1 – 15 marks
GAZ’s share price currently trades around $3.20 and it has a market capitalisation of $152 million. The volume of shares traded each day has been increasing steadily since GAZ listed in 2010.
- Define market capitalisation and calculate the number of shares on issue showing your calculation. 3 marks
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- Explain whether GAZ is traded on the primary or the secondary market and discuss the reason for why their shares are traded on this market. 2 marks
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- Discuss 4 points about the efficient secondary market role of a stock exchange and its importance to GAZ. 4 marks
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- Explain the primary market role of a stock exchange and discuss why the primary market role is important for business/economic growth. 3 marks
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e) Define liquidity in the share market (market liquidity) and discuss why liquidity in the share market is important both to shareholders and to the corporation (GAZ). 3 marks
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Question 2 – 10 marks
Assume you are an analyst discussing Gazals financials with a potential shareholder in GAZ. The shareholder has a marginal tax rate of 39% (including Medicare Levy) and on the amount they are prepared to invest, would be eligible to receive a fully franked dividend of $7,000 from Gazal Ltd at the next distribution date
- Discuss how dividend imputation works, including in your answer –
- what dividends, franked dividends and franking credits are, and
- why future dividends might be only partly franked if Gazal’s New Zealand subsidiary begins to generate profits. 5 marks
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b) Calculate the income tax payable by the shareholder showing all workings. Assume the Company tax rate is 30% and shareholder rate is 39%. 5 marks
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Question 3 – 13 marks
The same investor would like you to explain how volatile GAZ is, and how they might use this knowledge to alter their existing stock portfolio. They have shown you the following data on their existing stock portfolio:
| Stock | $ Value | Beta |
| Stock A | $8,000 | 1.10 |
| Stock B | $53,000 | 0.80 |
| Stock C | $19,000 | 1.50 |
- Outline what a beta co-efficient implies about the volatility of a company’s shares relative to the overall market. Include the beta co-efficient of the market as a whole in your answer. 2 marks
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- With regard to Stock A above, state mathematically what its beta coefficient of 1.10 implies about the volatility of the company’s shares relative to the overall market? 2 marks
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- Calculate the market risk (Beta) of the current portfolio and explain what the figure you calculated means. 5 marks
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- If the investor bought $20,000 shares in GAZ and GAZ had a beta of 0.9, recalculate the new portfolio beta and explain how this will impact on the market risk of the portfolio? 4 marks
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Question 4 – 13 marks
The new $3 million property Gazal has recently bought for their new headquarters will be financed by $1,953,750 of the firms’ own funds, plus a mortgage from Northpac banking Corporation. Northpac have offered Gazal a mortgage loan at 8.15% per annum. The loan will be amortised by monthly instalments over the next 12 years, payable at the end of each month.
- Outline the main features of a mortgage loan by:
- defining what a mortgage is,
- explaining 2 features relating to the operation of a mortgage loan and
- identifying the parties to a mortgage loan, and naming the entities in the question as each relevant party 5 marks
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- Describe what an amortised mortgage loan is including an example. 3 marks
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c) Calculate the amount of each monthly instalment Gazal will need to make including the correct equation in your answer. 5 marks
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Question 5 – 6 marks
- GAZ has an overdraft facility established with their bank.
- Explain the purpose and
- 3 features which describe the operation of overdraft finance. 4 marks
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- Once the directors of GAZ increase the proportion of debt with the acquisition of the new building, explain how an increase in interest rates might affect the company and the shareholders. 2 marks
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Question 6 – 8 marks
The directors of GAZ are happy with your advice. They would like to know what your thoughts are about the economy in general and where interest rates might head.
a) Using the current yields researched in class with your teacher, input these into the Excel Spreadsheet provided in the Subject Moodle Assessment Tab to construct an appropriately labelled Yield Curve using these rates. 4 marks
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b) Gazal wish you to outline your views on how the Australian Economy is performing. Using the Yield Curve you constructed in a) explain what the current Yield Curve suggests about the Economy and possible future interest rates, including a reference to the shape of the graph you have constructed. 4 marks
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Referencing – 5 marks
0-2 : An inappropriate referencing system applied or referenced material does not support the answer/argument. Response is not relevant to the task.
2.5-3.5 : Significant paraphrasing of sourced material but all citations appropriately referenced. Must cite in Harvard AGPS
4 – 4.5 : Referenced material supports the answer/argument. All citations appropriately referenced. An analytical approach/ individual interpretation has been attempted. Minimal paraphrasing.
5 : Exceptional skills in the topic area are demonstrated with no paraphrasing of sourced material. All citations appropriately referenced. Displays original approach to the questions, demonstrating critical & analytical approach.
END OF CASE STUDY QUESTIONS
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