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a) Evaluate the working capital efficiency of Santos in 2014 as compared to 2013 by referring to Source 1. (10 marks)
b) Assess Santos’ short term liquidity based on 2014 financial figures. (2 marks)
c) What type of financing strategy do you believe Santos is taking to fund its working capital over 2013-2014 based on their financial risk management in the 2014 Annual Report? (3 marks)
d) What is a convertible bond and why is it a hybrid security? (3 marks)
e) In 2014 is Santos financing using predominantly long-term or short-term debt? Are they using predominantly direct or indirect debt financing? How can you tell? What currency are they predominantly borrowing in? Refer to Source 1. (5 marks)
f) What has happened to the amount of interest bearing loans and liabilities of Santos’ balance sheet in 2014 as compared to 2013? What could have caused this to happen based on Sources 1-4? (4 marks)
g) According to the Sources above what has happened to the yields on Santos hybrid securities (convertible bonds) in 2014-15? Why has this happened? How would it affect the market price of its existing bonds today? (3 marks)
h) Imagine you purchased a Santos $1000 face value bond at the end of 2008 when its yield to maturity was 4%. This bond was issued in 2007 and has a fixed annual coupon rate of 4.5%
and matures at the end of 2020. Currently it is the end of 2015 and it has a yield to maturity of 5% and you want to sell this bond. If you do sell it, what would be the holding period return for your investment in this bond? (10 marks)
3. Capital Budgeting (40 marks)
Answer the following questions with the aid of excel spreadsheets. **You also need to answer the below questions in your word file and refer to your excel spreadsheets as supporting documents. Upload your ONE excel spreadsheet separately under “Excel File for Report”. Consider Sources 1-4 above for some of the answers.
Imagine in 2015 Santos is evaluating whether to sell off its Exxon Mobil-led Papua New Guinea LNG venture project mentioned in Source 3. Assume in 2015 Santos’ total incremental revenues from all their projects are equal to product sales year ended 31st December 2014. Assume also that total incremental costs for all Santos projects in 2015 are 10% lower than total cost of sales year ended 31st December 2014. Assume that the incremental depreciation for all projects in 2015 is the same as the “depreciation and depletion” expense year ended 2014. Assume that the free cash flows for the Exxon Mobil-led Papua New Guinea LNG 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 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 AUD. Assume the tax rate is 30% over the 20 years.
Using the above information as well as Sources 1-4 answer the following questions. (Hint: Look at Sources 1 and 3 in particular)
a) Based on the above information and sources what are the free cash flows to the Exxon Mobil-led Papua New Guinea LNG Santos project mentioned in source 2? (10 marks)
b) Calculate the NPV for the Exxon Mobil-led Papua New Guinea LNG Santos Project using the below costs of capital and recommend whether at these two rates Santos should keep investing in the project. a. A WACC (cost of capital) of 5.94%? b. A WACC (cost of capital) of 8%?
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