A). Pacific Energy Limited (ASX: PEA) is an ASX-listed energy supply business. T
ID: 2757010 • Letter: A
Question
A). Pacific Energy Limited (ASX: PEA) is an ASX-listed energy supply business. The businesses deliver low-cost ‘off-grid’ power supply to the Australian resource sector and ‘grid-connected’ renewable hydro power.
PEA owns and operates 22 power stations with a total power generation capacity approaching 237MW. These power stations utilise either gas, diesel, dual fuel or water to generate electricity for our long-term customers.
The Company’s core business division Kalgoorlie Power Systems (KPS) has been delivering its resource sector clients, including some of the world’s biggest mining companies, ‘off-grid’ power supply solutions for in excess of 25 years.
i) Being part of the treasury team of Pacific Energy Limited, your first exercise is to categorize Pacific Energy’s capital structure into debt and equity capital. Begin by going to the website http://www.asx.com.au/asx/research/company.do#!/PEA to obtain Pacific Energy Limited’s 2015 Annual Report.
ii) Calculate after-tax Weighted Average Cost of Capital.
iii) Assuming Pacific Energy Limited’s credit rating is AAA, what alternative capital structure would you recommend lowering the cost of capital to the company?
Show all your calculation and limit your report to 1,000 words. (30%)
Guidelines:
You are to calculate cost of debt and cost of equity to work out Weighted Average Cost of Capital.
To lower the cost of capital of the company, you could suggest an alternative debt and equity capital mix taking into account the company is AAA rated.
B) Financial management provides a framework for pursuing synergy between the functional responsibilities and financial resources of the business organisation. Contemporary organisations integrate strategic decision models capable of maximizing wealth generation. By reading an annual report of any one listed company, write any essay how you think the organisation is working towards this goal of maximizing wealth. Limit your essay between 1,000 to 1,500 words. (10%).
Explanation / Answer
i) Being part of the treasury team of Pacific Energy Limited, your first exercise is to categorize Pacific Energy’s capital structure into debt and equity capital. Begin by going to the website http://www.asx.com.au/asx/research/company.do#!/PEA to obtain Pacific Energy Limited’s 2015 Annual Report.
Answer:
From the balance sheet as on 30 June 2015:
Total equity = AUD 130,124,000
Total Debt = AUD 30,905,000
Total capital = AUD 169,029,000
ii) Calculate after-tax Weighted Average Cost of Capital.
Answer:
Dividends paid = AUD 9,187,000
Growth rate of the firm = 6.41%
Current market price = AUD 0.390 per share
Number of shares outstanding = 3.25x12,046 = 39,150,000
Therefore dividend per share = 0.23466
Cost of equity = DPS/MPS + growth rate
Ke = 0.23466/0.390 + 6.41% = 0.6658 or 66.58%
Financial expenses = AUD 2,505,000
Total debt = 30,905,000
Now cost of debt = 2505/30905000 = 0.08105
Income tax rate = 30.5%
Therefore WACC = 0.08105 x (1-30.5%) x 0.183 + 0.6658 x 0.817
WACC = 0.5439 + 0.01031 = 0.5524
iii) Assuming Pacific Energy Limited’s credit rating is AAA, what alternative capital structure would you recommend lowering the cost of capital to the company?
Answer:
1. By restructuring the capital structure we can reduce the cost of capital. The one way is to take more debt in capital structure. Taking more loans from financial institutions is one way to reduce WACC.
2. Other way is to take loan from outside your country. This is known as international financing. By issuing Euro Dollar Loans you can reduce your companies WACC to a comfortable level.
3. By issuing hybrid financial instruments WACC can be reduced.
Show all your calculation and limit your report to 1,000 words. (30%)
Guidelines:
You are to calculate cost of debt and cost of equity to work out Weighted Average Cost of Capital.ü
To lower the cost of capital of the company, you could suggest an alternative debt and equity capital mix taking into account the company is AAA rated.ü
B) Financial management provides a framework for pursuing synergy between the functional responsibilities and financial resources of the business organisation. Contemporary organisations integrate strategic decision models capable of maximizing wealth generation. By reading an annual report of any one listed company, write any essay how you think the organisation is working towards this goal of maximizing wealth.
Answer:
1. Companies are spending more on social welfare as can be seen from their annual reports.
2. Companies are alert towards their responsibility for the environment in which they operate.
3. Companies are becoming more resoponsible anf caring for their employee welfare.