largest mining corporation in the world
Part
A: Solve all 3 Problems (50 points)
[Note: you are supposed to show every step of
your calculation and interpret the result.]
Question 1
Adobe is a software company that creates
the most innovative creativity apps. Recently their software has become cloud
based. Their price to book ratio is 1.67 and they currently have 1,000,000 shares
outstanding. Below you will find an excerpt from their balance sheet for 2019
a) Calculate
the stock price using the price to book ratio. (5 marks)
b) If
their stock price is listed on the stock market at $9, should the stockholders
sell or hold the stock? (5 marks)
c)
Critically
discuss the price to book ratio in valuing stocks and provide an alternative
method to see if a stock is undervalued or overvalued. (5 marks)
Question 2
Cornerstone
Corporation is a large construction company in Boston, Massachusetts. Their
income statement for last year indicated a net income of $12,500,000, and the
corporation has 1,100,000 shares of common stock outstanding. The current stock
price of Cornerstone Corporation on the Boston stock exchange is $13.75 per
share. It is looking to expand its operation to the neighboring cities and will
be issuing 400,000 extra shares and expects to have a net income of $16,000,000
by the end of the current year.
a) Assuming
the company’s price to earnings ratio remains at its current level, what will
be the company’s stock price one year from now? (10 marks)
b) The PE ratio is a very common method used by investors to get a quick calculation on the market’s perception of a company. Evaluate the formula used to calculate the PE ratio focusing on the limitations of this method of valuation?
Question 3
Glencore is the largest mining
corporation in the world with annual revenues of $220 billion dollars, their
headquarters are located in the UK and Switzerland. In financing new mining
locations, the corporation uses both debt and equity financing to provide a
favorable balance between risk and cost of capital. Its financial partners will
provide unlimited financing at an annual interest rate of 10% as long as its
target capital structure is 25% debt, and 75% common equity. Last year the
company paid a dividend of $2.25 per share and the constant growth rate is
expected at 4.5%. The current price on the stock market is $14.7 per share.
Their corporate tax rate is 32%. They are looking to invest in mining locations
in two areas, one in South Africa, and the other in Australia. The rate of
return for the two locations are expected to be 12% and 16% respectively.
Assume that all of its potential projects are equally risky, and as risky as
the firm’s other assets.
a) Calculate
Glencore’s cost of common equity.
b) Calculate
their Weighted Average Cost of Capital.
c) Critically
evaluate how corporations use the weighted average cost of capital to decide on
their future projects, and decide which location Glencore should invest in. (10
marks)
Part B: Answer all 3 of the following Questions
Question 4
Two
common investment appraisal techniques used in corporate finance are the IRR, and
the Payback method.
Critically
discuss these appraisal techniques and discuss the advantages and disadvantages
of each.
Question 5
Financial decisions of corporations
are based on many techniques discussed in this course which are in turn based
on their respective set of assumptions.
Critically discuss the Expected Net
Present Value method (ENPV) and explain why it may be more effective than the
NPV method in valuing projects? (15 marks)
Question 6
Corporate governance can be defined as the set
of rules governing the way the directors interact both with each other in the
effective management of the company, and with the shareholders in their
accounting for their stewardship of the company.
Critically discuss key corporate governance
issues.
USA 
India