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THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF RISK AND ACTUARIAL STUDIES

MONTH OF EXAMINATION – JUNE 2012

FINAL EXAMINATION

ACTL5108

FINANCE AND FINANCIAL REPORTING FOR ACTUARIES

1) TIME ALLOWED – 2 HOURS.

2) TOTAL NUMBER OF QUESTIONS – 5.

3) TOTAL MARKS - 100.

4) QUESTIONS ARE NOT OF EQUAL VALUE.

5) ANSWER ALL QUESTIONS.

6) THE PAPER MAY BE RETAINED BY THE CANDIDATE.

7) CANDIDATES MAY BRING THEIR OWN “UNSW APPROVED

CALCULATOR”.

ALL ANSWERS MUST BE WRITTEN IN INK. EXCEPT WHERE THEY ARE

EXPRESSLY REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING,

SKETCHING OR GRAPHICAL WORK.

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Question 1 (21 marks)

Pacific Brands Limited (ASX Code : PBG) is a listed company on the Australian Stock

Exchange specialising in retail fashion sales and distribution. They manufacture and

distribute clothing, footwear and bedding to department stores, discount department stores

and boutique fashion stores. The advent of online retailing has significantly reduced their

sales volume and profit margin, as a result of increased competition.

In early January 2012, the company announced they were in informal negotiations with

KKR, a US private equity firm, with respect to a takeover. It is rumoured KKR wishes to

acquire all the stocks of Pacific Brands and taking ownership of the company.

a.) Discuss the potential conflicts of interest faced by the Board of Directors of Pacific

Brands Limited in this situation. (6 marks)

b.) The 2012 first-half year results featured a $362.4m statutory net loss after tax (2011 :

-$166.1m), $35.7m net profit after tax before significant one-off items (2011 : $58.0m)

and sales revenue of $684.7m (2011 : $852.1m). The Board of Directors declared a 2c

interim dividend, down from 3c for the 2011 first half year.

Suppose you are at the conference call with the CEO, CFO of Pacific Brands and other

analysts. Draft three questions to assist you in preparing a broker’s report assessing

this company’s attractiveness as an investment for the medium term (three to five

years). Explain how these questions will help you in preparing the report and

achieving the objective of the report in advising investors in their decision-making

process. (15 marks)

(Marks are awarded for your proposed questions being relevant given the information

provided by the Board of Directors, as well as the clarity of your explanations.)

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Question 2 (29 marks)

A property trust is currently assessing the value of a commercial office property in light of

a weaker outlook of the economy which will lead to job cuts and lower demand for offices.

The commercial property in question is expected to experience reduced demand and thus

lower rental income for the next three years. Forecast on office property demand beyond

the three years is for no change. Below is the profile of the property financial metrics before

and after the downgrade based on lower forecast :

Net Lettable Area (square metre) 50,000

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

Occupancy Rate (%) 96% 94% 91% 91% 90% 85%

Annual Rent (per square metre) $400 $410 $415 $400 $408 $410

Depreciation Expense $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000

Maintenance Expense $4,600,000 $4,700,000 $4,950,000 $4,600,000 $4,720,000 $5,200,000

Tax Rate (%) 30% 30% 30% 30% 30% 30%

After AdjustmentBefore Adjustment

The capitalisation rate of the property, which is the risk-adjusted return demanded, is

8.25% p.a. over the life of the property. The net present value of the future cash flows of the

property beyond the three year horizon is estimated to fall from $200m to $180m (in dollar

value as at the end of year 3).

a.) Calculate the free cash flow of the property for the next three years for the two cases

(before and after downgrade). Hence, calculate the size of the impairment writedown

of this property’s value. Give reasons for your answer and show clear working.

(17 marks)

b.) What information would you use to help you in determining the capitalisation rate for

this property? Give and describe two sources. (6 marks)

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c.) A colleague asks you the following question :

“I need to give advice to a client on whether they should purchase a commercial

property. The IRR of this property is 18% and I have estimated their best alternative

project will yield 14%. I think the client should purchase the property then. What do

you think?”

Evaluate the colleague’s statement and consider if it is reasonable in light of your

knowledge on project appraisal. (6 marks)

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Question 3 (20 marks)

Stockland Group is Australia’s second largest property trust with primary operations in

retail commercial and industrial property investment as well as development.

As at 30th June 2011, the group has 2.38 billion stapled securities on issue and the company

announced a security buyback program in August 2011. Under this program, up to 5% of

the issued securities will be repurchased over the next 12 months. On 14th March 2012, the

Board announced they would extend the buyback program so up to 10% of the issued

securities will be repurchased by 19th August 2012. The buyback program is funded

through Stockland’s operating cash flows and proceeds generated from sale of non-core

property holdings.

a.) Describe three key factors that may influence the Board of Directors to adopt a security

buyback program in managing its capital. (8 marks)

b.) What is the effect of the security buyback program on Stockland Group’s gearing ratio?

(3 marks)

c.) Holding all other factors constant, and assuming Stockland Group buys back 10% of

their issued securities, calculate the percentage increase in earnings per stapled security

resulting from the buyback. (4 marks)

d.) Suppose the current value of Stockland stapled securities is worth $3.11. We expect

Stockland Group to report a statutory net profit after tax of $720m for the financial year

ending 30th June 2012. The Board is expecting to pay 85% of its statutory NPAT for the

financial year as its distribution to securityholders. The group would have repurchased

10% of their issued securities by the dividend date. Calculate the implied distribution

yield. (5 marks)

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Question 4 (14 marks)

In February 2012, a well-known Australian general insurance company released their 2011

full year financial results and reported a substantial decrease in their profit. At the same

time, their gearing ratio increased sharply due to significant writedowns of their assets,

coupled with a poor underwriting profit resulting from the natural disasters which

occurred over the year.

The Board of Directors announced a $500m equity capital raising to restore its balance sheet

at the same time they released their full year results.

You are working in the financial institution which has been hired to act as an underwriter

to the capital raising.

a.) Describe two potential risk factors the underwriter faces in this capital raising.

Consider in particular the circumstances associated with this general insurance

company. (8 marks)

b.) List four significant pieces of information that would assist you in determining a

suitable rights price. (6 marks)

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Question 5 (16 marks)

On 15th December 2010, the NSW State Government announced they have sold their

power-generating assets to Origin Energy and TRU Energy for $5.3b. In the following

week, the media reported the scandalous nature of the sale including the Board of one

power company resigning on the night of 14th December 2010 for refusing to approve the

sale. The Board was replaced within hours with directors chosen by the government so the

deal would be passed. Accusations were also made on the lack of disclosure to the public

on the sale process prior to the date of announcement. In response, a State Tribunal has

been set up in order to further investigate this matter so the public’s concern can be

addressed.

The State Tribunal has sought your advice in its investigation process.

a.) How would you conduct an investigating on the conduct of this transaction in order to

understand whether the sale of the NSW power assets was fair and reasonable?

(10 marks)

b.) Discuss the two possible measures you would impose to prevent a repeat case

occurring. (6 marks)

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