- BAFN200 S1, 2015 Group Assignment Fortescue Metals Group (FMG)
On 5 March 2015 Fortescue Metals Group (FMG) announced a financial restructuring which involved issuing $2.5billion of new debt and the retiring of several tranches of existing debt. The intention was to extend the company’s maturity profile and reduce interest costs.
The company opened negotiations with US lenders but then turned to the US bond market as it felt the risk premium lenders required was unattractive. The bond market was equally cautious and the required (by lenders) return on the bonds was, again, deemed unattractive by FMG. On 18 March 2015 FMG announced it was not pursuing its refinancing programme.
Over the last 5 years, the share price of the company has fluctuated between a high of around $6.50 and a low of 1.85. A key driver of this price - and the company’s prospects in general - is the global price of iron ore, which has fallen considerably in the last six months. The share price of FMG over the last 5 years is shown below.
Source: Yahoo Finance, 30/5/2015
Using publicly available data:
1. Analyse the share price history of FMG over the last 5 years, identifying the main causes of its volatility in share price and traded volumes. Include in your discussion an analysis of the relationship between the iron ore price and FMG’s share price using an appropriate range of statistical analysis tools.
2. Research FMG’s history (not more than 10 years) of bond issuance and its scheduled maturities.
3. Analyse FMG’s historic cost of debt against a benchmark, “risk free” rate and derive a 95% confidence interval estimate for its average risk premium on debt.
4. Estimate FMG’s cost of equity capital using at least two different techniques.
5. Research media commentary on the refinancing proposal and estimate FMG’s current cost of debt capital from this and, if appropriate, other sources.
6. Comment on whether the current risk premium lies within the confidence range in (2) above and, if not, explain why this may be.
7. Estimate FMG’s weighted average cost of capital.
8. Discuss the limitations of your analysis.
State all assumptions you make in answering the above.
The assignment is to be submitted as a Word document via LEO/Turnitin, in hard copy placed in the assignment box on Level 10, Tenison Woods House and with supporting spreadsheets submitted to the LIC by email by 15 May 2015 at 5pm. The assignment will not be deemed as submitted until electronic, hard copies and any supporting documents are received. Penalties will be applied for late submission. Submissions received after 5pm on 15/05/2015 but within 72 hours will be subject to a deduction of 10% of the maximum available mark. Submissions received after 72 hours of the submission deadline will receive a zero (0) award. The assignment carries a word limit of 4,000 words, plus exhibits.
Please note: Turnitin does not accept spreadsheet submissions. If you use spreadsheets in your analysis, key outputs from the spreadsheet should be pasted into the Word document submitted. Where spreadsheets have been used in your analysis, you should email copies of the live spreadsheets to the LIC with the same deadline as the other documents.