Shenzhen ZhongjinLingnanNonfemet Co. (SZLN) is a Chinese organization that is contemplating about acquiring of an Australian mining organization. The administration of SZLN must survey the benefits of the purchase, the offer to be made, how it is to be funded and the political ramifications of the buy for both the nations of China and Australia.
10- year AUS$ treasury rate (rf), BE, Market return, Re ( Discounting AUS$)
Cash Flow Statement
FCFE , NPV, Estimated Value of Equity, No. of share outstanding, Value per Share
Proforma Income Statement
Estimates and Assumptions
1- Assume you are a current shareholder in PEM and you are trying to value it. The 10 year Australian Treasury bond rate is 4.58%, the 5 year Australian rate is 3.97%, the 10 year US Treasury rate is 3.53%, and the 5 year US Treasury rate is 2.29% in November 2008. The equity beta is in footnote 4 of Exhibit 14. What rate would you use to discount US dollar cash flows to equity if leverage remains unchanged at its current value over the life of the project?
2- Assume that the entire ore reserve in Broken Hill is fully depleted at the end of 8 years and some assumptions....What are the cash flows to equity?
3- What is the present value of the equity of PEM per share in Australian dollars? Note that PEM’s leverage changes over time. Assume that you are finding the value from the perspective of a current holder of PEM shares, and not from the perspective of a partially state owned corporation like SZLN. State any other assumptions you make while doing the calculations.
4- Using the price paid for Herald, what would be the comparable price you would pay for PEM? State any assumptions you make. What might cause you to doubt the valuation you get from such an analysis?
5- Suppose SZLN decides to proceed with the purchase. Would you advocate that it buys PEM shares in the market, buys newly-issued PEM Treasury shares, or buys convertible debt issued by PEM? What are the advantages and disadvantages of each approach?
6- What might SZLN do to convince the Australian government not to block the transaction?