Case Description: You are the CFO of Aust Defence Supplies Inc - a mature publicly listed Australian firm supplying low technology products for use in the defence forces, and to the camping and hiking leisure market. The business has several divisions based around Brisbane, with their head offices in South Brisbane. The last annual report and market data provides the following information regarding the financial structure of the company. The liabilities of Aust Defence Supplies include: 1,000 unsecured notes on issue, and a $100-dollar coupon payment ($50 paid semi-annually). The notes mature in 1 1 years, and the current trading price on the note is $980; the face value is $1,000. 900 debentures which mature in 8 years and have a current market price of $1,115. The debentures have a face value of $1,000 and pay a coupon payment of $112 annually. 3,000 issued shares of preferred stock, with current market price of $94.50 and paying a dividend of $12.10 70,000 ordinary shares with a current market price is $40. The company has picked up some contracts over the last few years, with growth in earnings, averaging 8.2 per cent per year. It is expected with current opportunities that this might continue for two more years, but then slow to 3 or 4%. The company directors have just declared a dividend of $4.34 per share for the last 12 months. The Reserve Bank has suggested that inflation rates are expected to be stable at about 2%. The company tax rate faced by Aust Defence Supplies is 27.5% Problems: Part 1: [3 marks] What is the cost of capital of Aust Defence Supplies? Part 2: [10 marks] You have received a confidential envelope. It contains a draft of a competitive bid notification for a contract to supply duffel canvas to the Australian Navy. The cover memo from Aust Defence Supplies' CEO David Sharpe asks you to review the bid before it is submitted. The bid and its supporting documents have been prepared by Aust Defence Supplies' sales staff. It calls for Aust Defence Supplies to supply 480,000 metres of duffel canvas over 5 years. The proposed selling price is fixed at $30 per metres. The company will have to supply the following quantities per year: Year 2 3 4 5 Supply in 50,000 90,000 120,000 120,000 100,000 metres

pur-new-sol

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