Southport Minerals Inc Case Solution

Case Solution

Discuss how a benefit of a great investment project might be enhanced by considering making financing and operating options which either manage investment returns or reduce project risks.

Excel Calculations

EBIT

Operating Cash Flow

Free Cash flow of Assets

Terminal Value

Present ValueTotal Present Value

Interest tax Shield

Base Case Value

Side Effect: Tax shield

Adjusted Present Value

Questions Covered

1. What are the risks of the Firstburg investment proposal?

2. How did the specific financing choice available to Southport Minerals alter both the risk and return potential of the Firstburg investment proposal? How effective was it in dealing with the project risks?

3. If you were trying to negotiate an improvement in the terms of the Firstburg financing proposals, in which of the following areas would you concentrate your efforts, and why would you concentrate them there? (a) interest rates; (b) debt maturities; (c) allowable dividends; (d) price terms?

4. Which method of analyzing the value of the Firstburg investments proposal to Southport Minerals is most reasonable? Why are the other methods less reasonable? Provide your best estimate of the project’s value by using the adjusted present value approach.