| INTRODUCTION | |
| You are working for a real estate development company called ModelOff Real Estate (“MORE”). MORE | |
| are assessing the financial viability of a new project and have asked you to assist with this. The project is | |
| a residential real estate development of 1,630 houses in an area that the local council has identified as | |
| requiring new residential housing. The land for the houses is being sold by the council to enable this | |
| development to be undertaken and the council is currently undertaking a sale process for this land. MORE | |
| is one of two developers in this land sale process. | |
| You will need to develop a model to forecast the cash flows for the project. The model will be quarterly | |
| and cover four years (16 quarters) from 1 January 2017 until 31 December 2020. | |
| The key model inputs (discussed below) have been provided to you in the Excel file titled | |
| ‘MO16 Round 1 - Sec 4 - Going Around in Circles.xlsx’. | |
| Assume that all cash flows occur on the last day in the quarter. No inflation should be applied. | |
| HOUSES | |
| There are four different categories of houses to be built on the site. The size, construction cost and sales | |
| price for each house category are summarised in the table below: | |
| Category Size Construction cost Sales price | |
| Square metres $ per square metre $ | |
| ------------------------------------------------------------------------------------- | |
| Category A 50 2,600 250,000 | |
| Category B 60 2,400 300,000 | |
| Category C 75 2,300 335,000 | |
| Category D 95 2,500 500,000 | |
| The number of houses built in each quarter is shown in the table below. All associated construction costs | |
| are paid in the quarter the house is constructed. | |
| Quarter 5 6 7 8 9 10 11 12 Total | |
| Quarter ended Mar 18 Jun 18 Sep 18 Dec 18 Mar 19 Jun 19 Sep 19 Dec 19 | |
| ------------------------------------------------------------------------------------- | |
| Category A 200 100 70 70 50 50 - - 540 | |
| Category B - 100 150 100 80 80 - - 510 | |
| Category C - - - 50 100 100 50 50 350 | |
| Category D - - - - 30 50 100 50 230 | |
| The number of houses sold in each quarter is shown in the table below. All associated revenue is received | |
| in the quarter the house is sold. | |
| Quarter 7 8 9 10 11 12 13 14 15 16 Total | |
| Quarter ended Sep 18 Dec 18 Mar 19 Jun 19 Sep 19 Dec 19 Mar 20 Jun 20 Sep 20 Dec 20 | |
| -------------------------------------------------------------------------------------------------- | |
| Category A 40 160 104 73 66 52 40 5 - - 540 | |
| Category B - 20 100 135 101 82 64 8 - - 510 | |
| Category C - - - 10 55 95 90 55 40 5 350 | |
| Category D - - - - 6 31 58 85 45 5 230 | |
| OTHER COSTS | |
| There are other costs that the project will incur in addition to the house construction cost. These are: | |
| • Land purchase costs in Quarter 1 of $80m. These are to be paid to the council. | |
| • Earthworks costs in Quarters 1, 2, 3 and 4 of $20m, $17.5m, $15m and $15m respectively. | |
| • Pre-construction costs in Quarters 1, 2, 3 and 4 of $2.5m, $5m, $7.5m, and $9m respectively. | |
| • Other costs of $2.5m per quarter in each of the first four quarters and $1m per quarter in the | |
| subsequent eight quarters (Quarter 5 to Quarter 12) | |
| EQUITY FINANCING | |
| Total equity funding of $40 million will be used for the project. This will be paid in at $10 million each | |
| quarter for the first four quarters. Debt will be drawn to fund all other costs. In quarters where the project | |
| generates cash, available cash is first used to repay any outstanding debt. Once the debt is fully repaid | |
| any remaining cash is distributed to the shareholders. | |
| For questions 38 – 40, an alternative equity drawdown approach will be modelled. Under this, equity will | |
| be drawn in each quarter at 20% of the funding required in that period until $40m equity is drawn. Once | |
| the $40 million is fully drawn, debt will be drawn to fund all remaining financing requirements. | |
| DEBT FINANCING | |
| You are currently in negotiations with a local bank to provide a debt facility for the project. The maximum | |
| size of the facility will be a key output of your financial model. | |
| The facility will charge a 7% p.a. interest rate. The interest will be calculated on the opening balance each | |
| quarter. The interest rate for each quarter will be calculated on a (days in quarter) / (days in calendar year) | |
| basis. | |
| The facility will charge an arranging fee of $5 million paid at the end of the first quarter. | |
| There are other fees that the bank may charge depending on the outcomes of the negotiation process. | |
| These fees should not be included for questions 31 – 33 but should be incorporated for questions 34 and | |
| 35 onwards respectively. These potential other fees are | |
| • | |
| Changing the arranging fee from a fixed $5 million to be equal to 2% of the maximum required | |
| facility size. Incorporate this from question 34 onwards. | |
| • | |
| A commitment fee of 1.25% p.a. The commitment fee will be calculated on the undrawn facility | |
| amount at the start of each quarter and paid at the end of the quarter. The commitment fee rate | |
| for each quarter will be calculated on a (days in quarter) / (days in calendar year) basis. The fee | |
| will be paid in every quarter until the end of the model (31 Dec 2020), even if the facility has been | |
| fully repaid. Incorporate this from question 35 onwards. | |
| FINANCING – ADDITIONAL INFORMATION | |
| To assist you in answering this question, we provide the following additional information on the funding: | |
| • | |
| In any given quarter, there will be some or all of the following: operating cash flow (positive or | |
| negative cashflow), arranging fees (negative cashflow), commitment fees (negative cashflow) and | |
| interest (negative cashflow). | |
| • | |
| Where the sum total of these values is negative, this cashflow shortfall must be financed through | |
| either equity or debt. There are two different approaches to the sizing of the equity draw each | |
| quarter, as set out above. | |
| • | |
| Where the sum total of these values is positive, this excess cashflow is first used to repay debt. | |
| Once the debt facility is fully repaid, distributions to shareholders can be made. | |
| • | |
| You will be required to calculate a quarterly closing debt facility balance to answer some of the | |
| questions. This is an end of period calculation after all debt drawdowns and repayments are | |
| made. The maximum facility size (used to calculate arranging and commitment fees) is the | |
| maximum of the quarterly closing debt facility balances calculated. | |
| ACCURACY OF ANSWERS | |
| Components of this questions will likely require the calculations to iterate in order to get the correct | |
| solution. The maximum change for an iteration should be no larger than $0.1 to ensure your answers are | |
| accurate. | |
| For Questions 31 to 37, select your answer from a multiple choice list. | |
| For Questions 38 to 40, you are required to type in your answer. | |