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4BUS1110 Principles of Finance
Coursework 2: Brad Taker plc
Individual Report which is worth 50% of your overall module mark
 
Brad Taker plc is a ‘top-end’ clothing retailer, who has enjoyed steady growth in recent years, but have embarked on expansion plans in the last 12 months. They operate in many countries and focus on men’s attire. The men’s clothing market is deemed to offer potential for growth as other markets are seen as too competitive and somewhat ‘saturated’.   In addition to the current expansion plans, an opportunity has arisen to expand into retail units in airports, where currently, they do not have a presence. They are currently considering the option to open units in the 8 largest UK airports. A positive return must be generated over a 4 year period. £500,000 has already been spent on market research and site surveys. They have also paid a reserve fee of £10,000 per unit. If they do not go ahead they will sell each reserve on for £12,500 each.
 
Investment Option: The market research estimates combined sales of £40m could be achieved in year 1, with growth of 5% in subsequent years. The company will maintain the current gross profit margin going forward. Operating expenses (are currently 47% of revenue, this will be reduced to 40% for this venture. However, renting the 8 units will lead to an estimated combined rental of £4m in the first year. This will rise by 10% per annum. Marketing and promotions will also require extra expenditure. Upfront advertising will require £3m of investment immediately but in subsequent years, the annual marketing budget of £7.5m will include the new venture. However, in store discounts and sales will account for 2.5% of revenue per annum. These are all assumed to be cashflows in the year they are incurred. The investment in each unit (to refurbish and fit) depends on the size and location of the unit. Site surveys estimate the following:

Airport
Size of unit
Cost per m2

Heathrow
12m X 15m
£6000

Gatwick
10m x 15m
£6000

Stansted
8m x 10m
£6000

Birmingham
8m x 8m
£4000

Manchester
8m x 8m
£4000

Glasgow
5m x 6m
£2500

Edinburgh
5m x 8m
£2500

Belfast
5m x 8m
£2500

 
Brad Taker use a combination of appraisal techniques in assessing opportunities and currently have a cost of capital of 12%.
 
Financing: Brad Taker have relied on overdraft in recent years, incurring variable rates between 10% and 14% on amounts outstanding. The overdraft will be held at the current level for the next 18 months. In the last year they have taken out an 8 year term loan of £60m to fund recent expansion. This loan is secured on property and the rate is 5%. Interest has yet to be paid on this borrowing. There is also a covenant attached to this loan, such that gearing (calculated in book value) must remain at 30%.  To fund the airport project they are prepared to take out an additional loan of £6m. They have cash and equivalents of £16m but do not want to use all of this on this project. The company has set an internal target that interest cover does not drop below 8. The rate agreed on the new loan is 7%. Issuing (rights issue) shares is not considered appropriate at this time, even though their share price is high. .
 
The income statements and statement of financial position (balance sheet) for the past four years are set out in Appendix 1. Other data and industry average ratios are provided in Appendix 2 to support your analysis
You have been approached to advise the company on this investment in the form of a report.
 
REQUIRED:
 
Produce a written report of approximately 2000 words advising the company on their plans to expand. The report should use a font of 11, line spacing of 1.5 and Harvard referencing. Your report should include:
 

A review of the historical financial statements provided in Appendix 1 and use of any analytical tools covered in the module to provide a description of the company at the point of making the investment decision. (Your description should comment on the company’s profitability, efficiency, liquidity, gearing).

 

Analyse the consequences of the financing option that the company are considering. Discuss the advantages and disadvantages of using debt. Consider the alternatives and suggest why the firm may not wish to issues shares or use cash. An explanation of the key features of debt and equity finance and internal v external financing, differentiating clearly between them, is required. State clearly your view regarding financing this opportunity.

 

An investment appraisal of the proposal (over 5 years) using NPV and Payback, with an evaluation of the results. Discuss the usefulness and limitations of the appraisal methods. Comment on your results and any assumptions that you have made. You should include qualitative issues but may ignore taxation.

 
The emphasis of this report must be on the explanation and evaluation of your analysis. As a consequence, the calculations required for the report will account for approximately 1/3 of your coursework mark. Marks awarded will depend on the application of the knowledge and understanding that you will display in your arguments.
Please note that this work should not contain your name when submitted as UH now has a policy of anonymous marking for submission of individual coursework.  You may wish to put your student registration number (shown as your membership number on your ID card) on the front of your work.
 
NOTE: The filename should be in the following format:
STUDENTIDPOFCW2.doc  
e.g. If your ID IS 16001234  the filename would be 16001234POFCW2.doc
 
Please submit your work by 3pm Tuesday 18th April 2017. Submission is by upload to studynet. A drop box ‘Brad Taker plc’ is provided in the assignment section of the module site. Late submissions (without approved extensions) submitted within 24 hours will have up to a 5% penalty deducted (subject to a minimum mark of 40%).  Those submitted after 24 hours within a week of the deadline will be capped at 40%.  Assignments submitted after one week will receive a mark of zero.
 
CASE
The Centre for Academic Skills Enhancement (CASE) have produced guides on how to write reports and how to use the Harvard style of referencing. They also run workshops on report writing and Harvard referencing. Information can be found on their website.
 
Brad Taker plc Marking Scheme: (use as guide for layout)
Coursework 2

Requirement   
Mark

Presentation
Cover sheet, page numbers, font size of 11, 1.5 line spacing, student number, module name and code shown clearly, layout, report structure, writing skills, spelling, use of financial terms, referencing
10%

Review of historical financial information (point 1 in the brief)
Use of analytical tools to investigate profitability, efficiency, liquidity, gearing (15) and commentary on findings (10)
25%

Discussion of financing issues (point 2 in the brief)
Consequences of new debt (4 marks)
Advantages and disadvantages of debt (6)
Alternatives available (10).
Recommendation of how the project should be financed (5)
25%

Project evaluation (point 3 in the brief)
Calculations (15) Evaluation based on Payback and NPV including usefulness and limitations of each method and qualitative comments on cash flow (20)
35%

Recommendation
Recommendation for investment with financing options
5%

TOTAL
100%

 
 
Appendix 1:
Recent financial information for the company is as follows:
 
For the years ending 31 January, Statement of Financial Position:

 
2013
2014
2015
2016

 
£m
£m
£m
£m

Non-Current assets
·         Property Equipment & vehicles
·         Investments
 
50
 
 
5
55
 
57
 
 
7
64
 
64
 
 
8
72
 
140
 
 
9
149

Current Assets
·         Inventory
·         Receivables
·         Cash
 
 
93
30
5
128
 
101
36
8
145
 
111
38
11
160
 
125
50
16
191

Total Assets
183
209
232
340

Current liabilities
·         Payables
·         Taxation
·         Overdraft
 
 
47
7
20
74
 
51
8
21
80
 
56
9
26
91
 
61
8
38
107

Non-current liabilities
·         Term loans
 
 
0
 
0
 
0
 
60

Total Liabilities
74
80
91
167

Net Assets
109
129
141
173

Shareholders’ funds
·         Ordinary shares
(5p nominal value)
·         Share premium
·         Reserve
·         Retained earnings
 
 
2
10
2
95
 
 
2
10
2
105
 
 
2
10
1
128
 
 
2
10
4
157

      
109
 
129
 
141
 
173

 
 
 
For the years ending 31 January, Income Statement summaries:

 
2013
2014
2015
2016

 
£m
£m
£m
£m

Turnover
325
342
388
455

Gross Profit
198
216
235
273

Operating profit
38
43
50
59

Interest payable
2
3
3
5

Profit before tax
36
40
 
47
54

Profit after tax
attributable to shareholders
29
 
32
36
44

Dividends
11
12
13
15

Retained earnings
18
20
23
29

 
Appendix 2

Other data:
2013
2014
2015
2016

Average share price (pence)
 
1175
 
2111
 
2310
 
2640

Share index
6,284
6,832
6,510
6,083

Industry PE ratio
19
17
18
20

 
 

Industry Average Ratios
 
2016

Return on Shareholders’ funds %
 
22

Return on Capital Employed %
 
30

Gross Profit Margin %
 
55

Operating Profit Margin %
 
 
11

Asset turnover (net assets)
 
2.2

Payable days
 
 
120

Collection period (days)
 
 
29

Inventory days
 
 
245

Acid test
 
0.45

Current ratio
 
 
2.2

Gearing (%)
 
30

Interest cover (times)
 
15

Debt/Equity(%)
 
 
38

EPS (pence)                                                                                               88

DPS
 
 
25

 
 

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