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:
Size of unit
Cost per m2
12m X 15m
10m x 15m
8m x 10m
8m x 8m
8m x 8m
5m x 6m
5m x 8m
5m x 8m
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.
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:
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.
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)
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
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)
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)
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)
Recommendation for investment with financing options
Recent financial information for the company is as follows:
For the years ending 31 January, Statement of Financial Position:
· Property Equipment & vehicles
· Term loans
· Ordinary shares
(5p nominal value)
· Share premium
· Retained earnings
For the years ending 31 January, Income Statement summaries:
Profit before tax
Profit after tax
attributable to shareholders
Average share price (pence)
Industry PE ratio
Industry Average Ratios
Return on Shareholders’ funds %
Return on Capital Employed %
Gross Profit Margin %
Operating Profit Margin %
Asset turnover (net assets)
Collection period (days)
Interest cover (times)
EPS (pence) 88
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