-text-size-adjust: auto; -webkit-text-M08EFA – Corporate Finance
Coursework – February 2016
Learning Outcome of the Assessment To demonstrate a critical understanding of corporate finance theories by using empirical evidence to evaluate financing methods, asset valuation and investment appraisal techniques.
Background: In a firm, financial managers are responsible for making two key types of decisions: Investment decisions and financing decisions. With Investment Decisions, managers decide what investments to undertake to accomplish the objective of maximising shareholder wealth. With Financing Decisions, managers decide how to optimally finance the firm’s business. This assignment aims to test your ability to critically assess and undertake both types of decisions.
Written Report and Group Work You can undertake the coursework assignment individually or in pairs. You should write a report of no more than 3,500 words on the case study provided below. In the report, you should justify any assumptions made, properly cite the source of any figures used, explain your calculations and analysis, include figures and tables to support your analysis if necessary. You could attach to your report as appendices all necessary evidence that can support your conclusions.
Submission and Deadline
You are required to submit your report through the Turnitin with the link provided on the Moodle.
If you are working in pairs, only one of you should submit the report.
Please make sure to include the names and ID numbers of all members in your group on the front page of your report.
Deadline for submission of the report is:
23.55 on Wednesday 20th April 2016
Feedback Within two weeks after the deadline you will receive comments and feedback for your report.
M08EFA CASE STUDY – LAD TelEQ PLC
Setup LAD TelEQ is a UK company currently operating in the sector of Technology Hardware & Equipment. The company’s business is focused on developing wireless devices, wireless solutions for communication, smart systems, and providing components and systems that protect electronics. Its customers include individual and business consumers. It is now March 2016, and the company has recently approved an ambitious plan to expand its business in Wireless Smart Home Devices and the company is considering a project, named CarHome, with details provided below.
Capital Structure: The company has 268 million shares in issue which currently trade at 350 GBX each. The company has 2m bonds which will mature in 5 years. The bonds have coupon rate of 8.5%. Standard & Poor’s rating for the bonds is BBB. The company has no debt other than the one described above.
CarHome Project: The proposed project is to develop a portable wireless smart home device which allows a person to access and control electronic devices at home from his car. LAD TelEQ has already conducted an extensive feasibility study with a cost of £3m to evaluate the attractiveness of the new product. The following estimates have been generated.
Immediate upfront costs for engineering and design are expected to be £20m in total.
The company also needs to develop new software for the new device. The company expects the software development requires 100 software engineers to work full time in a year. The expected cost per engineer is £100,000 per year.
The company will have to install new equipment to test the new product and to support devices in the future. The expected cost of the new equipment is £40m. The depreciation of the equipment follows straight-line method and will be allocated for 5 years from Year 1 to Year 5.
Revenues and Costs in Year 1. The revenues start in Year 1. Estimates for revenues and other cash flows in Year 1 are as follows. Corporation tax rate is currently 20% and is expected to remain unchanged in the future. Unit Price (£) Value (£1000) Sales 300,000 300 90,000 Costs of Goods sold 300,000 100 30,000 Selling, General and Administrative 10,000 Expenses on upgrading the new product and continuously developing new versions and software 20,000
Year 2 to Year 6.
Sales units will grow at 15% per year.
The sales price and cost of manufacturing per unit on the other hand will reduce by 6% per year.
Selling, general and administrative costs are expected to increase by 5% per year.
The expenses on upgrading the new product and continuously developing new versions of the product and software are expected to increase by £2m per year.
In Year 7, sales units are expected to reduce by 10%. All other inputs remain the same as in Year 6. All cash flows in Year 8 and any years after that are expected to be the same as those in Year 7.
Cannibalization. In addition to the information above, the introduction this new portable wireless smart device will reduce the sales of a wireless GPS device that the LAD TelEQ is providing. Expectedly, 40% of the sales units of the new device are from the reduction in the sales units of the GPS device. The current sale price and cost of production per unit of the GPS product are respectively £110 and £40. These numbers are constant for the remaining of the life of the GPS project. The GPS product is expected to be withdrawn from the market completely in 6 years from now.
Required Write a formal report for the board of directors of LAD TelEQ Plc to provide an analysis of the proposed project and make recommendations for the company. In the final report you should:
• Provide an estimate of the Weighted Average Cost of Capital (WACC) for LAD TelEQ Plc
• Conduct an evaluation of the proposed project using any appropriate techniques
• Conduct a sensitivity analysis on the project
• Conduct any further risk analysis you think is crucial for a comprehensive appraisal of the project
• Provide a final recommendation on whether to accept or reject the project
• If you recommend the company to accept the project, please also provide a recommendation regarding financing decision and briefly justify your recommendation.
Note: LAD TelEQ is NOT a real company. However, please assume that it would be competing with real firms operating in the UK market when you write the report.
Source for references:
Lecture slides, textbooks, journals and the information above
The following additional sources may be useful for you to collect practical information: i) DataStream, Bloomberg, Reuters, FAME
ii) http://www2.standardandpoors.com/ iii) The FT.com iv) London Stock Exchange v) Company Annual reports (available on the website of a company of your interest)
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