Put yourself in the following situation as a member of the Financial Services Team of XYZ plc, which is a UK conglomerat
Posted: Wed May 18, 2022 10:30 pm
Put yourself in the following situation as a member of the
Financial Services Team of XYZ plc, which is a UK conglomerate. It
owns companies across different industries, such as – car
manufacturing, consumer goods, leisure etc.
You have been requested to provide meaningful financial analysis
and information for decision making concerning financing,
performance, capital investment, constrain in production,
budgeting, and sensitivity analysis. Accordingly, you are required
to write a report (3,000 words in total) providing information
about these areas.
Financial analysis related to Investment
Strategy:
Because of the climate change target of the UK (the road to
net-zero target), the company’s newly appointed investment manager
Ms Madison came up with a new investment strategy – closing five of
the company’s existing brand and focusing more on the company’s
most popular electronic vehicle brand in the UK. According to her
assessment, this closing decision will generate around £100 million
free cash flow, which the company could reinvest to expand its
popular brand – ‘eXi Drive’. Madison suggests that the market
survey indicates this is one of the most popular brands in England,
and demand is increasing. The year-to-year sales of the ‘eXi Drive’
brand have gone up by 25% (5,000 units in 2021 compared to 2020),
which was higher than all of those five brands together.
Moreover, she has indicated that the expansion decision will
reduce the overall cost while improving quality. This cost-quality
dynamic will help the company face competition and achieve a larger
market share. However, this expansion will cost £150 million for
the company, which require rigorous strategic assessment, including
financial viability. Now, she has approached you to evaluate this
possible restructuring decision, whether it is a financially viable
strategy or not. She also has suggested that this expansion project
will run for the next five years, and after that, the company will
enter into a new strategic cycle.
You have collected the following information from her to do the
financial analysis for meaningful
decisions.
The expansion is expected to increase the sales of ‘eXi Drive’
by the following units.
8,000 units in 2022
8,000 units in 2023
10,000 units in 2024
11,000 units in 2025
12,000 units in 2026
In 2021 the market price of this brand was £45,000, but the
company wants to reduce it by £5,000 in 2022 and then will
increase/decrease with the pace of the economy and purchasing power
of the consumers. KPMG has projected that the Bank of England’s
bank rate will remain 0.50 per cent for the next couple of years,
which will allow the post-Brexit-and-Covid expansion of the
economy. In line with this economic assessment, your company has
decided not to increase the price for the next three years (i.e.,
till 2024), but from the fourth year, a contingency plan is in
place to increase the unit price by £2,000.
The production cost is £20,000 per unit, which will increase in
the line of inflation and other materials cost over the project’s
life at a rate of 10% each year starting from year two. The
production involves fixed overhead expenditure of £20 million in
2022 and 2023, £15 million in 2024 and £10 million in 2025 and
2026. The project requires a working capital investment of £850,000
at the beginning, 50 per cent of which the company will recover at
the end of project life. The cost of promotion and R&D will be
£5 million, respectively, over the five years. Assume that there is
no other cost involved in this investment. The company is currently
following the straight-line depreciation method, and historically
10% of the cost price of such investment is recovered in the final
year.
Financing choices: (the Board of Directors have
agreed)
The Board of Directors disapproved reinvesting the £100 million
free cash flow from closing the existing five brands. Instead, they
want to keep this fund reserve for future uncertainty. For this
expansion project recommended by Ms Madison, the Board has
recommended raising capital from alternatives financing from
external sources.
The company has three choices for financing this expansion:
issuing new equity, issuing a bond, or issuing preference
shares.
The equity of XYZ plc is currently trading in London Stock
Exchange (LSE) with a face value of £10. The market price of each
share is as follows:
Date
Closing Price
04.11.20
£34.50
03.12.20
£36.20
06.01.21
£33.55
03.02.21
£35.10
To date
£ 34.80
In the last fiscal year, the company had declared a £1.2 per
share dividend (DPS). The company’s investment banker KPMG always
charges an issuing (i.e. flotation) cost of 20% on the face value
to issue new common stock in the market. Historically, the
company’s earnings per share are as follows:
Year
EPS (Earning Per Share
2017
22p
2018
26p
2019
17p
2020
22p
2021
25p
The company has also assessed the possibility of issuing a bond
in the market. Currently, bonds of similar companies are selling at
£110, slightly over the face value (i.e. £100) with a coupon rate
of 10% and maturity of 5 years. The company’s third financing
option is to issue preferred stock in the LSE. The industry average
preferred dividend and the current market price of preference
shares of similar companies are £10 and £108, respectively.
You have also collected additional data on the UK financial
market and the company. Currently, the yield of the 3-month UK Gilt
is 3.0%, the FTSE 100 index has an average yearly return of 10%,
and the average corporate tax rate in the UK is 30%. In addition,
the beta of XYZ plc is 1.5, which is slightly higher than the
market beta of 1.
The company wants to maintain its existing capital structure
policy of 50% debt, 10% preferred equity and 40% common equity for
this new investment.
Ms Madison has requested you to make a report based on the
following queries so that she can present it at the next board
meeting.
Explain how the BREXIT could affect the UK automobile
manufacturing sector and the possible strategic changes required in
this industry to cope with the
risk?
Financial Services Team of XYZ plc, which is a UK conglomerate. It
owns companies across different industries, such as – car
manufacturing, consumer goods, leisure etc.
You have been requested to provide meaningful financial analysis
and information for decision making concerning financing,
performance, capital investment, constrain in production,
budgeting, and sensitivity analysis. Accordingly, you are required
to write a report (3,000 words in total) providing information
about these areas.
Financial analysis related to Investment
Strategy:
Because of the climate change target of the UK (the road to
net-zero target), the company’s newly appointed investment manager
Ms Madison came up with a new investment strategy – closing five of
the company’s existing brand and focusing more on the company’s
most popular electronic vehicle brand in the UK. According to her
assessment, this closing decision will generate around £100 million
free cash flow, which the company could reinvest to expand its
popular brand – ‘eXi Drive’. Madison suggests that the market
survey indicates this is one of the most popular brands in England,
and demand is increasing. The year-to-year sales of the ‘eXi Drive’
brand have gone up by 25% (5,000 units in 2021 compared to 2020),
which was higher than all of those five brands together.
Moreover, she has indicated that the expansion decision will
reduce the overall cost while improving quality. This cost-quality
dynamic will help the company face competition and achieve a larger
market share. However, this expansion will cost £150 million for
the company, which require rigorous strategic assessment, including
financial viability. Now, she has approached you to evaluate this
possible restructuring decision, whether it is a financially viable
strategy or not. She also has suggested that this expansion project
will run for the next five years, and after that, the company will
enter into a new strategic cycle.
You have collected the following information from her to do the
financial analysis for meaningful
decisions.
The expansion is expected to increase the sales of ‘eXi Drive’
by the following units.
8,000 units in 2022
8,000 units in 2023
10,000 units in 2024
11,000 units in 2025
12,000 units in 2026
In 2021 the market price of this brand was £45,000, but the
company wants to reduce it by £5,000 in 2022 and then will
increase/decrease with the pace of the economy and purchasing power
of the consumers. KPMG has projected that the Bank of England’s
bank rate will remain 0.50 per cent for the next couple of years,
which will allow the post-Brexit-and-Covid expansion of the
economy. In line with this economic assessment, your company has
decided not to increase the price for the next three years (i.e.,
till 2024), but from the fourth year, a contingency plan is in
place to increase the unit price by £2,000.
The production cost is £20,000 per unit, which will increase in
the line of inflation and other materials cost over the project’s
life at a rate of 10% each year starting from year two. The
production involves fixed overhead expenditure of £20 million in
2022 and 2023, £15 million in 2024 and £10 million in 2025 and
2026. The project requires a working capital investment of £850,000
at the beginning, 50 per cent of which the company will recover at
the end of project life. The cost of promotion and R&D will be
£5 million, respectively, over the five years. Assume that there is
no other cost involved in this investment. The company is currently
following the straight-line depreciation method, and historically
10% of the cost price of such investment is recovered in the final
year.
Financing choices: (the Board of Directors have
agreed)
The Board of Directors disapproved reinvesting the £100 million
free cash flow from closing the existing five brands. Instead, they
want to keep this fund reserve for future uncertainty. For this
expansion project recommended by Ms Madison, the Board has
recommended raising capital from alternatives financing from
external sources.
The company has three choices for financing this expansion:
issuing new equity, issuing a bond, or issuing preference
shares.
The equity of XYZ plc is currently trading in London Stock
Exchange (LSE) with a face value of £10. The market price of each
share is as follows:
Date
Closing Price
04.11.20
£34.50
03.12.20
£36.20
06.01.21
£33.55
03.02.21
£35.10
To date
£ 34.80
In the last fiscal year, the company had declared a £1.2 per
share dividend (DPS). The company’s investment banker KPMG always
charges an issuing (i.e. flotation) cost of 20% on the face value
to issue new common stock in the market. Historically, the
company’s earnings per share are as follows:
Year
EPS (Earning Per Share
2017
22p
2018
26p
2019
17p
2020
22p
2021
25p
The company has also assessed the possibility of issuing a bond
in the market. Currently, bonds of similar companies are selling at
£110, slightly over the face value (i.e. £100) with a coupon rate
of 10% and maturity of 5 years. The company’s third financing
option is to issue preferred stock in the LSE. The industry average
preferred dividend and the current market price of preference
shares of similar companies are £10 and £108, respectively.
You have also collected additional data on the UK financial
market and the company. Currently, the yield of the 3-month UK Gilt
is 3.0%, the FTSE 100 index has an average yearly return of 10%,
and the average corporate tax rate in the UK is 30%. In addition,
the beta of XYZ plc is 1.5, which is slightly higher than the
market beta of 1.
The company wants to maintain its existing capital structure
policy of 50% debt, 10% preferred equity and 40% common equity for
this new investment.
Ms Madison has requested you to make a report based on the
following queries so that she can present it at the next board
meeting.
Explain how the BREXIT could affect the UK automobile
manufacturing sector and the possible strategic changes required in
this industry to cope with the
risk?