Introduction
Company History
Waldorf Plc is based in the UK and has been selling bakery products for over a hundred years. Originally established as a family bakery in the North of England the company grew through acquisition in the 1980’s and is now national and a household name. Their sausage rolls in particular are incredibly popular.
The company floated on the stock exchange in the early 2000’s and has enjoyed a period of organic growth until the coronavirus pandemic. It fared reasonably well as it was able to trade through much of the lockdown and is on target to grow again in the future.
Although the original stores focused on baking goods such as bread and cakes, the company changed focus in the 2010’s to become the place for “food to go”. It also focused on providing a consistent product across the country. This strategy meant that goods were no longer fully produced on site. The company has not sold a loaf of bread for over 10 years. Instead, production is in warehouses and food transported frozen to be finished in the stores. Producing frozen foods also meant that Waldorf branded goods could be sold in supermarkets for customers to experience at home.
The company has had no long term debt on its Statement of Financial Position until the change to FRS16 in 2019 where it now shows lease obligations as a long term liability. It still does not have any “loans” in the traditional sense eg bank loans, bonds or debentures. The new finance director has been exploring the options for debt financing.
Waldorf plc has rewarded its shareholders with healthy dividends. Typically half of the profits are paid as dividends to shareholders. Share price and dividends have grown year on year at 10% for 5 years prior to the coronavirus pandemic and are set to continue to grow at 10% for the foreseeable future.
The marketing manager is very excited about the potential for a new vegan pasty. The vegan sausage roll was launched in 2019 and has been a huge success. He believes the pasty could be even better. Working with the finance director they have forecast the sales and costs for the pasty. (Appendix II)
The finance director is currently off work with stress. You have been asked to advise the company in her absence.
(Refer to Appendix I for information on board members and senior management)
Recent events
The war in Ukraine may seriously impact the supply chain. As well as availability and cost increases of raw materials used in production, the cost of fuel is also increasing. Price increases are a concern for the company and also for the general public. In January 2022 The company had to increase the price of several products including the much loved sausage roll and there was outcry on social media:
Waldorf fans slam 5p sausage roll price increase as a ‘national tragedy’
One fan wrote on Twitter: “Not forgetting the national tragedy of Waldorfs’ sausage rolls going up by 5p.”
Another upset fan tweeted: “upping the price of your sausage rolls you sellouts. I won’t forget the day you betrayed millions of us. Broken hearted is an understatement.”
“Going up by 5p, shameful I’m boycotting. Well at least until Friday” another heart broken customer commented.
The Daily Bugle, 11th January 2022
Despite the public response, sales continue to be strong and the public still seem to love the Waldorf brand and product. However the company may have to raise prices further in the near future.
Investment Appraisal
The company uses Net Present Value to evaluate the financial viability of its capital investments. Forecasts are generally shown in real terms. The real rate of return usually used by Waldorf plc is 12%.
Writing down allowances are available at the rate of 25% reducing balance. The company pays corporation tax at the rate of 20%. This is paid one year in arrears.
Debt Finance
Statler Waldorf is very proud of the fact that his company has no long term loans. Miss Hogwarts had been looking at options for debt finance.
Extract from Minutes from Senior Management Meeting 1st March:
(Refer to Appendix I for information on board members and senior management)
Item 8: Opportunity for debt financing
PH: As previously mentioned, Waldorf plc should consider debt financing. I propose an issue of 5 million 5% 10 year debentures, issued at par, redeemable at par.
SW: I am in charge and I do not want debt. I still don’t understand why we appear to have debt now. I know its something to do with SAP accounting standards policies procedures or something. I generally leave finance to the finance director but I do not want my company to have debt.
PH: But tax relief is available on the interest payments… we are definitely missing something here by not taking out debt finance.
KG: I agree. And the cost of capital will fall.
SW: How will the shareholders react though? Surely if we add interest payments to our costs there will be less money for shareholders?
PH: Actually, taking on debt finance will increase shareholder value.
KG: Yes, that’s correct. Honestly Mr Waldorf some level of debt is good for the company.
SW: It will take a lot to convince me.
PH: I’ll show you the calculations after the meeting. Tax savings, Mr Waldorf.
SW: Did you say tax savings? I might be interested.
Unfortunately Miss Hogwarts went off sick soon after the meeting and Mr Waldorf never received her calculations.
Dividend Payments
Historically, Waldorf plc pays out half of its profits as dividends. The new finance director was querying if this is the right approach.
Extract from Senior Management Zoom Meeting 17st March:
(Refer to Appendix I for information on board members and senior management)
KG: I’m really worried about Penny.
SW: Who?
KG: Miss Hogwarts. The finance director.
SW: Oh. Why?
KG: She has gone off sick. And there is so much work to do. She was going to do some work on dividend payments.
SW: Ah yes, the shareholders. Need to keep the shareholders happy.
KG: They’re never happy though. One lot wanted all of the profit as dividends. We need to keep something for growth.
SW: Not too many dividends. The tax man wants his cut. Blasted tax man. Wants tax when you buy things, tax when you sell things, tax when you earn money. Only two certainties in this life I tell you, death and taxes. No dividends, then no tax.
KG: Penny – sorry Miss Hogwarts never finished her report on dividend payments. I’ll ask the interim finance person if they can help.
SW: And whilst I think about it can you ask them to explain stock market efficiency to me? In simple terms that this old man can understand.
Email from Finance Director:
The Finance Director is trying to keep up to date with company news and sent you the following email:
Hello,
I am a little concerned that the original estimates provided by me and Tier for the vegan pasty are overly optimistic. I would prefer a more conservative approach to the investment appraisal.
Here are some revised figures for you to consider:
| Cost of machinery: | £1.6 million |
| Life: | 4 years |
| Scrap value | £50,000 |
| Sales price | £2.00 |
| Materials | £1.00 |
| Labour | £0.55 |
I also think that we may need to increase the discount rate to reflect the risk with the project. Perhaps try 15%.
Writing down allowances are still available at 25% reducing balance. However I am concerned that the corporation tax rate may be more like 22%.
Please can you re-forecast the pasty project with these conservative estimates?
Further, I have been looking at our options for issuing debt finance. Other companies with debt finance get the benefit of tax relief on their interest payments. Some fixed rate debentures would allow us to raise finance without the need to issue more shares and there would be no expectation of dividend payments. I thought 5 million 5% debentures could be issued.
Regards,
P Hogwarts
Miss Penelope Hogwarts B.Sc (Hons), ACA.
Appendix I
Executive Board of Directors
Three directors make up the executive board:
CEO: Mr Statler Waldorf OBE
Grandson of the original baker who set up the first Waldorf Store in the North of England. He has a long history with the company and originally worked as a delivery boy for his Grandfather and then leaned the business from the inside. Today he effectively leaves the day to day running to the senior management and is probably unaware that his company no longer sells loaves of bread.
His favourite Waldorf product is the classic sausage roll. Warm.
Chairman: Kermit Grenouille
Kermit joined the company in 2015. Previous roles included chairman of a logistics company and then chairman of a well known retail store. Kermit oversaw the move to “food to go” and the final removal of any in store production with the conversion to centralised warehouses and frozen foods “baked” in store.
His favourite Waldorf product is the Bacon Breakfast Roll.
Financial Director – Miss Penelope Hogwarts ACA
Miss Penelope Hogwarts joined the company only recently, in January 2022. She has a degree in Accounting and is a qualified chartered accountant. Previous roles include finance director for the same retail organisation as Kermit.
Her favourite Waldorf product is the Caramel Custard Doughnut.
She is currently off work with stress.
Other Relevant Senior Management:
Marketing Manager Tier Johnson B Sc (Hons)
Tier joined Waldorf’s straight after graduating from University in 2012. He is passionate about the Waldorf brand and keen to develop new products to increase customers.
His favourite Waldorf product is the as yet not available vegan pasty.
Appendix II
Vegan Pasty Estimations:
The following information relates to the proposal to bake and sell the new vegan pasty:
Machinery:
Cost of Pasty Machine: £1.5 million
Life: 5 years
Scrap value: £100,000
Pasty Sales forecast:
Annual demand 1 million units.
Price and Cost information (per pasty)
| Selling price | £2.20 |
| Materials | £0.80 |
| Labour | £0.45 |
Email from Marketing Manager:
Hi I have had a look at the costs we submitted for the vegan pasty. I know we already spent £30,000 on consultancy fees. I cannot see this is the plan? Also we have included the machine cost but there is nothing about the factory. The machine will go into our Bradford Factory and I know that place costs a fortune to run with all the electricity it uses. And I really think we’ve got a winning product here. I’m sure we can push the price up to £2.50. These are so tasty, I think we can sell 1.2 million per year. And reduce costs, get a good deal from our suppliers, I reckon 75p per pasty seems better. Labour is cheap – I think 40p per pasty. One of my mates did a finance course and said that if the company has debt the cost of capital falls and we have debt now so why not try 10% as a rate instead of 12%? Rishi Sunak was talking about reducing the tax rate to 18% and also proposed tax relief on capital purchases at 100% in the first year. Does that make a difference? And also I think the machine will only cost £1.2 million and have a scrap value of £200,000 after 5 years. I think we can sell vegan pasties forever but I read that we forecast for 5 years so that’ll be OK. Can you put that in your spreadsheet and see what happens? Let me know!
Best,
Tier
Appendix III
Additional Financial Information
Extract from: Income Statement for the year ending 31Mar 2022
| £m | |
| Turnover | 1,180 |
| Gross profit | 531 |
| Profit before interest & Tax | 112 |
| Profit after tax | 90 |
Extract from: Statement of Financial Position (SOFP) as at 31 Mar 2022
| Equity & Capital: | £m |
| £0.02 Ordinary shares | 2 |
| Retained earnings | 350 |
| Liabilities: | |
| Non-Current Liabilities (Lease obligations) | 250 |
| Current Liabilities | 150 |
Notes:
Approximately half of the earnings are paid as dividends.
PE ratio is 25
The current tax rate is 20% (paid one year in arrears).
Assessment guidance notes;
The case study requires you to consider material from across the main themes of the module.
Identify and analyse the strategic financial possibilities based upon the information available and the application of relevant theories.
Requirements to be addressed:
A report that contains:
Numerical Components
- An investment appraisal for the new vegan pasty.
(30 marks)
- An estimate of the Weighted Average Cost of Capital (WACC) under the present situation and an estimate of the WACC if the debentures were issued.
(15 marks)
Narrative components
- A memo to the Marketing Manager to explain the net present value method of investment appraisal and relevant cash flows.
(10 marks)
- A section aimed at explaining the cost of capital, the weighted average cost of capital and a discussion of relevant theories regarding the cost of capital and debt financing.
(15 marks)
- A section to explain dividend irrelevancy theory and stock market efficiency.
(20 marks)
There are 10 marks for presentation, structure and referencing.
Total: 100 marks
Guideline length: 2,000-2,500 words. (Excluding appendices)
Note: this is an individual piece of work.
Plagiarism:
It is expected that the students will co-operate in gaining understanding of the case but the preparation of your report must be your individual effort.
Plagiarism is a serious academic offence. You are strongly advised to familiarise yourself with the relevant section in the Rights, Responsibilities and Regulations for Students on Taught Programmes handbook.
Assessment criteria & weighting:
| Very Poor | Poor | Unsatisfactory | Satisfactory | Good | Very Good | Extremely Good | Excellent | Exceptional | |||||||||||
| Criteria | Weighting | 1 – 19% | 20 – 34% | 35 – 39% | 40 – 49% | 50 – 59% | 60 – 69% | 70 – 79% | 80 – 89% | 90 – 100% | |||||||||
| Presentation: Structure, referencing. | 10% | Poor presentation. Weak structure. Inadequate referencing. | Poor presentation. Weak structure. Inadequate referencing. | Perhaps poor presentation or inadequate referencing. | Adequately presented. Adequate referencing. | Generally well presented. Reasonable referencing. | Well presented. Well referenced. Or perhaps one area is weaker than the other. | Extremely well presented and well referenced with a range of sources. | Excellent presentation and correctly referenced with a wide range of sources. | Exceptional presentation. Full Harvard referencing for a wide range of sources. | |||||||||
| Numerical Analysis: NPV of project (30%) | 30% | No calculations | Very limited calculations or incorrect. Fundamental misconceptions. | Missing or incorrect calculations. Limited demonstration of knowledge. | Some adequate calculations. Perhaps some errors, perhaps only one scenario or not used appendix. | Calculations mostly correct. Perhaps minor errors or omissions. Use of at least two scenarios. Use of appendix for calculations. | Calculations mostly correct. Only minor errors or omissions. Use of at least two scenarios in report. Use of appendix for additional scenarios. | Calculations mostly correct. A range of scenarios shown in appendix. At least three scenarios explained and used in report. | Calculations mostly correct. Only very minor errors. Several scenarios shown in appendix. At least three scenarios explained and used in report. | All calculations correct. Several scenarios shown in appendix. At least three scenarios fully explained and used in report. | |||||||||
| Numerical Analysis: WACC | 15% | No calculations | Very limited calculations or incorrect. Fundamental errors. | Missing or incorrect calculations. Limited demonstration of knowledge. | Some adequate calculations. Perhaps some errors. Or correct answer given with limited calculations shown. | Calculations mostly correct and clearly shown. Perhaps minor errors or omissions. | Calculations mostly correct and clearly shown. Perhaps minor errors or omissions. | Calculations mostly correct; minor errors. Workings clearly shown. Also evaluates results. | Calculations mostly correct; only minor errors. Workings clearly shown. Results evaluated. | All calculations correct. Workings clearly shown. Results evaluated. | |||||||||
| Narrative: Memo explanation of investment appraisal and relevant costs | 10% | No or very weak explanation. | Very limited explanation. Fundamental misconceptions. | Inadequate explanation. Perhaps missing key areas. | Adequate explanation. Perhaps missing some areas. | Reasonable explanation. Addresses key points. Or perhaps well written but incorrect format. | Well written explanation. Addresses most points. Correct format. | Clear explanation. Addresses most points. Links to scenario. | Clear explanation. Addresses all points. Links to scenario. | Exceptional explanation in memo format. Addresses all points. Links to scenario and general theory. | |||||||||
| Narrative: Explanation of WACC and discussion of M&M Theory | 15% | No or very weak explanation and discussion. | Very limited explanation. Very limited discussion. Or one area has fundamental errors. | Inadequate explanation. Inadequate discussion. Or one section missing. | Adequate explanation and discussion. Or perhaps one area is strong but the other less well covered. | Reasonable explanation and discussion. Or perhaps well written but missing some areas. | Well written explanation. Good discussion. Use of scenario and general theory. | Clear explanation. Good discussion of theories. Links to scenario and general theories. | Excellent explanation and discussion. Use of scenario and general theories. Use of illustrations and examples. | Exceptional explanation and discussion. Links to scenario, WACC calculation and general theories. Use of illustrations and examples. | |||||||||
| Narrative: Dividend irrelevancy; stock market efficiency | 20% | No or very weak discussion. | Very limited explanations. Or one area has fundamental errors. | Inadequate explanations. Or one section missing. | Adequate explanations. Or perhaps one area is strong but the other less well covered. | Reasonable explanations. Or perhaps well written but missing some areas. | Well written explanations. Use of scenario and general theory. | Clear explanations. Links to scenario and general theories. | Excellent explanations. Use of scenario and general theories. Use of illustrations and examples. | Exceptional explanations. Links to scenario and general theories. Use of examples. Demonstrates wider research. | |||||||||
| 100% | |||||||||||||||||||
