This assignment requires you to answer all questions
Criteria for Assessment
This assignment is designed to assess learning outcomes:
1. Introduction to capital markets and investment process
2. Capital appraisal techniques
3. Diversification and optimal portfolio allocation of risky assets
4. Capital asset pricing model and the security market line
Word Count
The word count is 1,500 words
Setting:
It is October 1st 2021. ManeSalah Plc has established itself as one of the leading supermarket chains in the UK. The firm’s debt is currently rated at A+, however recent developments in the UK market have hit the company and there are rumours in the stock market about a possible downgrade in the credit rating to just below Investment Grade status. The company however remains optimistic and is looking to expand further by undertaking the Firmino Project, details of which are given below.
ManeSalah Capital Structure:
ManeSalah Plc has 5000m shares in issue which currently trade at £1.60 each. Its only debt is in the form of 10m bonds that have exactly 5 years left to expiry, these have a coupon rate of 12% and face value per bond of £100.
The Firmino Project:
The proposed project is to launch specialist “Firmino” Supermarkets in small towns around the UK, the outlets will all be part of the ManeSalah company but trade under the Firmino name. The aim is to build 100 Firmino stores across the UK, although this number is very dependent on the availability of suitable premises.
ManeSalah Plc has employed consultants Dalglish Inc to undertake a viability study of the proposed project. The agreed fee for the study was £180m, which is being paid in three equal instalments; one has already been paid, the second is being paid today, and the final instalment will be paid in two years time.
Based on the report provided by Dalglish Inc, the cash flows – per new Firmino outlet in Year 3 of the project – are expected to be:
Based on the report provided by Dalglish Inc, the cash flows – per new Firmino outlet in Year 3 of
the project – are expected to be:
| Year 3 cash flow per outlet | |
| Sale revenues | £80m |
| Cost of Goods sold | £50m |
| Saff Costs | £15m |
| Avertising Costs | £4m |
| Tax | £8m |
The viability study also concluded the following:
1. The project will require the following cash injections (these exclude fees due to Dalglish Inc.)
o An immediate investment of £700m
o A further investment of £550m at the end of Year 1
o A further £400m at the end of Year 2
2. Other than the cash injections above there will be no other cash flows in years 1 or 2
3. From Year 3 until Year 6:
o Sales revenues will grow at 8% per year
o Cost of goods sold will increase by 7% per year
o Staff costs will increase by 10% per year
o Advertising costs will increase by £1m per year (per outlet)
o Tax costs are expected to remain at 10% of total sales revenues
4. Cash flows in Year 7 and every year thereafter will be identical to those in Year 6.
Required:
Using the information provided in the case above, write a report for the board of directors of ManeSalah Plc providing an analysis of the proposed project and recommendations for the company. For this section you may assume the firm does open 100 stores.
Specifically, the final report should include:
1. An estimate of the current Weighted Average Cost of Capital (WACC) of the company
2. A detailed cash flow forecast for the whole project (100 stores)
3. An appraisal of the project using any techniques you think are appropriate
4. A final recommendation of whether the project should be accepted
The board has also stressed that they want the report to examine the following possibility:
• That the chances of opening 100 stores is only 75%, whilst there is a 20% chance that the firm will only open 80 stores and 5% chance they will only open 50 stores
For this scenario, the report should also include:
5. An estimate of the expected NPV, the standard deviation of the NPV, a recommend
Further Information:
In addition to the lecture slides, textbooks, journals and the information above the following sources of information may be useful:
i) DataStream, Bloomberg, Reuters, FAME
ii) http://www2.standardandpoors.com/
iii) The FT.com
iv) Company Annual reports (available from a company’s website)
Please Note: • ManeSalah Plc is NOT a real company (it has no website!). However, in writing the report you should assume that it would be competing
