This test includes six tasks and in total 70 points.
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each calculation.
Given namne
Surnamne
Points Grade
Overall information about Barling Manufacturing Plc
Barling Manufacturing Plc, BM Plc, is a renowned manufacturer of equipment for the farming industry.
Mrs Brown is the CEO of the company since two years back and she just hired John Ballwin as her CFO.
The board is headed by Angus Johnson and he has a reputation to not let any opportunity to slip in-between
his fingers however he is know to carefully scrutinise any initiative that land on his desk.
Mr Johnson has delivered the boards decision for financial baseline 2023 to Mrs Brown and Mr Ballwin.
The base required rate of return, BRRR, is set at 8%. Shareholders of the company requires a return of 17%.
The base required rate can be added with a risk premium, RP, depending on the nature of investment.
The set RP's are as follows: RP-1 3%, RP-2 6% and RP-3 8%. The interest to borrow from banks is expected to be 7%.
Tax rate is set at 20%.
Any investment has to deliver a return on investment of 10%.
Task I
18 points
BM Plc have seen some fantastic years and is in need of investing some of its liquidity.
Mrs Brown have found two companies that she thinks fit within the frame of the
company's requirements for investments. The first is Tudor and this company is operating
as distributer of fertilizers. This business is relatively stable and is expected to deliver
a return on investment of -4% in bad times and 20% in good times. The probability for good
times for Tudor is 55%.
The second company is Blake and this is a different operation but the opportunities for
high yield is really god. In good times it is expected to deliver a return of 25% however in
bad times it will deliver -8%. The probability for a bad year for Blake is 50%.
Mr Johnsson has looked into the matter and decided for investing in either of the companies
or a combination of 60% in Blake and 40% in Tudor.
John Ballwin got this task in his lap and is completely lost. Please help John with a proper
analyse of this opportunity and give him a qualitative statement to be delivered to Mrs Brown
and Mr Johnson. The statement should cover all investments and discuss pros and cons.
Task I
18 points
BM Plc have seen some fantastic years and is in need of investing some of its liquidity.
Mrs Brown have found two companies that she thinks fit within the frame of the
company's requirements for investments. The first is Tudor and this company is operating
as distributer of fertilizers. This business is relatively stable and is expected to deliver
a return on investment of -4% in bad times and 20% in good times. The probability for good
times for Tudor is 55%.
The second company is Blake and this is a different operation but the opportunities for
high yield is really god. In good times it is expected to deliver a return of 25% however in
bad times it will deliver -8%. The probability for a bad year for Blake is 50%.
Mr Johnsson has looked into the matter and decided for investing in either of the companies
or a combination of 60% in Blake and 40% in Tudor.
John Ballwin got this task in his lap and is completely lost. Please help John with a proper
analyse of this opportunity and give him a qualitative statement to be delivered to Mrs Brown
and Mr Johnson. The statement should cover all investments and discuss pros and cons.
Tudor
Return
-4%
20%
Bad
Good
Blake
Return
Probability
-8%
50%
25%
50%
Probability
45%
55%
Expected Return:
Tudor
40%
Return x
-4%
20%
Expected return:
Bad
Good
Probability
45%
55%
Rj
-2%
11%
9.2%
Exp return
9.2%
9.2%
Deviation
-13.2%
10.8%
Blake
60%
Return x
-8%
25%
Probability
50%
50%
Rj
-4%
13%
8.5%
Standard deviation Tudor Ltd
Return
-4.0%
20.0%
Probability
45.0%
55.0%
Variance
Standard deviation
Deviation
squared * P
0.8%
0.6%
1.4%
11.9%
Standard deviation Blake Ltd
Return
-8.0%
25.0%
Probability
50.0%
50.0%
Exp return
8.5%
8.5%
Deviation
-16.5%
16.5%
Variance
Standare deviation
Mixed Portfolio
Tudor and Blake do badly
Tudor bad Blake good
Tudor good Blake bad
Tudor and Blake do well
Deviation
squared * P
1.4%
1.4%
2.7%
16.5%
Joint returns
60%*-4%+40%*-8% =
60%*-4%+40%*25% =
60%*20%+40%*-8%
60%*20%+40%*25%
Joint probability
-6.40%
13.40%
3.20%
23.00%
45%*50%
45%*50%
55%*50%
55%*50%
22.5%
22.5%
27.5%
27.5%
100.0%
Return * Probability
-1.44%
3.02%
0.88%
6.33%
8.78%
Standard deviation mixed portfolio
Return
Tudor and Blake do badly
Tudor bad Blake good
Tudor good Blake bad
Tudor and Blake do well
-6.4%
13.4%
3.2%
23.0%
Conclusion
This is not a viable option as ROI has to be more than 10%
Deviation
squared * P
Probability
Exp return
Deviation
22.50%
8.78%
-0.15
0.52%
22.50%
8.78%
0.05
0.05%
27.50%
8.78%
-0.06
0.09%
27.50%
8.78%
0.14
0.56%
Variance
1.21%
Standard deviation
10.99%
Task II
12 points
It is not everyday that John is asked to make advanced investment analysis. Today is just
an ordinary day. Eva Svensson has asked for his opinion on an investment. It is a spray painting
station. Looks like a simple thing but John and Eva knows that the technology for painting
is developing not least due to ever changing requirements due to health and safety issues
and environmental concerns. Due to this the rate to be used is BRRR + RP-3.
There are two options; Trekantens Måleri from Sweden and Jauhemaalus from Finland.
The Swedish offer is an upfront investment of £150 000 with yearly maintenance fees of
£37 000 payable in the end of each of the four years the equipment is expected to last.
The Finnish option requires an investment of £100 000 with yearly maintenance fees of
£40 000 payable in the end of each year. This investment is expected to last for three years.
Make a full analyse of these options and give your opinion on which option should be chosen.
Task II
12 points
It is not everyday that John is asked to make advanced investment analysis. Today is just
an ordinary day. Eva Svensson has asked for his opinion on an investment. It is a spray painting
station. Looks like a simple thing but John and Eva knows that the technology for painting
is developing not least due to ever changing requirements due to health and safety issues
and environmental concerns. Due to this the rate to be used is BRRR + RP-3.
There are two options; Trekantens Måleri from Sweden and Jauhemaalus from Finland.
The Swedish offer is an upfront investment of £150 000 with yearly maintenance fees of
£37 000 payable in the end of each of the four years the equipment is expected to last.
The Finnish option requires an investment of £100 000 with yearly maintenance fees of
£40 000 payable in the end of each year. This investment is expected to last for three years.
Make a full analyse of these options and give your opinion on which option should be chosen.
16%
Sweden
Finland
-£
-£
Sweden
0
150.00 -£
100.00 -£
1
37.00 -£
40.00 -£
2
37.00 -£
40.00 -£
3
37.00 -£
40.00
4
37.00
5
-150 -37/(1+14%)^1 -37/(1+14%)^2 -37/(1+14%)^3 -37/(1+14%)^4
-150 -31.89655172 -27.49702735 -23.70433392 -20.43477062
Annuity
Sweden
Finland
Factor
(1-(1+16%)^-4)/16% =
(1-(1+16%)^-3/16% =
Sweden
-£
0
150.00 -£
-£
1
37.00 -£
90.61 -£
2
37.00 -£
90.61 -£
3
37.00 -£
90.61 -£
4
37.00 £
90.61 -£
Finland
Annuity
-£
0
100.00 -£
-£
1
40.00 -£
84.53 -£
2
40.00 -£
84.53 -£
3
40.00 £
84.53 -£
4
£
84.53
The Finnish option is preferable
2.798
2.246
-£
-£
253.53
189.84
-£
-£
253.53
253.53
Yearly cost
-£
90.61
-£
84.53
5 NPV
-£
90.61 -£
253.53
296.67
5
-
-£
-£
189.84
236.52
Task III
6 points
Mrs Brown came up to John bright and early this day. She was in a hurry as today she needs to attend
the monthly board meeting. She is required to deliver the WACC to the board.
Short term credit is interest free.
In summary the balance sheet for BM Plc looks as follows:
Calculate WACC
Assets
Equity and Liabilities
Land
Buildings
Machinery
Inventory
Accounts Receivables
Liquid assets
£
£
£
£
£
£
1,000,000.00 Equity
12,000,000.00 Long term borrowing
25,000,000.00 Short term credit
13,000,000.00
22,000,000.00
15,000,000.00
Total
£ 88,000,000.00 Total
£ 55,000,000.00
£ 25,000,000.00
£ 8,000,000.00
£ 88,000,000.00
Task III
6 points
Mrs Brown came up to John bright and early this day. She was in a hurry as today she needs to attend
the monthly board meeting. She is required to deliver the WACC to the board.
Short term credit is interest free.
In summary the balance sheet for BM Plc looks as follows:
Calculate WACC
Assets
Equity and Liabilities
Land
Buildings
Machinery
Inventory
Accounts Receivables
Liquid assets
£
£
£
£
£
£
1,000,000.00 Equity
12,000,000.00 Long term borrowing
25,000,000.00 Short term credit
13,000,000.00
22,000,000.00
15,000,000.00
Total
£ 88,000,000.00 Total
RRR Shareholders
Interest
Tax
17%
7%
20%
Eq / Total
Credit / Total
63%
38%
Real interest
WACC:
£ 55,000,000.00
£ 25,000,000.00
£ 8,000,000.00
£ 88,000,000.00
5% (7%*25 000 000)/(25 000 000 + 8 000 000)
5%*38%*(1-20%)+17%*63%=
12.23%
Task IV
14 points
a)
You can own shares in different types of companies. Menton these.
(2 points)
b)
Shares comes in different forms. Mention these.
(2 points)
c)
An analys is looking for extraordinary resources in any one firm. Such resource
is named….? Give an explanation of what these extraordinary resourses mean. (3 points)
d)
During the process to deliver an investment there might be expenditures that might turn out to be
non productive and should not be included in the investment. What is this type of cost called?
( 1 point)
e)
A discount rate that makes the present value of future stream of cash flows equal to the
initial investment(s). What is this and how can it be calculated? (6 points)
a)
You can own shares in different types of companies. Menton these.
(2 points)
Ltd and Plc
b)
Shares comes in different forms. Mention these.
(2 points)
Ordinary shares
Preference shares
None voting or reduced voting shares
Deferred ordinary shares
Preferred ordinary shares
Golden shares
c)
An analys is looking for extraordinary resources in any one firm. Such resource
is named….? Give an explanation of what these extraordinary resourses mean. (3 points)
Core capabilities page 635
d)
During the process to deliver an investment there might be expenditures that might turn out to be
non productive and should not be included in the investment. What is this type of cost called?
( 1 point)
Sunk cost
e)
A discount rate that makes the present value of future stream of cash flows equal to the
initial investment(s). What is this and how can it be calculated? (6 points)
Internal Rate of Return
Modified internal rate of return
2
4
Task V
10 points
When assessing a multifacited company there is a method or model that
considers the industry, the age of the offering and how well the company
is set. Describe this model in detail.
Task V
10 points
When assessing a multifacited company there is a method or model that
considers the industry, the age of the offering and how well the company
is set. Describe this model in detail.
Page 643
Task VI (10 points)
A knock on the door and John asked who liked to get his attention. Arne the head of paint department
liked to get Johns opinion on a proposed investment. The idea is to change the paint equipent used
for the hood to Tractor V.
Arne explained that there is a possibility to reduce both Direct Material and Direct Labour when producing
hood to Tractor V . He presented John with an estimated effect if they would move from current paint to
to powder paint. The reason for reduced Direct Material and Direct Labour is that the proposed new paint would
create lower waste during the pocess of painting. The needed investment to make this happen is £50 000 to be depreciated
during 5 years at an estimated yearly volume of 500 hoods. At the end of the economical life of the investment Arne do not
expect it to hold any value on the market.
Currently the General overhead is £10 000 per year and that will remain. However the new machine will require
additional attention meaning that an engineer needs to ensure operational efficiency at a yearly rate of £12 500
explaining the increase in Overhead from £20 to £45. Below please find the current and proposed cost.
The current machine is estimated to be sold for £5 000 if it is decided to go ahead with the new machine.
The required rate for this type of investment is BRRR plus RP-1.
Is this a viable option. Please make an analyse of this and give your opinion.
Hood Old
Direct Material
Direct Labour
Overhead
Depreciation
Cost
£
£
£
£
£
450.000
20.000
20.000
20.000
510.000
Hood New
£
£
£
£
£
410.000
8.000
45.000
20.000
483.000
Task VI (10 points)
A knock on the door and John asked who liked to get his attention. Arne the head of paint department
liked to get Johns opinion on a proposed investment. The idea is to change the paint equipent used
for the hood to Tractor V.
Arne explained that there is a possibility to reduce both Direct Material and Direct Labour when producing
hood to Tractor V . He presented John with an estimated effect if they would move from current paint to
to powder paint. The reason for reduced Direct Material and Direct Labour is that the proposed new paint would
create lower waste during the pocess of painting. The needed investment to make this happen is £50 000 to be depreciated
during 5 years at an estimated yearly volume of 500 hoods. At the end of the economical life of the investment Arne do not
expect it to hold any value on the market.
Currently the General overhead is £10 000 per year and that will remain. However the new machine will require
additional attention meaning that an engineer needs to ensure operational efficiency at a yearly rate of £12 500
explaining the increase in Overhead from £20 to £45.
The current machine is estimated to be sold for £5 000 if it is decided to go ahead with the new machine.
The required rate for this type of investment is BRRR plus RP-2.
Is this a viable option. Please make an analyse of this and give your opinion.
Units
Hood Old
Direct Material
Direct Labour
Overhead
Depreciation
Cost
RRR
£
£
£
£
£
500
Hood New
450.000
20.000
20.000
20.000
510.000
£
£
£
£
£
Total
£ 10,000.00
£ 12,500.00
£ 22,500.00
General OH
Specific
Total
410.000
8.000
45.000
20.000
483.000
11%
Changes
Direct Material
Direct Labour
Overhead
Hood Old
£
450.000
£
20.000
£
20.000
Change per year:
0
50,000.00
5,000.00
1
Hood New
£
410.000
£
8.000
£
45.000
Change
£
40.000
£
12.000
-£
25.000
£
27.000
£ 13,500.00 27*500
2
3
4
5
Investment
Sale
Change
-£
£
Cash Flow
-£
45,000.00 £ 13,500.00 £ 13,500.00 £ 13,500.00 £ 13,500.00 £ 13,500.00
Disc
-£
45,000.00 £ 12,162.16 £ 10,956.90 £
£ 13,500.00 £ 13,500.00 £ 13,500.00 £ 13,500.00 £ 13,500.00
It is a viable option as NPV is positive
9,871.08 £
8,892.87 £
8,011.59 £
4,894.61
Per #
£ 20.00
£ 25.00
£ 45.00