案例分析题Boullain Co is based in the Eurozone and manufactures components for agricultural machinery

案例分析题Section B TWO questions ONLY to be attempted Louieed Co Louieed Co, a listed company, is a major supplier of educational material, selling its products in many countries. It supplies schools and colleges and also produces learning material for business and professional exams. Louieed Co has exclusive contracts to produce material for some examining bodies. Louieed Co has a well-defined management structure with formal processes for making major decisions. Although Louieed Co produces online learning material, most of its profits are still derived from sales of traditional textbooks. Louieed Cos growth in profits over the last few years has been slow and its directors are currently reviewing its long-term strategy. One area in which they feel that Louieed Co must become much more involved is the production of online testing materials for exams and to validate course and textbook learning. Bid for Tidded Co Louieed Co has recently made a bid for Tidded Co, a smaller listed company. Tidded Co also supplies a range of educational material, but has been one of the leaders in the development of online testing and has shown strong profit growth over recent years. All of Tidded Cos initial five founders remain on its board and still hold 45% of its issued share capital between them. From the start, Tidded Cos directors have been used to making quick decisions in their areas of responsibility. Although listing has imposed some formalities, Tidded Co has remained focused on acting quickly to gain competitive advantage, with the five founders continuing to give strong leadership. Louieed Cos initial bid of five shares in Louieed Co for three shares in Tidded Co was rejected by Tidded Cos board. There has been further discussion between the two boards since the initial offer was rejected and Louieed Cos board is now considering a proposal to offer Tidded Cos shareholders two shares in Louieed Co for one share in Tidded Co or a cash alternative of $2275 per Tidded Co share. It is expected that Tidded Cos shareholders will choose one of the following options: (i) To accept the two-shares-for-one-share offer for all the Tidded Co shares; or, (ii) To accept the cash offer for all the Tidded Co shares; or, (iii) 60% of the shareholders will take up the two-shares-for-one-share offer and the remaining 40% will take the cash offer. In case of the third option being accepted, it is thought that three of the companys founders, holding 20% of the share capital in total, will take the cash offer and not join the combined company. The remaining two founders will probably continue to be involved in the business and be members of the combined companys board. Louieed Cos finance director has estimated that the merger will produce annual post-tax synergies of $20 million. He expects Louieed Cos current price-earnings (P/E) ratio to remain unchanged after the acquisition. Extracts from the two companies most recent accounts are shown below: The tax rate applicable to both companies is 20% Assume that Louieed Co can obtain further debt funding at a pre-tax cost of 75% and that the return on cash surpluses is 5% pre-tax. Assume also that any debt funding needed to complete the acquisition will be reduced instantly by the balances of cash and cash equivalents held by Louieed Co and Tidded Co. Required:

案例分析题Toltuck Co is a listed company in the building industry which specialises in the construction of large commercial and residential developments. Toltuck Co had been profitable for many years, but has just incurred major losses on the last two developments which it has completed in its home country of Arumland. These developments were an out-of-town retail centre and a major residential development. Toltuck Cos directors have blamed the poor results primarily on the recent recession in Arumland, although demand for the residential development also appears to have been adversely affected by it being located in an area which has suffered serious flooding over the last two years. As a result of returns from these two major developments being much lower than expected, Toltuck Co has had to finance current work-in-progress by a significantly greater amount of debt finance, giving it higher gearing than most other construction companies operating in Arumland. Toltuck Cos directors have recently been alarmed by a major credit agencys decision to downgrade Toltuck Cos credit rating from AA to BBB. The directors are very concerned about the impact this will have on the valuation of Toltuck Cos bonds and the future cost of debt. The following information can be used to assess the consequences of the change in Toltuck Cos credit rating. Toltuck Co has issued an 8% bond, which has a face or nominal value of $100 and a premium of 2% on redemption in three years time. The coupon on the bond is payable on an annual basis. The government of Arumland has three bonds in issue. They all have a face or nominal value of $100 and are all redeemable at par. Taxation can be ignored on government bonds. They are of the same risk class and the coupon on each is payable on an annual basis. Details of the bonds are as follows: Toltuck Cos shareholder base can be divided broadly into two groups. The majority of shareholders are comfortable with investing in a company where dividends in some years will be high, but there will be low or no dividends in other years because of the cash demands facing the business. However, a minority of shareholders would like Toltuck Co to achieve at least a minimum dividend each year and are concerned about the company undertaking investments which they regard as very speculative. Shareholders from both groups have expressed some concerns to the board about the impact of the fall in credit rating on their investment. Required:

案例分析题Chithurst Co gained a stock exchange listing five years ago. At the time of the listing, members of the family who founded the company owned 75% of the shares, but now they only hold just over 50%. The number of shares in issue has remained unchanged since Chithurst Co was listed. Chithurst Cos directors have continued the policy of paying a constant dividend per share each year which the company had before it was listed. However, investors who are not family members have become increasingly critical of this policy, saying that there is no clear rationale for it. They would prefer to see steady dividend growth, reflecting the increase in profitability of Chithurst Co since its listing. The finance director of Chithurst Co has provided its board with details of Chithurst Cos dividends and investment expenditure, compared with two other similar-sized companies in the same sector, Eartham Co and Iping Co. Each company has a 31 December year end. Chithurst Cos finance director has estimated the costs of equity for all three companies. Chithurst Cos finance director has estimated the costs of equity for all three companies. Required:

案例分析题Pault Co is currently undertaking a major programme of product development. Pault Co has made a significant investment in plant and machinery for this programme. Over the next couple of years, Pault Co has also budgeted for significant development and launch costs for a number of new products, although its finance director believes there is some uncertainty with these budgeted figures, as they will depend upon competitor activity amongst other matters. Pault Co issued floating rate loan notes, with a face value of $400 million, to fund the investment in plant and machinery. The loan notes are redeemable in ten years time. The interest on the loan notes is payable annually and is based on the spot yield curve, plus 50 basis points. Pault Cos finance director has recently completed a review of the companys overall financing strategy. His review has highlighted expectations that interest rates will increase over the next few years, although the predictions of financial experts in the media differ significantly. The finance director is concerned about the exposure Pault Co has to increases in interest rates through the loan notes. He has therefore discussed with Millbridge Bank the possibility of taking out a four-year interest rate swap. The proposed terms are that Pault Co would pay Millbridge Bank interest based on an equivalent fixed annual rate of 4847%. In return, Pault Co would receive from Millbridge Bank a variable amount based on the forward rates calculated from the annual spot yield curve rate at the time of payment minus 20 basis points. Payments and receipts would be made annually, with the first one in a years time. Millbridge Bank would charge an annual fee of 25 basis points if Pault Co enters the swap. A number of concerns were raised at the recent board meeting when the swap arrangement was discussed. Pault Cos chairman wondered what the value of the swap arrangement to Pault Co was, and whether the value would change over time. One of Pault Cos non-executive directors objected to the arrangement, saying that in his opinion the interest rate which Pault Co would pay and the bank charges were too high. Pault Co ought to stick with its floating rate commitment. Investors would be critical if, at the end of four years, Pault Co had paid higher costs under the swap than it would have done had it left the loan unhedged. Required:

案例分析题Section B TWO questions ONLY to be attempted Fernhurst Co is a manufacturer of mobile communications technology. It is about to launch a new communications device, the Milland, which its directors believe is both more technologically advanced and easier to use than devices currently offered by its rivals. Investment in the Milland The Milland will require a major investment in facilities. Fernhurst Cos directors believe that this can take place very quickly and production be started almost immediately. Fernhurst Co expects to sell 132,500 units of the Milland in its first year. Sales volume is expected to increase by 20% in Year 2 and 30% in Year 3, and then be the same in Year 4 as Year 3, as the product reaches the end of its useful life. The initial selling price in Year 1 is expected to be $100 per unit, before increasing with the rate of inflation annually. The variable cost of each unit is expected to be $4368 in year 1, rising by the rate of inflation in subsequent years annually. Fixed costs are expected to be $900,000 in Year 1, rising by the rate of inflation in subsequent years annually. The initial investment in non-current assets is expected to be $16,000,000. Fernhurst Co will also need to make an immediate investment of $1,025,000 in working capital. The working capital will be increased annually at the start of each of Years 2 to 4 by the inflation rate and is fully recoverable at the end of the projects life. Fernhurst Co will also incur one-off marketing expenditure of $1,500,000 post inflation after the launch of the Milland. The marketing expenditure can be assumed to be made at the end of Year 1 and be a tax allowable expense. Fernhurst Co pays company tax on profits at an annual rate of 25%. Tax is payable in the year that the tax liability arises. Tax allowable depreciation is available at 20% on the investment in non-current assets on a reducing balance basis. A balancing adjustment will be available in Year 4. The realisable value of the investment at the end of Year 4 is expected to be zero. The expected annual rate of inflation in the country in which Fernhurst Co is located is 4% in Year 1 and 5% in Years 2 to 4. The applicable cost of capital for this investment appraisal is 11%. Other calculations Fernhurst Cos finance director has indicated that besides needing a net present value calculation based on this data for the next board meeting, he also needs to know the figure for the projects duration, to indicate to the board how returns from the project will be spread over time. Failure of launch of the Milland The finance director would also like some simple analysis based on the possibility that the marketing expenditure is not effective and the launch fails, as he feels that the products price may be too high. He has suggested that there is a 15% chance that the Milland will have negative net cash flows for Year 1 of $1,000,000 or more. He would like to know by what percentage the selling price could be reduced or increased to result in the investment having a zero net present value, assuming demand remained the same. Assessment of new products Fernhurst Cos last board meeting discussed another possible new product, the Racton, and the finance director presented a range of financial data relating to this product, including the results of net present value and payback evaluations. One of the non-executive directors, who is not a qualified accountant, stated that he found it difficult to see the significance of the different items of financial data. His understanding was that Fernhurst Co merely had to ensure that the investment had a positive net present value and shareholders were bound to be satisfied with it, as it would maximise their wealth in the long term. The finance director commented that, in reality, some shareholders looked at the performance of the investments which Fernhurst Co made over the short term, whereas some were more concerned with the longer term. The financial data he presented to board meetings included both short and long-term measures. Required:

案例分析题The Adverane Group is a multinational group of companies with its headquarters in Switzerland. The Adverane Group consists of a number of fully-owned subsidiaries and Elted Co, an associate company based in the USA in which Adverane Group owns 30% of the ordinary equity share capital. Balances owing between the parent, Adverane Co, and its subsidiaries and between subsidiaries are settled by multilateral netting. Transactions between the parent and Elted Co are settled separately. Transactions with Elted Co Adverane Co wishes to hedge transactions with Elted Co which are due to be settled in four months time in US$. Adverane Co will owe Elted Co US$37 million for a major purchase of supplies and Elted Co will owe Adverane Co US$1015 million for non-current assets. Adverane Groups treasury department is considering whether to use money markets or exchange-traded currency futures for hedging. Annual interest rates available to Adverane Co Exchange traded currency futures Contract size CHF125,000, price quotation US$ per CHF1 Three-month expiry: 11213 Six-month expiry: 11204 Netting The balances owed to and owed by members of Adverane Group when netting is to take place are as follows: The group members will make settlement in Swiss francs. Spot mid-rates will be used in calculations. Settlement will be made in the order that the company owing the largest net amount in Swiss francs will first settle with the company owed the smallest net amount in Swiss francs. Transfer price arrangements The Adverane Group board has been reviewing the valuation of inter-group transactions, as it is concerned that the current system is not working well. Currently inter-group transfer prices are mostly based on fixed cost plus a mark-up negotiated by the buying and selling divisions. If they cannot agree a price, either the sale does not take place or the central treasury department determines the margin. The board has the following concerns: Both selling and buying divisions have claimed that prices are unfair and distort the measurement of their performance. Significant treasury department time is being taken up dealing with disputes and then dealing with complaints that the price it has imposed is unfair on one or the other division. Some parts of the group are choosing to buy from external suppliers rather than from suppliers within the group. As a result of the review, the Adverane Group board has decided that transfer prices should in future be based on market prices, where an external market exists. Note: CHF is Swiss Franc, 3 is Euro, US$ is United States dollar and BRL is Brazilian Real. Required:

案例分析题Hathaway Co operates in the aviation industry, manufacturing safety equipment for commercial aircraft

案例分析题Nutourne Co is a company based in the USA

案例分析题Tillinton Co Tillinton Co is a listed company which has traditionally manufactured childrens clothing and toys with long lives. Five years ago, it began manufacturing electronic toys and has since made significant investment in development and production facilities. The first electronic toys which Tillinton Co introduced into the market were received very well, partly as it was seen to be ahead of its competitors in making the most of the technology available. The country where Tillinton Co is listed has seen a significant general increase in share prices over the last three years, with companies in the electronic goods sector showing particularly rapid increases. Statement by Tillinton Cos chief executive Assume it is now September 20X3. Tillinton Cos annual report for the year ended 31 March 20X3 has just been published. Its chief executive commented when announcing the companys results: I am very pleased to report that revenue and gross profits have shown bigger increases than in 20X2, resulting in higher post-tax earnings and our company being able to maintain increases in dividends. The sustained increase in our share price clearly demonstrates how happy investors are with us. Our cutting-edge electronic toys continue to perform well and justify our sustained investment in them. Our results have also benefited from improvements in operational efficiencies for our older ranges and better working capital management. We are considering the development of further ranges of electronic toys for children, or developing other electronic products for adults. If necessary, we may consider scaling down or selling off our operations for some of our older products. Steph Slindon represents an institutional investor who holds shares in Tillinton Co. Steph is doubtful whether its share price will continue to increase, because she thinks that Tillinton Cos situation may not be as good as its chief executive suggests and because she believes that current share price levels generally may not be sustainable. Financial information Extracts from Tillinton Cos financial statements for the last three years and other information about it are given below. Tillinton Co statement of profit or loss in years ending 31 March (all amounts in $m) Tillinton Co statement of financial position in years ending 31 March (all amounts in $m) Other information Market price per $050 share (in $, $250 at Note: None of Tillinton Cos loan finance in 20X3 is repayable within one year. Required:

案例分析题Buryecs Co is an international transport operator based in the Eurozone which has been invited to take over a rail operating franchise in Wirtonia, where the local currency is the dollar ($). Previously this franchise was run by a local operator in Wirtonia but its performance was unsatisfactory and the government in Wirtonia withdrew the franchise. Buryecs Co will pay $5,000 million for the rail franchise immediately. The government has stated that Buryecs Co should make an annual income from the franchise of $600 million in each of the next three years. At the end of the three years the government in Wirtonia has offered to buy the franchise back for $7,500 million if no other operator can be found to take over the franchise. Todays spot exchange rate between the Euro and Wirtonia $ is 01430 = $1. The predicted inflation rates are as follows: Buryecs Cos finance director (FD) has contacted its bankers with a view to arranging a currency swap, since he believes that this will be the best way to manage financial risks associated with the franchise. The swap would be for the initial fee paid for the franchise, with a swap of principal immediately and in three years time, both these swaps being at todays spot rate. Buryecs Cos bank would charge an annual fee of 05% in for arranging the swap. Buryecs Co would take 60% of any benefit of the swap before deducting bank fees, but would then have to pay 60% of the bank fees. Relevant borrowing rates are: In order to provide Buryecs Cos board with an alternative hedging method to consider, the FD has obtained the following information about over-the-counter options in Wirtonia $ from the companys bank. The exercise price quotation is in Wirtonia $ per 1, premium is % of amount hedged, translated at todays spot rate. Assume a discount rate of 14%. Required:

案例分析题Section A This ONE question is compulsory and MUST be attempted Conejo Co is a listed company based in Ardilla and uses the $ as its currency. The company was formed around 20 years ago and was initially involved in cybernetics, robotics and artificial intelligence within the information technology industry. At that time due to the risky ventures Conejo Co undertook, its cash flows and profits were very varied and unstable. Around 10 years ago, it started an information systems consultancy business and a business developing cyber security systems. Both these businesses have been successful and have been growing consistently. This in turn has resulted in a stable growth in revenues, profits and cash flows. The company continues its research and product development in artificial intelligence and robotics, but this business unit has shrunk proportionally to the other two units. Just under eight years ago, Conejo Co was successfully listed on Ardillas national stock exchange, offering 60% of its share capital to external equity holders, whilst the original founding members retained the remaining 40% of the equity capital. The company remains financed largely by equity capital and reserves, with only a small amount of debt capital. Due to this, and its steadily growing sales revenue, profits and cash flows, it has attracted a credit rating of A from the credit rating agencies. At a recent board of directors (BoD) meeting, the companys chief financial officer (CFO) argued that it was time for Conejo Co to change its capital structure by undertaking a financial reconstruction, and be financed by higher levels of debt. As part of her explanation, the CFO said that Conejo Co is now better able to bear the increased risk resulting from higher levels of debt finance; would be better protected from predatory acquisition bids if it was financed by higher levels of debt; and could take advantage of the tax benefits offered by increased debt finance. She also suggested that the expected credit migration from a credit rating of A to a credit rating of BBB, if the financial reconstruction detailed below took place, would not weaken Conejo Co financially. Financial reconstruction The BoD decided to consider the financial reconstruction plan further before making a final decision. The financial reconstruction plan would involve raising $1,320 million ($132 billion) new debt finance consisting of bonds issued at their face value of $100. The bonds would be redeemed in five years time at their face value of $100 each. The funds raised from the issue of the new bonds would be used to implement one of the following two proposals: (i) Proposal 1: Either buy back equity shares at their current share price, which would be cancelled after they have been repurchased; or (ii) Proposal 2: Invest in additional assets in new business ventures. Conejo Co, Financial information Extract from the forecast financial position for next year Conejo Cos forecast after-tax profit for next year is $350 million and its current share price is $11 per share. The non-current liabilities consist solely of 52% coupon bonds with a face value of $100 each, which are redeemable at their face value in three years time. These bonds are currently trading at $10780 per $100. The bonds covenant stipulates that should Conejo Cos borrowing increase, the coupon payable on these bonds will increase by 37 basis points. Conejo Co pays tax at a rate of 15% per year and its after-tax return on the new investment is estimated at 12%. Other financial information Current government bond yield curve The finance director wants to determine the percentage change in the value of Conejo Cos current bonds, if the credit rating changes from A to BBB. Furthermore, she wants to determine the coupon rate at which the new bonds would need to be issued, based on the current yield curve and appropriate yield spreads given above. Conejo Cos chief executive officer (CEO) suggested that if Conejo Co paid back the capital and interest of the new bond in fixed annual repayments of capital and interest through the five-year life of the bond, then the risk associated with the extra debt finance would be largely mitigated. In this case, it was possible that credit migration, by credit rating companies, from A rating to BBB rating may not happen. He suggested that comparing the duration of the new bond based on the interest payable annually and the face value in five years time with the duration of the new bond where the borrowing is paid in fixed annual repayments of interest and capital could be used to demonstrate this risk mitigation. Required:

案例分析题Section B TWO questions ONLY to be attempted Eview Cinemas Co is a long-established chain of cinemas in the country of Taria. Twenty years ago Eview Cinemas Cos board decided to convert some of its cinemas into sports gyms, known as the EV clubs. The number of EV clubs has expanded since then. Eview Cinemas Cos board brought in outside managers to run the EV clubs, but over the years there have been disagreements between the clubs managers and the board. The managers have felt that the board has wrongly prioritised investment in, and refurbishment of, the cinemas at the expense of the EV clubs. Five years ago, Eview Cinemas Co undertook a major refurbishment of its cinemas, financing this work with various types of debt, including loan notes at a high coupon rate of 10%. Shortly after the work was undertaken, Taria entered into a recession which adversely affected profitability. The finance cost burden was high and Eview Cinemas Co was not able to pay a dividend for two years. The recession is now over and Eview Cinemas Co has emerged in a good financial position, as two of its competitors went into insolvency during the recession. Eview Cinemas Cos board wishes to expand its chain of cinemas and open new, multiscreen cinemas in locations which are available because businesses were closed down during the recession. In two years time Taria is due to host a major sports festival. This has encouraged interest in sport and exercise in the country. As a result, some gym chains are looking to expand and have contacted Eview Cinemas Cos board to ask if it would be interested in selling the EV clubs. Most of the directors regard the cinemas as the main business and so are receptive to selling the EV clubs. The finance director has recommended that the sales price of the EV clubs be based on predicted free cash flows as follows: 1. The predicted free cash flow figures in $millions for EV clubs are as follows: 2. After Year 4, free cash flows should be assumed to increase at 52% per annum. 3. The discount rate to be used should be the current weighted average cost of capital, which is 12%. 4. The finance director believes that the result of the free cash flow valuation will represent a fair value of the EV clubs business, but Eview Cinemas Co is looking to obtain a 25% premium on the fair value as the expected sales price. Other information supplied by the finance director is as follows: 1. The predicted after-tax profits of the EV clubs are $454 million in Year 1. This can be assumed to be 40% of total after-tax profits of EV Cinemas Co. 2. The expected proceeds which Eview Cinemas Co receives from selling the EV clubs will be used firstly to pay off the 10% loan notes. Part of the remaining amount from the sales proceeds will then be used to enhance liquidity by being held as part of current assets, so that the current ratio increases to 15. The rest of the remaining amount will be invested in property, plant and equipment. The current net book value of the non-current assets of the EV clubs to be sold can be assumed to be $3,790 million. The profit on the sale of the EV clubs should be taken directly to reserves. 3. Eview Cinemas Cos asset beta for the cinemas can be assumed to be 0952. 4. Eview Cinemas Co currently has 1,000 million $1 shares in issue. These are currently trading at $1575 per share. The finance director expects the share price to rise by 10% once the sale has been completed, as he thinks that the stock market will perceive it to be a good deal. 5. Tradeable debt is currently quoted at $96 per $100 for the 10% loan notes and $93 per $100 for the other loan notes. The value of the other loan notes is not expected to change once the sale has been completed. The overall pre-tax cost of debt is currently 9% and can be assumed to fall to 8% when the 10% loan notes are redeemed. 6. The current tax rate on profits is 20%. 7. Additional investment in current assets is expected to earn a 7% pre-tax return and additional investment in property, plant and equipment is expected to earn a 12% pre-tax return. 8. The current risk-free rate is 4% and the return on the market portfolio is 10%. Eview Cinemas Cos current summarised statement of financial position is shown below. The CEO wants to know the impact the sale of the EV clubs would have immediately on the statement of financial position, the impact on the Year 1 forecast earnings per share and on the weighted average cost of capital. Required:

案例分析题Amberle Co is a listed company with divisions which manufacture cars, motorbikes and cycles. Over the last few years, Amberle Co has used a mixture of equity and debt finance for its investments. However, it is about to make a new investment of $150 million in facilities to produce electric cars, which it proposes to finance solely by debt finance. Project information Amberle Cos finance director has prepared estimates of the post-tax cash flows for the project, using a four-year time horizon, together with the realisable value at the end of four years: Year 1 2 3 4 $m $m $m $m Post-tax operating cash flows 2850 3670 4440 5090 Realisable value 4500 Working capital of $6 million, not included in the estimates above and funded from retained earnings, will also be required immediately for the project, rising by the predicted rate of inflation for each year. Any remaining working capital will be released in full at the end of the project. Predicted rates of inflation are as follows: Year 1 2 3 4 8% 6% 5% 4% The finance director has proposed the following finance package for the new investment: Issue costs of 3% of gross proceeds will be payable on the subsidised loan. No issue costs will be payable on the bank loan. Issue costs are not allowable for tax. Financial information Amberle Co pays tax at an annual rate of 30% on profits in the same year in which profits arise. Amberle Cos asset beta is currently estimated at 114. The current return on the market is estimated at 11%. The current risk-free rate is 4% per year. Amberle Cos chairman has noted that all of the companys debt, including the new debt, will be repayable within three to five years. He is wondering whether Amberle Co needs to develop a longer term financing policy in broad terms and how flexible this policy should be. Required:

案例分析题High K Co is one of the three largest supermarket chains in the country of Townia. Its two principal competitors, Dely Co and Leminster Co, are of similar size to High K Co. In common with its competitors (but see below), High K Co operates three main types of store: Town centre stores these sell food and drink and a range of small household items. High K Cos initial growth was based on its town centre stores, but it has been shutting them over the last decade, although the rate of closure has slowed in the last couple of years. Convenience stores these are smaller and sell food and drink and very few other items. Between 2003 and 2013, High K Co greatly expanded the number of convenience stores it operated. Their performance has varied, however, and since 2013, High K Co has not opened any new stores and closed a number of the worst-performing stores. Out-of-town stores these sell food and drink and a full range of household items, including large electrical goods and furniture. The number of out-of-town stores which High K Co operated increased significantly until 2010, but has only increased slightly since. The majority of town centre and out-of-town stores premises are owned by High K Co, but 85% of convenience stores premises are currently leased. High K Co also sells most of its range of products online, either offering customers home delivery or click and collect (where the customer orders the goods online and picks them up from a collection point in one of the stores). High K Cos year end is 31 December. When its 2016 results were published in April 2017, High K Cos chief executive emphasised that the group was focusing on: Increasing total shareholder return by improvements in operating efficiency and enhancement of responsiveness to customer needs Ensuring competitive position by maintaining flexibility to respond to new strategic challenges Maintaining financial strength by using diverse sources of funding, including making use in future of revolving credit facilities Since April 2017, Dely Co and Leminster Co have both announced that they will be making significant investments to boost online sales. Dely Co intends to fund its investments by closing all its town centre and convenience stores, although it also intends to open more out-of-town stores in popular locations. The government of Townia was re-elected in May 2017. In the 18 months prior to the election, it eased fiscal policy and consumer spending significantly increased. However, it has tightened fiscal policy since the election to avoid the economy overheating. It has also announced an investigation into whether the countrys large retail chains treat their suppliers unfairly. Extracts from High K Cos 2016 financial statements and other information about it are given below: High K Co statement of profit or loss extracts Year ending 31 December (all amounts in $m) High K Co statement of financial position extracts Year ending 31 December (all amounts in $m) Required:

案例分析题Staple Group is one of Barlands biggest media groups. It consists of four divisions, organised as follows: Staple National the national newspaper, the Daily Staple. This divisions revenues and operating profits have decreased for the last two years. Staple Local a portfolio of 18 local and regional newspapers. This divisions operating profits have fallen for the last five years and operating profits and cash flows are forecast to be negative in the next financial year. Other newspaper groups with local titles have also reported significant falls in profitability recently. Staple View a package of digital channels showing sporting events and programmes for a family audience. Staple Groups board has been pleased with this divisions recent performance, but it believes that the division will only be able to sustain a growth rate of 4% in operating profits and cash flows unless it can buy the rights to show more major sporting events. Over the last year, Staple Views biggest competitor in this sector has acquired two smaller digital broadcasters. Staple Investor established from a business which was acquired three years ago, this division offers services for investors including research, publications, training events and conferences. The division gained a number of new clients over the last year and has thus shown good growth in revenues and operating profits. Some of Staple Groups institutional investors have expressed concern about the fall in profitability of the two newspaper divisions. The following summarised data relates to the groups last accounting year. The % changes in pre-tax profits and revenues are changes in the most recent figures compared with the previous year. Staple Groups board regards the Daily Staple as a central element of the groups future. The directors are currently considering a number of investment plans, including the development of digital platforms for the Daily Staple. The finance director has costed the investment programme at $150 million. The board would prefer to fund the investment programme by disposing parts or all of one of the other divisions. The following information is available to help assess the value of each division: One of Staple Groups competitors, Postway Co, has contacted Staple Groups directors asking if they would be interested in selling 15 of the local and regional newspapers for $60 million. Staple Groups finance director believes this offer is low and wishes to use the net assets valuation method to evaluate a minimum price for the Staple Local division. Staple Groups finance director believes that a valuation using free cash flows would provide a fair estimate of the value of the Staple View division. Over the last year, investment in additional non-current assets for the Staple View division has been $125 million and the incremental working capital investment has been $62 million. These investment levels will have to increase at 4% annually in order to support the expected sustainable increases in operating profit and cash flow. Staple Groups finance director believes that the valuation of the Staple Investor division needs to reflect the potential it derives from the expertise and experience of its staff. The finance director has calculated a value of $1185 million for this division, based on the earnings made last year but also allowing for the additional earnings which he believes that the expert staff in the division will be able to generate in future years. Assume a risk-adjusted, all-equity financed, cost of capital of 12% and a tax rate of 30%. Goodwill should be ignored in any calculations. Staple Groups finance and human resources directors are looking at the staffing of the two newspaper divisions. The finance director proposes dismissing most staff who have worked for the group for less than two years, two years employment being when staff would be entitled to enhanced statutory employment protection. The finance directoralso proposes a redundancy programme for longer-serving staff, selecting for redundancy employees who have complained particularly strongly about recent changes in working conditions. There is a commitment in Staple Groups annual report to treat employees fairly, communicate with them regularly and enhance employees performance by structured development. Required:

案例分析题Section A This ONE question is compulsory and MUST be attempted The eight-member board of executive directors (BoD) of Chrysos Co, a large private, unlisted company, is considering the companys long-term business and financial future. The BoD is considering whether or not to undertake a restructuring programme. This will be followed a few years later by undertaking a reverse takeover to obtain a listing on the stock exchange in order to raise new finance. However, a few members of the BoD have raised doubts about the restructuring programme and the reverse takeover, not least the impact upon the companys stakeholders. Some directors are of the opinion that an initial public offering (IPO) would be a better option when obtaining a listing compared to a reverse takeover. Chrysos Co was formed about 15 years ago by a team of five senior equity holders who are part of the BoD and own 40% of the equity share capital in total; 30 other equity holders own a further 40% of the equity share capital but are not part of the BoD; and a consortium of venture capital organisations (VCOs) own the remaining 20% of the equity share capital and have three representatives on the BoD. The VCOs have also lent Chrysos Co substantial debt finance in the form of unsecured bonds due to be redeemed in 10 years time. In addition to the BoD, Chrysos Co also has a non-executive supervisory board consisting of members of Chrysos Cos key stakeholder groups. Details of the supervisory board are given below. Chrysos Co has two business units: a mining and shipping business unit, and a machinery parts manufacturing business unit. The mining and shipping business unit accounts for around 80% of Chrysos Cos business in terms of sales revenue, non-current and current assets, and payables. However, it is estimated that this business unit accounts for around 75% of the companys operating costs. The smaller machinery parts manufacturing business unit accounts for the remaining 20% of sales revenue, non-current and current assets, and payables; and around 25% of the companys operating costs. The following figures have been extracted from Chrysos Cos most recent financial statements: Profit before depreciation, interest and tax for the year to 28 February 2017 Corporate restructuring programme The purpose of the restructuring programme is to simplify the companys gearing structure and to obtain extra funding to expand the mining and shipping business in the future. At present, Chrysos Co is having difficulty obtaining additional funding without having to pay high interest rates. Machinery parts manufacturing business unit The smaller machinery parts manufacturing business unit will be unbundled either by having its assets sold to a local supplier for $3,102 million after its share of payables have been paid; or The smaller machinery parts manufacturing business unit will be unbundled through a management buy-out by four managers. In this case, it is estimated that its after-tax net cash flows will increase by 8% in the first year only and then stay fixed at this level for the foreseeable future. The cost of capital related to the smaller business unit is estimated to be 10%. The management buy-out team will pay Chrysos Co 70% of the estimated market value of the smaller machinery parts manufacturing business unit. Mining and shipping business unit Following the unbundling of the smaller machinery parts manufacturing business unit, Chrysos Co will focus solely on the mining and shipping business unit, prior to undertaking the reverse takeover some years into the future. As part of the restructuring programme, the existing unsecured bonds lent by the VCOs will be cancelled and replaced by an additional 600 million $1 shares for the VCOs. The VCOs will pay $400 million for these shares. The bank overdraft will be converted into a 15-year loan on which Chrysos Co will pay a fixed annual interest of 450%. The other debt under non-current liabilities will be repaid. In addition to this, Chrysos Co will invest $1,200 million into equipment for its mining and shipping business unit and this will result in its profits and cash flows growing by 4% per year in perpetuity. Additional financial information Chrysos Co aims to maintain a long-term capital structure of 20% debt and 80% equity in market value terms. Chrysos Cos finance director has assessed that the 450% annual interest it will pay on its bank loan is a reasonable estimate of its long-term cost of debt, based on the long-term capital structure above. Although Chrysos Co does not know what its cost of capital is for the mining and shipping business unit, its finance director has determined that the current ungeared cost of equity of Sidero Co, a large quoted mining and shipping company, is 1246%. Chrysos Cos finance director wants to use Sidero Cos ungeared cost of equity to calculate its cost of capital for the mining and shipping business unit. The annual corporation tax rate on profits applicable to all companies is 18% and it can be assumed that tax is payable in the year incurred. All the non-current assets are eligible for tax allowable depreciation of 12% annually on the book values. The annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation. Details of the supervisory board The non-executive supervisory board provides an extra layer of governance over the BoD. It consists of representatives from the companys internal stakeholder groups including the finance providers, employees and the companys management. It ensures that the actions taken by the BoD are for the benefit of all the stakeholder groups and to the company as a whole. Any issues raised in board meetings are resolved through negotiation until an agreed position is reached. Required:

案例分析题Section B TWO questions ONLY to be attempted Tippletine Co is based in Valliland. It is listed on Vallilands stock exchange but only has a small number of shareholders. Its directors collectively own 45% of the equity share capital. Tippletine Cos growth has been based on the manufacture of household electrical goods. However, the directors have taken a strategic decision to diversify operations and to make a major investment in facilities for the manufacture of office equipment. Details of investment The new investment is being appraised over a four-year time horizon. Revenues from the new investment are uncertain and Tippletine Cos finance director has prepared what she regards as cautious forecasts. She predicts that it will generate $2 million operating cash flows before marketing costs in Year 1 and $145 million operating cash flows before marketing costs in Year 2, with operating cash flows rising by the expected levels of inflation in Years 3 and 4. Marketing costs are predicted to be $9 million in Year 1 and $2 million in each of Years 2 to 4. The new investment will require immediate expenditure on facilities of $306 million. Tax allowable depreciation will be available on the new investment at an annual rate of 25% reducing balance basis. It can be assumed that there will either be a balancing allowance or charge in the final year of the appraisal. The finance director believes the facilities will remain viable after four years, and therefore a realisable value of $135 million can be assumed at the end of the appraisal period. The new facilities will also require an immediate initial investment in working capital of $3 million. Working capital requirements will increase by the rate of inflation for the next three years and any working capital at the start of Year 4 will be assumed to be released at the end of the appraisal period. Tippletine Co pays tax at an annual rate of 30%. Tax is payable with a years time delay. Any tax losses on the investment can be assumed to be carried forward and written off against future profits from the investment. Predicted inflation rates are as follows: Financing the investment Tippletine Co has been considering two choices for financing all of the $306 million needed for the initial investment in the facilities: A subsidised loan from a government loan scheme, with the loan repayable at the end of the four years. Issue costs of 4% of the gross finance would be payable. Interest would be payable at a rate of 30 basis points below the risk free rate of 25%. In order to obtain the benefits of the loan scheme, Tippletine Co would have to fulfil various conditions, including locating the facilities in a remote part of Valliland where unemployment is high. Convertible loan notes, with the subscribers for the notes including some of Tippletine Cos directors. The loan notes would have issue costs of 4% of the gross finance. If not converted, the loan notes would be redeemed in six years time. Interest would be payable at 5%, which is Tippletine Cos normal cost of borrowing. Conversion would take place at an effective price of $275 per share. However, the loan note holders could enforce redemption at any time from the start of Year 3 if Tippletine Cos share price fell below $150 per share. Tippletine Cos current share price is $220 per share. Issue costs for the subsidised loan and convertible loan notes would be paid out of available cash reserves. Issue costs are not allowable as a tax-deductible expense. In initial discussions, the majority of the board favoured using the subsidised loan. The appraisal of the investment should be prepared on the basis that this method of finance will be used. However, the chairman argued strongly in favour of the convertible loan notes, as, in his view, operating costs will be lower if Tippletine Co does not have to fulfil the conditions laid down by the government of Valliland. Tippletine Cos finance director is sceptical, however, about whether the other shareholders would approve the issue of convertible loan notes on the terms suggested. The directors will decide which method of finance to use at the next board meeting. Other information Humabuz Co is a large manufacturer of office equipment in Valliland. Humabuz Cos geared cost of equity is estimated to be 105% and its pre-tax cost of debt to be 54%. These estimates are based on a capital structure comprising $225 million 6% irredeemable bonds, trading at $107 per $100, and 125 million $1 equity shares, trading at $320 per share. Humabuz Co also pays tax at an annual rate of 30% on its taxable profits. Required:

案例分析题Section A This ONE question is compulsory and MUST be attempted Lirio Co is an engineering company which is involved in projects around the world. It has been growing steadily for several years and has maintained a stable dividend growth policy for a number of years now. The board of directors (BoD) is considering bidding for a large project which requires a substantial investment of $40 million. It can be assumed that the date today is 1 March 2016. The BoD is proposing that Lirio Co should not raise the finance for the project through additional debt or equity. Instead, it proposes that the required finance is obtained from a combination of funds received from the sale of its equity investment in a European company and from cash flows generated from its normal business activity in the coming two years. As a result, Lirio Cos current capital structure of 80 million $1 equity shares and $70 million 5% bonds is not expected to change in the foreseeable future. The BoD has asked the companys treasury department to prepare a discussion paper on the implications of this proposal. The following information on Lirio Co has been provided to assist in the preparation of the discussion paper. Expected income and cash flow commitments prior to undertaking the large project for the year to the end of February 2017 Lirio Cos sales revenue is forecast to grow by 8% next year from its current level of $300 million, and the operating profit margin on this is expected to be 15%. It is expected that Lirio Co will have the following capital investment requirements for the coming year, before the impact of the large project is considered: 1. A $010 investment in working capital for every $1 increase in sales revenue; 2. An investment equivalent to the amount of depreciation to keep its non-current asset base at the present productive capacity. The current depreciation charge already included in the operating profit margin is 25% of the non-current assets of $50 million; 3. A $020 investment in additional non-current assets for every $1 increase in sales revenue; 4. $8 million additional investment in other small projects. In addition to the above sales revenue and profits, Lirio Co has one overseas subsidiary Pontac Co, from which it receives dividends of 80% on profits. Pontac Co produces a specialist tool which it sells locally for $60 each. It is expected that it will produce and sell 400,000 units of this specialist tool next year. Each tool will incur variable costs of $36 per unit and total annual fixed costs of $4 million to produce and sell. Lirio Co pays corporation tax at 25% and Pontac Co pays corporation tax at 20%. In addition to this, a withholding tax of 8% is deducted from any dividends remitted from Pontac Co. A bi-lateral tax treaty exists between the countries where Lirio Co is based and where Pontac Co is based. Therefore corporation tax is payable on profits made by subsidiary companies, but full credit is given for corporation tax already paid. It can be assumed that receipts from Pontac Co are in $ equivalent amounts and exchange rate fluctuations on these can be ignored. Sale of equity investment in the European country It is expected that Lirio Co will receive Euro () 20 million in three months time from the sale of its investment. The has continued to remain weak, while the $ has continued to remain strong through 2015 and the start of 2016. The financial press has also reported that there may be a permanent shift in the /$ exchange rate, with firms facing economic exposure. Lirio Co has decided to hedge the receipt using one of currency forward contracts, currency futures contracts or currency options contracts. The following exchange contracts and rates are available to Lirio Co. Required:

案例分析题Section A This ONE question is compulsory and MUST be attempted Morada Co is involved in offering bespoke travel services and maintenance services. In addition to owning a few hotels, it has built strong relationships with companies in the hospitality industry all over the world. It has a good reputation of offering unique, high quality holiday packages at reasonable costs for its clients. The strong relationships have also enabled it to offer repair and maintenance services to a number of hotel chains and cruise ship companies. Following a long discussion at a meeting of the board of directors (BoD) about the future strategic direction which Morada Co should follow, three directors continued to discuss one particular issue over dinner. In the meeting, the BoD had expressed concern that Morada Co was exposed to excessive risk and therefore its cost of capital was too high. The BoD feared that several good projects had been rejected over the previous two years, because they did not meet Morada Cos high cost of capital threshold. Each director put forward a proposal, which they then discussed in turn. At the conclusion of the dinner, the directors decided to ask for a written report on the proposals put forward by the first director and the second director, before taking all three proposals to the BoD for further discussion. First directors proposal The first director is of the opinion that Morada Co should reduce its debt in order to mitigate its risk and therefore reduce its cost of capital. He proposes that the company should sell its repair and maintenance services business unit and focus just on offering bespoke travel services and hotel accommodation. In the sale, the book value of non-current assets will reduce by 30% and the book value of current liabilities will reduce by 10%. It is thought that the non-current assets can be sold for an after-tax profit of 15%. The first director suggests that the funds arising from the sale of the repair and maintenance services business unit and cash resources should be used to pay off 80% of the long-term debt. It is estimated that as a result of this, Morada Cos credit rating will improve from Baa2 to A2. Second directors proposal The second director is of the opinion that risk diversification is the best way to reduce Morada Cos risk and therefore reduce its cost of capital. He proposes that the company raise additional funds using debt finance and then create a new strategic business unit. This business unit will focus on construction of new commercial properties. The second director suggests that $70 million should be borrowed and used to invest in purchasing non-current assets for the construction business unit. The new debt will be issued in the form of four-year redeemable bonds paying an annual coupon of 62%. It is estimated that if this amount of debt is raised, then Morada Cos credit rating will worsen to Ca3 from Baa2. Current liabilities are estimated to increase to $28 million. Third directors proposal The third director is of the opinion that Morada Co does not need to undertake the proposals suggested by the first director and the second director just to reduce the companys risk profile. She feels that the above proposals require a fundamental change in corporate strategy and should be considered in terms of more than just tools to manage risk. Instead, she proposes that a risk management system should be set up to appraise Morada Cos current risk profile, considering each type of business risk and financial risk within the company, and taking appropriate action to manage the risk where it is deemed necessary. Morada Co, extracts from the forecast financial position for the coming year Other financial information Morada Cos forecast after-tax earnings for the coming year are expected to be $28 million. It is estimated that the company will make a 9% return after-tax on any new investment in non-current assets, and will suffer a 9% decrease in after-tax earnings on any reduction in investment in non-current assets. Morada Cos current share price is $288 per share. According to the companys finance division, it is very difficult to predict how the share price will react to either the proposal made by the first director or the proposal made by the second director. Therefore it has been assumed that the share price will not change following either proposal. The finance division has further assumed that the proportion of the book value of non-current assets invested in each business unit gives a fair representation of the size of each business unit within Morada Co. Morada Cos equity beta is estimated at 12, while the asset beta of the repairs and maintenance services business unit is estimated to be 065. The relevant equity beta for the new, larger company including the construction unit relevant to the second directors proposals has been estimated as 121. The bonds are redeemable in four years time at face value. For the purposes of estimating the cost of capital, it can be assumed that debt beta is zero. However, the four-year credit spread over the risk free rate of return is 60 basis points for A2 rated bonds, 90 basis points for Baa2 rated bonds and 240 basis points for Ca3 rated bonds. A tax rate of 20% is applicable to all companies. The current risk free rate of return is estimated to be 38% and the market risk premium is estimated to be 7%. Required: