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

问答题1.YilandweYilandwe,whosecurrencyistheYilandweRand(YR),hasfacedextremelydifficulteconomicchallengesinthepast25yearsbecauseofsomequestionableeconomicpoliciesandpoliticaldecisionsmadebyitspreviousgovernments.AlthoughYilandwe’spopulationisgenerallypoor,itspeopleareneverthelesswell-educatedandambitious.Justoverthreeyearsago,anewgovernmenttookofficeandsincethenithasimposedanumberofstrictmonetaryandfiscalcontrols,includinganannualcorporationtaxrateof40%,inanattempttobringYilandweoutofitsdifficulties.Asaresult,theannualrateofinflationhasfallenrapidlyfromahighof65%toitscurrentlevelof33%.ThesestrictmonetaryandfiscalcontrolshavemadeYilandwe’sgovernmentpopularinthelargercitiesandtowns,butlesspopularintheruralareaswhichseemtohavesuffereddisproportionatelyfromthestrictmonetaryandfiscalcontrols.ItisexpectedthatYilandwe’sannualinflationratewillcontinuetofallinthecomingfewyearsasfollows:Yilandwe’sgovernmenthasdecidedtocontinuetheprogressmadesofar,byencouragingforeigndirectinvestmentintothecountry.Recently,governmentrepresentativesheldtradeshowsinternationallyandofferedbusinessesanumberofconcessions,including:(i)zerocorporationtaxpayableinthefirsttwoyearsofoperation;and(ii)anopportunitytocarryforwardtaxlossesandwritethemoffagainstfutureprofitsmadeafterthefirsttwoyears.ThegovernmentrepresentativesalsopromisedinternationalcompaniesinvestinginYilandweprimelocationsintownsandcitieswithgoodtransportlinks.ImoniCoImoniCo,alargelistedcompanybasedintheUSAwiththeUSdollar($)asitscurrency,manufactureshightechdiagnosticcomponentsformachinery,whichitexportsworldwide.Afterattendingoneofthetradeshows,ImoniCoisconsideringsettingupanassemblyplantinYilandwewherepartswouldbesentandassembledintoaspecifictypeofcomponent,whichiscurrentlybeingassembledintheUSA.Onceassembled,thecomponentwillbeexporteddirectlytocompaniesbasedintheEuropeanUnion(EU).TheseexportswillbeinvoicedinEuro(€).AssemblyplantinYilandwe:financialandotherdataprojectionsItisinitiallyassumedthattheprojectwilllastforfouryears.Thefour-yearprojectwillrequireinvestmentsofYR21,000millionforlandandbuildings,YR18,000millionformachineryandYR9,600millionforworkingcapitaltobemadeimmediately.TheworkingcapitalwillneedtobeincreasedannuallyatthestartofeachofthenextthreeyearsbyYilandwe’sinflationrateanditisassumedthatthiswillbereleasedattheendoftheproject’slife.Itcanbeassumedthattheassemblyplantcanbebuiltveryquicklyandproductionstartedalmostimmediately.Thisisbecausethebasicfacilitiesandinfrastructurearealreadyinplaceastheplantwillbebuiltonthepremisesandgroundsofaschool.Theschoolisideallylocated,nearthemainhighwayandrailwaylines.Asaresult,theschoolwillcloseandthechildrencurrentlystudyingtherewillberelocatedtootherschoolsinthecity.Thegovernmenthaskindlyagreedtoprovidefreebusestotakethechildrentotheseschoolsforaperiodofsixmonthstogiveparentstimetoarrangeappropriatetransportinthefuturefortheirchildren.Thecurrentsellingpriceofeachcomponentis€700andthispriceislikelytoincreasebytheaverageEUrateofinflationfromyear1onwards.Thenumberofcomponentsexpectedtobesoldeveryyearareasfollows:ThepartsneededtoassembleintothecomponentsinYilandwewillbesentfromtheUSAbyImoniCoatacostof$200percomponentunit,fromwhichImoniCowouldcurrentlyearnapre-taxcontributionof$40foreachcomponentunit.However,ImoniCofeelsthatitcannegotiatewithYilandwe’sgovernmentandincreasethetransferpriceto$280percomponentunit.ThevariablecostsrelatedtoassemblingthecomponentsinYilandwearecurrentlyYR15,960percomponentunit.ThecurrentannualfixedcostsoftheassemblyplantareYR4,600million.Allthesecosts,whereverincurred,areexpectedtoincreasebythatcountry’sannualinflationeveryyearfromyear1onwards.ImoniCopayscorporationtaxonprofitsatanannualrateof20%intheUSA.ThetaxinboththeUSAandYilandweispayableintheyearthatthetaxliabilityarises.AbilateraltaxtreatyexistsbetweenYilandweandtheUSA.Taxallowabledepreciationisavailableat25%peryearonthemachineryonastraight-linebasis.ImoniCowillexpectannualroyaltiesfromtheassemblyplanttobemadeeveryyear.Thenormalannualroyaltyfeeiscurrently$20million,butImoniCofeelsthatitcannegotiatethiswithYilandwe’sgovernmentandincreasetheroyaltyfeeby80%.Onceagreed,thisfeewillnotbesubjecttoanyinflationaryincreaseintheproject’sfour-yearperiod.IfImoniCodoesdecidetoinvestinanassemblyplantinYilandwe,itsexportsfromtheUSAtotheEUwillfallanditwillincurredundancycosts.Asaresult,ImoniCo’safter-taxcashflowswillreducebythefollowingamounts:ImoniConormallyusesitscostofcapitalof9%toassessnewprojects.However,thefinancedirectorsuggeststhatImoniCoshoulduseaprojectspecificdiscountrateof12%instead.Required:

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问答题(b)Comment on the impact of implementing TE's proposal and suggest possible actions Lamri may take as a result.(6 marks)

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问答题(b)Discuss possible reasons for the suggestions made by each of the three managers.(13 marks)

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