Ba Finance

7BSM1006 Managing Financial Value Drivers Coursework Semester A 2012 Assessment weighting 60% Bellingham plc Arthur Scroggs was a farmer. His family has owned and farmed 500 acres of prime land in the Vale of Aylesbury for four generations. In the mid 1980s small farms were finding the financial climate difficult with falling farm incomes and much lambast of putting farm land to alternative use. By 1985 Arthur had already sold his dairy lot to focus on ce genuine intersection when a fortuitous meeting with Lucy Bellingham at a trade conference led him to reconsider the early of the family farm.Bellingham is a designer of bespoke fitted kitchens who had a business platform but little capital. The curriculum was to manufacture top quality fitted kitchen furniture and establish design studios/showrooms in high income aras. Having recently sold his dairy herd, Arthur had enough capital to fund the new business and alike a number of large barns and outbuildings worthy for manufa cturing the kitchen units subject to refitting and planning consent being obtained. Lucys business plan was so convincing that Arthur decided to get out of farming altogether (by leasing his arable land to a local co-operative) and focus on developing the new business.From this small beginning grew the at a time publicly quoted high society of Bellingham plc. Initially, showrooms were established in Beaconsfield and then Kensington. Demand for their kitchens was brisk and Bellingham Bespoke Kitchens expanded rapidly but remained a partnership. The flyings clients are mainly celebrities from the entertainment world and the cost of a Bellingham Bespoke Kitchen is now ? 40,000 ? 150,000 or more. The tauten was restructured as a limited caller-out in 1990 and subsequently experienced rapid growth until 1999. In that year the then directors decided that the business had reached the limit of development in its present form.Future development unavoidable large-scale expansion of pro duction facilities in rear to provide the range of materials, furniture, quality and prompt actors line required by their discerning clients. This in turn needed an injection of capital that the directors were unable to cause themselves. The conviction that there was much money to be made from quality fitted kitchens had been vindicated. They analyzed a number of possibilities decision making eventually to expand production facilities by purchasing a modern production unit on an industrial state in Aylesbury.The expansion was funded by a stock market floatation and acme the necessary capital in the name of Bellingham plc. As the market grew and to keep abreast of new production technology, the directors agreed to reverse the maxim so dear to the heart of the fo on a lower floors, Arthur and Lucy neither a (long-term) borrower nor lender be. They payd modify of equipment and premises by means of issuing debentures. It is now October 2012 and the present directors of Bellin gham plc believe that the long-term success of the company lies in future international diversification and expansion.They consider that the most beneficial action they could take is to investigate the science of a subsidiary in the USA. The newly-appointed finance director, Bill Moneypenny, agrees with this opinion but insists that the company must first appraise its own current position and if necessary, make switchs to strengthen its existing financial smudge before embarking on new plans. He is particularly concerned that the company should preserve adequate liquid state and finance its assets in a beneficial manner.He is also concerned that too much emphasis has been determined on pandering to the whims of the rich and famous and not enough on running an efficient business operation. Lucy and Arthur button up retain 30% of Bellinghams equity and other long-standing directors own a further 20% a change of control is unlikely to be welcome. During the expiry two years, th e company has updated its design, production and showroom assets and, in what has been a difficult year, has been able to maintain sales and put on growth (see Bellinghams accounts in appendix 1).There has been a majuscule deal of uncertainty about world economic growth and stock markets have been extremely quicksilver(a) resulting low returns. However the firms ordinary packets have made good progress during the year. unexceptional share dividends have achieved substantial growth over the last two years although this rate of change magnitude is not expected to continue. Ordinary dividends have grown at an average rate of 14% per annum over the past 10 years and this rate is a more graphic growth rate for future dividends. The present market prices for Bellinghams shares and debentures are ?1 Ordinary shares? 7. 02 ex div ?0. 50p, 6% Pref shares? . 55 ex div 7% Debentures 2016? 100. 51 ex interest Any new venture would be expected to achieve a return on capital employed in l ine with that experienced recently by Bellingham plc. The finance director favours a payback period of 5 years. Bellingham would therefore need to agree a realistic acquisition price for such a new venture and its future cash flows in order to determine whether these criteria could be met. Although a number of enthronization projects are being considered, the main proposal soon being investigated offers an expansion into the US prime-property market which is forecast to grow faster than the UK market.Bellinghams finance director has already calculated the trends in the financial ratios of American Creations, an unquoted US company, from its unaudited annual accounts (see appendix 2) and has concluded that the proposal is now worthy of further investigation. American Creations is a family-owned venture requiring further capital to repair its balance aeroplane after making losses on a property development in Nevada from which it has now withdrawn. dough have suffered in the last t wo years due to write-offs associated with this development.The existing owners feel that the firms future lies in establishing wider international links and the retirement of senior family members, leaving the younger members active in the management of the firm. They are therefore considering selling a controlling interest of 60% to a suitable company. The firm has been established for 23 years, and is well respected in business circles. The average age of its mend tangible assets is 3 years. The directors have indicated that they may accept part payment in Bellingham shares subject to negotiation. The firms nominal share capital is $2. m, and the directors have indicated that they value the firm at five multiplication the year 2010 net profit. They consider this to be the firms normal level of profit excluding the extraordinary effects of the Nevada development. As the firm is at present family owned and run, there is no available price/earnings ratio. P/E ratios for the only tw o publicly-owned companies in the same business sector, Harvey Wilkinson Designs plc and Cucci Lifestyle plc, are currently 10 and 8 times respectively although both of these firms, unlike Bellingham, operate internationally. Wilkinson has grown at a confusable rate to Bellingham.The dividend yields of these companies have been as follows WilkinsonCucci Year to 31 December 2011 8. 1% 7. 25% 2010 7. 2% 6. 9% 2009 5. 3% 5. 95% American Creations has its own manufacturing facilities and operates throughout the USA and Caribbean with design offices in New York, Miami, Los Angeles and carbon monoxide gas Springs. Their main business, which is thriving, involves thoroughgoing(a) home furnishing and interior design for wealthy clients. In addition, the firm has a real estate office in each location and is thus able to offer a complete property service.The value of properties handled by the real estate offices is typically $5m $20m. Bellingham is interested not only in extending its oper ations internationally but particularly in the possibility of diversifying into the real estate business. Whilst well mindful of the existence of a number of competitors, the directors feel that there is a ready market in the US for their established name in terms of design flair, service and products. After discussions with the directors of American Creations, Bill Moneypenny has produced the chase forecast.Under average economic growth conditions, the American Creations operating forecasts (in $*1000) for the next five years are establish on the following Incomefrom Sales $7500 in 2013, rising by 12% per annum for the foreseeable future. from real estate sales commissions $2850 in 2013 increasing by 15% per annum for the foreseeable future. Manufacturing variable costs Labour $1250 in 2013, expected to increasing by 8% per annum. Materials $3800 in 2013, expected to increasing by 5% per annum. resolute costs excluding depreciationManufacturing O/H $2065 in 2013, increasing by 5 % per annum. General O/H $1850 in 2013, increasing by 2% per annum. DepreciationFactory, machinery & vehicles $500 per year. Office/Design studio apartment fixtures $200 per year. The beta of Bellingham plc is believed to be 1. 65 , the risk-free rate of return is 5. 5% and the return for the last year on the FT All-share index is 2%. UK corporation tax is currently 32% collectable 9 months after the end of the accounting year in question (you may assume for the offer of this case that accounting profit and taxable profit are identical. )Bellinghams directors estimate that the after-tax profits of American Creations could be allocated as follows 70% as retained earnings and 30% as dividends. This has been the pattern under the under the present ownership. There would be no restriction on the transfer of the appropriate share of these dividends to the UK. The US corporation tax rate applicable is 20% payable in the year in which the profit arises. There is no double taxation of pro fits of US origin in the UK. (For the purpose of this case, miss the possibility of any withholding taxes and the effects of foreign exchange risk. It is considered possible that, as the US saving develops further, even higher wages than those forecast may be demanded by the workforce. Required Evaluate the American Creations proposal on behalf of Bellingham plc, supporting your arguments with relevant theory and reckonings and indicating any non-financial matters you feel should be taken into consideration. Your plow should consider the following areas 1. An analysis of Bellinghams current position using relevant financial ratios. You should show the calculation of the ratios and provide interpretation of the results. . Calculation of Bellinghams cost of capital, using alternative methods and arriving at the most appropriate figure. 3. An investment appraisal of the American Creations proposal assuming the valuation suggested in the case, using a variety of methods and evaluat ion of the results. 4. A sensitivity analysis of the proposal and interpretation of the results. 5. Calculation and discussion of alternative valuations for acquiring the share in American Creations and how these would impact on the investment appraisal. 6.A discussion of the various available methods of financing the acquisition and consideration of which is the most appropriate. Your calculations and arguments should be supported by relevant theory, with evidence of wide reading or so the subject. You should provide a complete bibliography with appropriate referencing in your report. Submission requirements Your answer should take the form of a written report of approximately 2500 words excluding appendices and the reference list. Deviations from the word count exceeding plus or minus 10% will attract a penalty of 5%. The hand-in deadline for submission is 23. 0 on 25th November 2012. Submissions up to 24 hours late will attract a 10% penalty whilst those beyond 24 hours but less than 1 week late will be capped at 40%. Reports submitted more than one week late will attract a mark of zero. stoop one electronic copy via Studynet. This is an individual assignment and the report submitted should be entirely your own work. accessory 1Bellingham plc Abridged Trading, Profit & Loss Account for the year ended 30th June 2012 All amounts are in thousands of pounds sterling 2012 2011 2010 Sales 9606 7564 6100 Production Cost 4034 3101 2240 Gross Profit 5572 4463 3860 Selling Expenses 1467 1250 1080 Installation Expenses 1689 1300 980 tribunal Expenses 960 630 597 Operating Profit 1456 1283 1203 Debenture Interest 53 53 53 Profit Before revenue enhancement 1403 1230 1150 Corporation Tax 449 394 368 Profit After Tax 954 836 782 Dividends 341 280 220 Retained earnings 613 556 562 Balance Sheet at 30th June 2012 Fixed Assets (net) Land & Buildings 2300 2400 2500 Plant & Machine ry 1700 1186 552 Fixtures & Fittings 700 600 402 Motor Vehicles 185 140 105 Office equiptment 250 185 100 5135 4511 3659 genuine Assets Stocks Raw Materials 216 208 182 Work in Progress 200 205 190 Finished Goods 150 128 97 Debtors 1775 950 595 verify/Cash 230 136 104 2571 1627 1168 flow rate Liabilities Trade Creditors 1190 788 270 Corporation Tax 449 394 368 Final Dividend 171 140 110 1810 1322 748 Net Current Assets 761 305 420 Net Assets 5896 4816 4079 Long-term Liabilities 9% Debentures 2016 750 750 750 5146 4066 3329 Shares & reserves ?1 ordinary shares 1000 1000 1000 6% Preference shares of 50p ea, 500 500 500 Retained pr for yr 613 556 562 Profit & loss 3033 2010 1267 Shareholders bills 5146 4066 3329