Ba Finance

7BSM1006 Managing Financial Value Drivers Coursework Semester A 2012 Assessment charge 60% Bellingham plc Arthur Scroggs was a farmer. His family has owned and farmed 500 acres of prime priming coat in the Vale of Aylesbury for four generations. In the mid 1980s small farms were finding the m integritytary climate difficult with falling farm incomes and much tattle of putting farm land to alternative use. By 1985 Arthur had already sold his dairy herd to focus on cereal exertion when a fortuitous meeting with Lucy Bellingham at a occupation multitude led him to re admit the future of the family farm.Bellingham is a designer of bespoke fitted kitchens who had a blood plan but little not bad(p). The plan was to manufacture trespass whole step fitted kitchen furniture and establish design studios/showrooms in high income aras. Having be advanceddly sold his dairy herd, Arthur had enough capital to fund the in the raw business and in addition a number of large barns and o utbuildings suitable for manufacturing the kitchen units subject to refitting and intend consent being obtained. Lucys business plan was so convincing that Arthur unconquerable 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 first grew the flatadays publicly quoted company of Bellingham plc. Initially, showrooms were established in Beaconsfield and therefore Kensington. train for their kitchens was brisk and Bellingham Bespoke Kitchens expanded rapidly but remained a partnership. The dissipateds clients ar mainly celebrities from the entertainment worldly concern and the cost of a Bellingham Bespoke Kitchen is now ? 40,000 ? 150,000 or to a greater extent. The loyal was restructured as a limited company in 1990 and subsequently experienced rapid set aboutth until 1999. In that year the then directors decided that the business had r individuallyed the limit of phylogenesis in its nonplus form.Future development required large-scale expansion of production facilities in order to depict the range of materials, furniture, quality and prompt delivery required by their pick out clients. This in turn needed an injection of capital that the directors were unable to fuck off themselves. The conviction that there was much money to be made from quality fitted kitchens had been vindicated. They canvassd a number of possibilities deciding eventually to expand production facilities by purchasing a modern production unit on an industrial estate in Aylesbury.The expansion was funded by a stock mart floatation and raising the necessary capital in the name of Bellingham plc. As the market grew and to keep abreast of new production technology, the directors look atd to tip all over the maxim so dear to the heart of the founders, Arthur and Lucy neither a (long-term) borrower nor loaner be. They financed updating of equipment and premises by means of issuing d ebentures. It is now October 2012 and the present directors of Bellingham plc believe that the long-term success of the company lies in future world(prenominal) diversification and expansion.They consider that the most beneficial action they could take is to investigate the scholarship of a subsidiary in the USA. The newly-appointed finance director, Bill Moneypenny, agrees with this sound judgement but insists that the company must first appraise its own received position and if necessary, make changes to strengthen its existing pecuniary situation in front embarking on new plans. He is particularly concerned that the company should save up adequate liquidity and finance its assets in a beneficial manner.He is also concerned that too much emphasis has been placed on pandering to the whims of the well-fixed and famous and not enough on running an efficient business operation. Lucy and Arthur still retain 30% of Bellinghams equity and other long-standing directors own a furth er 20% a change of control is unlikely to be welcome. During the last two years, the company has updated its design, production and showroom assets and, in what has been a difficult year, has been able to maintain sales and profit maturation (see Bellinghams accounts in appendix 1).There has been a great deal of uncertainty about world economic growth and stock markets oblige been extremely volatile resulting pathetic returns. However the buckrams ordinary sh atomic number 18s have made level-headed progress during the year. Ordinary share dividends have achieved substantial growth over the last two years although this regulate of increase is not evaluate 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 realistic 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 201 6? 100. 51 ex interest Any new venture would be evaluate to achieve a return on capital engaged in line 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 investment projects are being considered, the main project currently 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 sheet after making losses on a p roperty development in Nevada from which it has now withdrawn. boodles have suffered in the last two years due to write-offs associated with this development.The existing owners timbre that the firms future lies in establishing wider international links and the loneliness 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 fixed 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 two publicly-owned companies in the comparable business sector, Harvey Wilkinson names 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 similar rate to Bellingham.The dividend yields of these companies have been as follows WilkinsonCucci Year to 31 declination 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 atomic number 27 Springs. Their main business, which is thriving, involves complete 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 dish.The value of properties handled by the rea l estate offices is typically $5m $20m. Bellingham is interested not only in extending its operations internationally but particularly in the possibility of diversifying into the real estate business. Whilst well aware 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 following forecast.Under average economic growth conditions, the American Creations operating forecasts (in $*1000) for the next five years are ground 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. Fixed 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 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 measure is currently 32% due 9 months after the end of the accounting year in motility (you may assume for the purpose of this case that accounting profit and ratable 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 formula under the under the present ownership. There would be no barricade on the transfer of the clutch share of these dividends to the UK. The US corporation tax rate applicable is 20% payabl e in the year in which the profit arises. There is no double taxation of profits of US origin in the UK. (For the purpose of this case, ignore the possibility of any withholding tax taxes and the effects of foreign exchange risk. It is considered possible that, as the US frugality 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 germane(predicate) theory and calculations and indicating any non-financial matters you feel should be taken into consideration. Your report should consider the following areas 1. An analysis of Bellinghams current position utilise relevant financial ratios. You should show the calculation of the ratios and provide interpretation of the results. . enumeration of Bellinghams cost of capital, using alternative methods and arriving at the most appropriate figure. 3. An investment appraisal of the American Cre ations proposal assuming the valuation suggested in the case, using a build of methods and evaluation 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 jar 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 read of wide reading around the subject. You should provide a complete bibliography with appropriate referencing in your report. Submission requirements Your answer should take the form of a write report of approximately 2500 words excluding appendices and the reference list. Deviations from the word count surpass plus or minus 10% will attract a penalisation 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. make up one electronic copy via Studynet. This is an individual assignment and the report submitted should be entirely your own work. Appendix 1Bellingham plc Abridged Trading, Profit & departure 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 marketing Expenses 1467 1250 1080 Installation Expenses 1689 1300 980 Administration Expenses 960 630 597 Operating Profit 1456 1283 1203 Debenture Interest 53 53 53 Profit Before taxation one hundred forty3 1230 1150 Corporation Tax 449 394 368 Profit After Tax 954 836 782 Dividends 341 280 220 Retained earnings 613 556 562 Bal ance cerement at 30th June 2012 Fixed Assets (net) Land & Buildings 2300 2400 2500 Plant & Machinery 1700 1186 552 Fixtures & Fittings 700 600 402 Motor Vehicles 185 one hundred forty 105 Office equiptment 250 185 100 5135 4511 3659 Current Assets Stocks Raw Materials 216 208 182 Work in Progress 200 205 190 Finished Goods 150 128 97 Debtors 1775 950 595 pious platitude/Cash 230 136 104 2571 1627 1168 Current 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% option shares of 50p ea, 500 500 500 Retained pr for yr 613 556 562 Profit & loss 3033 2010 1267 Shareholders funds 5146 4066 3329