Innovate plc
This assignment is based around a company making a decision to invest in projects and considers several aspects of this process: the investment decision and associated issues; the cost of financing; and the finance required. You will be expected to offer substantiated recommendations and present in report format. You will work in PAIRS but in exceptional cases a 3 will be permitted. Additional guidance on team working is provided to accompany this assignment brief.
Your work should include relevant research, appropriately sourced and referenced using Harvard format. Relevant sources are text books, academic journal articles, professional journals. 10% of the mark will be awarded for this aspect of your work.
DO NOT USE INTERNET SOURCES SUCH AS ANY OF THE ‘PEDIA’S OR TUTOR4U ETC
Your report should include the following sections:
1. Title Page
2. Introduction, to include summary of the issues (Do not copy and paste from the case study)
3. Results of cost of capital calculations and discussion
4. Results of financing options and discussion
5. Results of the investment appraisal and discussions
6. Overall recommendations and supporting comments
7. Teamwork reflection
8. References
9. Appendices (including calculations and assessment of the team performance)
NOTE: All named on the submission will be entitled to equal marks unless there is evidence in the reflection and the performance report that there was been an imbalance in the work undertaken. If this is the case, the team members can decide the balance of marks that a member has earned or not.
The Company
Innovate plc is a UK based manufacturing company. As at December 31st 2015, the capital structure of the company is as follows:
£000’s
50p Ordinary shares 20,000
Retained profit 35,000
12% redeemable debentures 10,000
65,000
The debentures have a market value of £110 per £100 nominal issue. Interest is due at the year end and has been recently paid. They are due to be redeemed in five years at a premium of £10. The ordinary shares have a current market value of £4 per share and a dividend is about to be paid of 50p per share. The dividend has been growing at 5% per annum.
The Investment Options
The company has several investment opportunities but due to their wish to grow at a ‘steady pace’ has limited the capital expenditure to £10m for the forthcoming year. The proposals under consideration are as follows:
Project
A: To replace the existing data processing equipment.
Initial cost £2,500,000. Expected life of equipment is three (3) years.
Expected annual cash inflow is £1,450,000.
B: To develop a new type of container.
Initial cost £1,700,000. Expected life of product is four (4) years.
Expected annual cash inflow is £735,000.
C: To install safety equipment.
Initial cost £1,400,000. Expected life of equipment is three (3) years.
Expected annual cash savings is £520,000.
D: To construct a new factory building.
Initial cost £4,500,000. Expected life of building is ten (10) years.
Expected annual cash inflow is £1,150,000.
E: To extend the existing loading equipment.
Initial cost £2,950,000. Expected life of equipment is four (4) years.
Expected annual cash inflow is £1,200,000.
F: To purchase patent rights to a new process.
Initial cost £1,800,000. Expected life of patent is seven (7) years.
Expected annual cash inflow is £530,000.
Assume that all cash flows commence from year one, and are received on the last day of the year.
Financing
Innovate plc have several options to raise the finance required, £10m. They have negotiated a further debt issue of 12% irredeemable debentures issued at par, for the whole amount. But a covenant on the existing debt means that the maximum gearing allowed is 20% and should not be exceeded.
Innovate plc does have £2m in cash available from current retained profit and could use this in conjunction with raising equity finance. But they had hoped to retain this to provide flexibility with liquidity in the year ahead.
The corporate rate of tax applicable is 25%.
Note: This has already been considered in calculating cashflows for the projects.
REQUIRED: You have been asked to prepare a report (2250 words +/- 10%) that considers the decisions and issues facing Innovate plc. You are expected to cover the following points:
Part 1: The cost of finance (20%)
• Explain what is meant by the term ‘cost of capital’ and why it is important for an organisation to determine its own cost of capital?
• Briefly describe the main factors which determine the cost of capital of a firm?
• Calculate the current weighted average cost of capital of Innovate plc.
Part 2: Financing (30%)
• Identify and discuss the advantages and disadvantage of the financing options available to Innovate plc.
• Is the debt option feasible? Consider its impact on Innovate plc
• If Innovate plc were to consider a rights issue, evaluate the number of shares to issue, a possible price and a theoretical ex-rights price.
• Recommend the financing option that Innovate should use and explain why.
• Calculate a revised cost of capital given your financing choice.
Part 3: The Investment Decision (30%)
• Discuss possible reasons why Innovate plc have set a limit on capital expenditure.
• Discuss the relative merits of investment appraisal tools that can be used to assist in project choice. Explain why some are preferred to others.
• Prepare a financial evaluation of each of the projects using appraisal tools of your choice. Identify which projects should be undertaken and why.
• Further, you have also been asked to raise for discussion other factors, which should be considered in reaching a final decision.
Part 4: Recommendation (5%)
• Provide a final recommendation regarding the financing and investment choice that you believe is in the best interests of Innovate plc. Briefly justify your choice. (5 marks)
MARKING SCHEME
You will be assessed on:
• THE COST OF FINANCE (20%)
o Explanation of ‘cost of capital’ and importance to an organisation (4%)
o Factors which determine the cost of capital of a firm? (6 %)
o WACC calculation (10%)
• FINANCING (30%)
o Identify and discuss the advantages and disadvantage of the financing options available to Innovate plc. (6%)
o Is the debt option feasible? Consider its impact on Innovate plc (4%)
o If Innovate plc were to consider a rights issue, evaluate the number of shares to issue, a possible price and a theoretical ex-rights price. (8%)
o Recommend the financing option that Innovate should use and explain why. (4%)
o Calculate a revised cost of capital given your choice in (d) (8%)
• INVESTMENT APPRAISAL (30%)
o Discuss possible reasons why Innovate plc have set a limit on capital expenditure. (5%)
o Discuss the relative merits of investment appraisal tools that can be used to assist in project choice. Explain why some are preferred to others. (8%)
o Prepare a financial evaluation of each of the projects using appraisal tools of your choice. Identify which projects should be undertaken and why
(12%)
o Further, you have also been asked to raise for discussion other factors, which should be considered in reaching a final decision. (5%)
• RECOMMENDATION (5%)
o Appropriate recommendation (2%)
o Clear justification taking into account key factors (3%)
• TEAM WORK REFLECTION (5%)
o Personal reflection with clear understanding of how the team work process worked and how issues were resolved. This must relate to the performance report appended to the assignment.
• PRESENTATION, SOURCING AND REFERENCING (10%)
o Clear, tidy, appropriate presentation (2%)
o Sentence construction, grammar and use of paragraphs (3%)
o Evidence of research and wider reading (3%)
o Referencing of information in Harvard format (2%)
INSTRUCTION FOR SUBMISSION:
Please go to CASE for help if you are unsure about how to write a report or use Harvard referencing.
Please use double line spacing and font size no less than 12.
Each student should submit AN electronic copy of the report, via StudyNet.
Ensure that you display the word count (not including the bibliography or appendices) and both your NAMES and STUDENT ID’s on the title page. Anonymous marking will not be applied to this assignment.
Please title your file: Innovate SURNAME 1 SURNAME 2
You must include NAMES AND STUDENT ID’s on your upload
You must submit no later than 4pm FRIDAY 18th March 2016.
Please note that extensions to this deadline will only be given in exceptional cases (illness, bereavement) and requests for extensions must be accompanied by documentary evidence.
Late submissions posted on StudyNet within 24 hours of the submission time will receive a 5% penalty, subject to a minimum mark of 40%. Those received after this time but within 7 days of the submission date and time will be capped at 40%. Submissions received more than one week later than the deadline date/time will be awarded a mark of 0%.
The deadline for submission is 4pm FRIDAY 18th March 2016.
5BUS1094 CW 2 Innovate plc Marking and Feedback Sheet
NAME 1: ID 1:
NAME 2: ID 2:
Cost of Financing (20%) Mark Comment
Explanation of ‘cost of capital’ and importance to an organisation
Factors which determine the cost of capital of a firm?
WACC calculation
Financing (30%)
Identify and discuss the advantages and disadvantage of the financing options available to Innovate plc.
Is the debt option feasible? Consider its impact on Innovate plc
If Innovate plc were to consider a rights issue, evaluate the number of shares to issue, a possible price and a theoretical ex-rights price.
Recommend the financing option that Innovate should use and explain why.
Calculate a revised cost of capital given your financing choice
Investment Decision (30%)
Discuss possible reasons why Innovate plc have set a limit on capital expenditure.
Discuss the relative merits of investment appraisal tools that can be used to assist in project choice. Explain why some are preferred to others.
Prepare a financial evaluation of each of the projects using appraisal tools of your choice. Identify which projects should be undertaken and why.
Further, you have also been asked to raise for discussion other factors, which should be considered in reaching a final decision.
Recommendations (5%)
Appropriate recommendation
Clear justification taking into account key factors
Team work Reflection (5%)
Personal reflection with clear understanding of how the team work process worked and how issues were resolved that relates to performance report appended.
Presentation, Sourcing and Referencing (10%)
Clear, tidy, appropriate presentation
Sentence construction, grammar and use of paragraphs
Evidence of research and wider reading
Referencing of information in Harvard format
OVERALL MARK
Marked by: Office hours:
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