Critically evaluate investment opportunities and using a range of financial analysis and investment appraisal techniques.

ASSIGNMENT QUESTION

 Background

Global News Ltd is a UK-based privately-owned news channel distributed on satellite, cable and on-line. At present it employs 1,000 personnel in a news gathering and editing capacity. This includes reporters, camera operators and editors. A further 450 staff work in the head-office and support functions. The company regards itself as having a progressive editorial style and has tried to reflect this in operational decisions, including a focus on maximizing the diversity of its workforce in all areas and emphasizing this approach in its branding.

The company is owned by the founders, Arlo and Manfred, with a 20% share each, a number of senior executives with a total of 20% between them (none with more than 5%), and 40% by Stox, a private equity fund. There are 20 million shares in issue and, according to a recent presentation given to the company by an investment bank the equity is worth £210-230m. The company paid dividends last year of £1.32 per share. The company has debt as follows:

• £25m in the form of subordinated loan stock provided by Stox at a fixed rate of 5.5%
• £30m in a “club deal” from three banks at a floating rate hedged through a swap at 4% for 5 years.

Last year the company had revenues of £156m million, Operating Profit of £15m and Net profit of £8m. Margins have been falling and the management are coming under pressure from Stox to improve performance.

The Director of Operations is concerned that the technology currently employed by the organization is aging and does not operate at a level of security or efficiency suitable for a company of GNL’s scale. He has been in discussions with a broadcasting IT designer, NBED, to carry out a preliminary analysis on how the systems could be upgraded.

NBED estimate that designing or licensing new software would cost £5m per year for the next 5 years. It would also require an investment of £60m in new hardware throughout the organisation. It would also require an increase in the training budget of £8,000 pa per employee in the first year and £2,000 pa thereafter.

The hardware would depreciate on a reducing balance basis of 30% per year for the first two years and 20% thereafter. The introduction of the new technology would mean a significant change in working practices and a significant reduction in the size of the workforce. This would be mainly amongst front line journalists, editors and camera operators, since much of the work can now be done by junior reporters using news feeds which are directly accessed through their computers.

It is thought that up to 650 staff could be made redundant at a cost of 50% of their annual salary. Average salaries throughout the company are £45,000. A certain number of new staff would need to be hired (10 in year one and 5 in each of the following two years) to support the change.

Assignment Task

You are required to prepare a report, using the information provided above covering the following areas:

1. a) An up to date estimate of the company’s cost of capital using publicly available data (15 marks)
2. b) A spreadsheet model forecasting the impact over the next 5 years of the business case proposal set out above, together with a critical review of the assumptions, using publicly available information and a revised business case using the model to show its impact (40 marks)
3. c) A critical evaluation of the project and revised business case using investment appraisal techniques and a critical discussion of the results of this analysis (15 marks)
4. d) A discussion and evaluation of how the company might meet the funding requirements of the project (10 marks)
5. e) A brief critical discussion of the corporate social responsibility issues raised by the proposal (10 marks)
6. f) A critical, supported conclusion providing recommendations for the adoption or otherwise of the proposal. (10 marks)

 

 ASSESSMENT CRITERIA

You are reminded that the learning outcomes for the module are as follows and your answer should be prepared throughout with these in mind.

7. Learning Outcomes (threshold standards):

On successful completion of this module the student will be expected to be able to: Knowledge and understanding

1. Understanding a range of approaches and investment criteria for investment in securities and projects including the meaning of cost of capital and its application
2. Understand the range of financial options available to financial managers in selecting sources of finance taking into consideration the size and stage of growth of the business

Intellectual, practical, affective and transferable skills

3. Critically evaluate investment opportunities and using a range of financial analysis and investment appraisal techniques.
4. Critically evaluate the criteria for developing a sustainable funding structure for a business or project.

 

 

Detailed assessment criteria and guidance are as follows:

1. a) You should use the Capital Asset Pricing Model and Dividend Valuation Model to establish a cost of equity. Cost of each debt instrument needs to be calculated and the data combined to produce a Weighted Average Cost of Capital (WACC). You must make clear your sources for data such as the riskfree rate and market risk premium and explain the basis for your choice of growth rate and beta using suitable market comparables. (LO 1)
2. b) A basic template for the model is provided online. You should use this as a guide and develop your own model using the assumptions provided. Although no specialist knowledge of the relevant industry is expected, you are expected to demonstrate research into the reasonableness of the assumptions put forward in the scenario. This should be properly referenced and sourced. Credit will be given for specific “real-life” research in this area, and also for the ability to adapt the spreadsheet model to reflect justified, revised assumptions. (LO 1&3)
3. c) You should use NPV/IRR as the primarily tools for this evaluation although you may also use payback period and ROCE as appraisal tools. Your evaluation and critical discussion should focus on this particular company and not take the form of a generic discussion of the mechanics or relative merits of the different approaches. (LO3)
4. d) You should consider the amount of funding required to implement the project and consider the impact of different options on the company’s overall gearing and ability to satisfy the cost of capital. Your discussion should not be a description of every option available but a critical evaluation of those available to this company, taking into account its existing level of debt and the nature of its shareholders. You are not required to provide a financial model of the cashflows resulting from a particular structure but you may consider the effect of different WACC results on the model developed in b) above. (LO2&4)
5. e) You should consider concepts of maximising shareholder wealth and corporate social responsibility in the context of cutbacks in staff levels. Credit will be given for research into “real-life” companies which have put an emphasis on diversity and inclusivity and also had to restructure the workforce. You should consider not only the social and public image issues raised, but also whether these may have direct or indirect financial consequences. (LO 4)
6. f) You should summarise the findings of your technical analysis and other areas of research. Your conclusion should set out and critically evaluate the options raised and make clear recommendations supported by specific arguments raised in the earlier sections. (LO 1-4)

 

Your analysis must be supported by relevant academic theories and concepts. The paper must be in a report format and comply with Harvard referencing guidelines. The report must not be descriptive in nature; it should provide clear evidence of understanding of the issues under consideration with an applied review of the business provided in the task scenario. It is essential you apply theories and concepts and not just explain them.

 

The majority of the marks will be awarded based on your ability to define, analyze and apply the key concepts; without any analysis or evaluation you may struggle to pass the module.

There is no correct number of academic references to be utilized as you must draw as many references as required to provide a high quality answer. However, a minimum of 12 academic sources are expected, and a majority of these should be current, internationally peer reviewed articles/journals or accredited textbook references. Sources such as Wikipedia/Investopedia and the like are not acceptable. Any sources available only online should be avoided. As you are producing a report in a business context you may, for this module, include references as footnotes.