You have been recently appointed as Financial Analyst via Graduate Scheme at Global Management Consulting Firm.
You are asked to complete two assignments from section A and any two from section B.
Notes:
- There is no word limit for the quantitative elements of this coursework. You should present your formulae and workings.
- In answering discussion question(s) you are required to support your arguments with relevant academic literature.
- Reference list should be located at the end of your coursework.
- Guidelines on how to reference your work are provided on the following canvas site.
SECTION A
Assignment 1 (compulsory)
Your client holds 15% of outstanding shares in Jazz plc and is a major shareholder. The strategy of the client is to be actively involved in the governance of their major investments. The client has recently started thinking that the management of Jazz plc may not acting to maximise the long-term value of the firm and has asked our firm to investigate the matter for him.
Using the information provided by our Research Assistants (see below), write a report advising the client if there are reasons to believe that Jazz plc is suffering from agency problems, and if so, how the problems could be addressed. You should comment on the following five areas
- Composition of the board of directors;
- Managerial compensation;
- Diversification of the operations;
- Level of leverage;
- Level of cash.
Note, that the advice should be critical and should presents various points of view. Furthermore, support your views with relevant academic literature.
Information from Research Assistant
- Breakdown of activities by the percentage of total annual company turnover;
| Turnover | |
| Retail | 50% |
| Utilities | 5% |
| Clothing | 40% |
| Media | 2% |
| Chemicals | 3% |
- Figures on profitability measured by the return on capital employed (ROCE) in 2015;
| ROCE | |
| Retail | 0.35 |
| Utilities | 0.05 |
| Clothing | 0.10 |
| Media | 0.06 |
| Chemicals | 0.07 |
- Current share price equals £1.50;
- Average annual share price growth over the past five years equals 5%;
- Level of gearing (debt/(debt+equity)) based on market values equals 15%;
- Level of cash proxied by a ratio of the company’s total cash and cash equivalents to its current liabilities equals 1.7;
- The board of directors consists of 25 members, out of which 19 are executive directors and 6 are independent directors. All independent directors have expertise within the retail industry;
- The directors’ average annual salary currently stands at £120,000 on a five-year rolling contract basis;
- The executive directors of the company were given share options five years ago. In two years the options will allow each director to purchase 100,000 shares in the company at a price of £1.30;
- The main objective of the firm is stated in the annual report, and it is to maximise the wealth of shareholders.
Information about the conglomerate sector:
- Average annual share price growth over the past five years equals 10%;
- Average gearing level (debt/(debt+equity)) based on market values equals 45%;
- Average cash ratio (ratio of the company’s total cash and cash equivalents to its current liabilities) in the sector equals 0.5;
- Average salaries are £90,000 and tend to be three-year rolling contracts.
Assignment 2 (compulsory)
Your client has been bequeathed a legacy of £2,000,000 and she is considering placing the entire funds in shares of Ben plc or in shares of company Jerry plc.
Using the forecast prepared by your research assistant (Table 2) advise your client on how a small degree of diversification could help her investment strategy. The advice should contain the following elements.
- Calculation of risk and return for the following eleven portfolios of shares (present workings ONLY for portfolio 1)
Table 1
| Portfolio | Proportion of portfolio invested in: | ||
| Ben | Jerry | ||
| 1 | 0% | 100% | |
| 2 | 10% | 90% | |
| 3 | 20% | 80% | |
| 4 | 30% | 70% | |
| 5 | 40% | 60% | |
| 6 | 50% | 50% | |
| 7 | 60% | 40% | |
| 8 | 70% | 30% | |
| 9 | 80% | 20% | |
| 10 | 90% | 10% | |
| 11 | 100% | 0% | |
- marks
- A graph illustrating the potential risks and returns that could be achieved using various combinations of Ben plc and Jerry plc (based on the calculations from requirement a (above)) and advice on which portfolio would be best to choose and why.
Information provided by Research Assistant
Table 2
| State of the economy | Probability of occurrence | Returns on Ben plc | Returns on Jerry plc |
| Recession | 0.4 | 1% | 3% |
| Growth | 0.4 | 4% | 3% |
| Boom | 0.2 | 4% | 1% |
The correlation coefficient between the two securities equals -0.41.
SECTION B
(CHOOSE ANY TWO ASSIGNMENTS)
Assignment 3
Hawking plc owns four acres of derelict land, which has a market value of £200,000. Every month Hawking plc receives at least one offer to purchase the land. Last month the directors of Hawking plc hired consultants to investigate how the land could generate some more value than the offered £200,000. The job set for consultant is now completed and they issued an invoice of £80,000 for their service. During the last general meeting they presented their proposal for building a car park.
Consultants presented that an experienced company will, for a total cost of £5m payable at the start of the project, design and construct the buildings and supply all the equipment and. The £5m investment includes £4m which is subject to depreciation at a rate of 10% per year. The car park facilities will be ready for Hawking’s use one year after construction begins (i.e. in year 2). Revenue from customers will be £0.5m per annum until infinity. The operating costs will be £0.1m per annum. Additionally, one new executive director will be needed to oversee the project from its start, at a cost of £50,000 per annum. During the first year, the senior management will also have to leave aside work on other projects, resulting in delays and reduced income from these projects accounting to £50,000 during year one (they will not be needed later).
Hawking’s cost of capital is 6%. Assume that there is no inflation or tax. For simplicity of analysis assume that all cash flows occur at year ends except those occurring at the start of the project.
Requirements:
- Present cash flows that should be included in the appraisal of the project.
7 marks
- Calculate the net present value of the project.
5 marks
- Advise if the proposal to build the car park should be accepted.
3 marks
- The presented above project is associated with some risks. The company is concerned about the state of the economy, as well as the prices presented by the consultants in the proposal. Discuss two alternative investment appraisal techniques that could be used to enrich the analysis of the consultants. Support your answer with academic literature. (word count: 400 words maximum)
Assignment 4
Three companies, i.e. Mika plc; Holt plc and Conte plc are all listed at the London Stock Exchange. Shares of Mika and Holt lie on the Security Market Line, and have the following characteristics:
Table 3
| Share of Mika | Share of Holt | |
| 0.07 | 0.05 | |
| β | 1.4 | 1 |
Requirements:
- Calculate the risk-free rate of return, the market rate of return, and the risk premium on the market index portfolio? Assume that Capital Asset Pricing Model (CAPM) holds.
5 marks
- Market analyst claims that expected return for Holt is 4% at the moment, and reported beta is1.2. The risk-free rate of return and risk premium are equal to the ones estimated in requirement a) (above). Use CAPM to determine if shares of Holt plc are mispriced and explain, what is likely to happen to the price and return on Holt’s shares? Assume that CAPM holds. Support your answer with graphical interpretation.
5 marks
- Critically discuss any five problems of CAPM. Support your discussion with academic literature. (word count: 600 words maximum)
Assignment 5
Miller plc is a UK based company operating within the health sector. The current market value of Miller plc’s is 137 pence (ex div) per share. The company has 5 million ordinary shares in issue. The annual dividend for the next financial year will be 2 pence per share, and the management of the company expect that dividends will grow at 5% for the foreseeable future. Miller plc also has:
- £1,000,000 12% irredeemable bonds, which were issued in the late 1990s,
- and redeemable bonds, with a current market value equal to £1,000,000 and cost after tax is 5%.
The current market value of the irredeemable debentures is 120% (that is £120 per £100). The corporate tax rate is 21%.
Requirements:
- Using the information provided, calculate Miller’s current cost of equity.
5 marks
- Calculate Miller’s cost of debt (redeemable and irredeemable bond).
5 marks
- Calculate Miller plc’s current weighted average cost of capital (WACC).
5 marks
- Critically discuss whether by integrating a level of gearing into capital structure a firm can its value. Support your discussion with academic literature. (word count 400 words maximum)
Assignment 6
Veith plc is a manufacturer of alpine skiing equipment. Veith plc is an all-equity firm and has 1,000,000 shares in issue. Its annual dividend history is presented in the table below.
TABLE 4
| Year | Dividend per share (pence) |
| This year | 33 |
| Last year | 30 |
| 2 years ago | 30 |
This year’ dividend has just been paid and the next is due in one year. Veith plc has an interesting investment opportunity, which requires extra financing for the next two years. Management is considering cutting the dividend to zero for each of the next four years to fund the project. In year five the dividend of 20 pence per share will be paid and it will grow at a constant rate of 7 % per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and requires a rate of return of 8% for its owners.
Requirements:
- Calculate the value of one share as well as the value of the firm, if the management chooses to ignore the investment opportunity and dividends continued to grow at the historical rate.
6 marks
- Calculate the value of one share as well as the value of the firm, if the investment is accepted, and therefore dividend policy is amended.
6 marks
- Advise if the company should start the investment and cut dividends.
3 marks
- Explain any three factors management should take into account when deciding on the amount of dividends to be paid. Support your discussion with academic literature. (word count 400 words maximum)
The coursework is designed to test all learning outcomes of the module, i.e.
- Understand the theory of financial management.
- Describe, analyse and critically evaluate the main financial policies, i.e. capital budgeting, external financing, working capital.
- Appraise the changing nature and developing role of the capital market and explain the importance of the efficient markets hypothesis in contemporary financial management.
- Describe, apply, and critically evaluate Portfolio Theory and the CAPM and their role in contemporary financial management.
Assessment Submission (for student information)
eSubmission is the approved method for your programme of study. You must hand in your assessed Assignment(s), for all modules that you are taking during the 2019/20 Academic Year using the Canvas system. Submission of a printed copy is NOT allowed. You should submit via the Assignments menu item on the relevant module Canvas site.
Assignments must be submitted by the date and time stipulated. Deadlines will be strictly adhered to. Students submitting late, and who do not have mitigating circumstances approved by the Mitigating Circumstances Panel, will be subject to penalties for late submission specified by the University. Please note that Saturday and Sunday are treated as “working days” for the purposes of the late submission policy.
