Financial Analysis Case Studies

  1. Skyview ltd is a manufacturing company that specialises in ski lift systems. The company was incorporated in 2012, and after unprecedented levels of growth was successfully floated on the London Stock Exchange on 1 April 2017 at an issue price of £2.10 per share.  The company now requires additional capital of £4 million to fund an expansion programme due to commence in 2022.

  The current capital structure of Skyview ltd as at 31 March 2021 is as follows:

  • 1,000,000 ordinary £1 shares, currently trading at a market value of 321p ex div. A final dividend of 21p per share has recently been paid. After the first year of floatation, a final dividend of 16p per share had been paid and this level of growth was sustained annually and is expected to continue in the future.
  • £2,000,000 of irredeemable debt. This debt has a coupon rate of 8% (pre-tax) and an ex int market value of £78.
  • £5,000,000 of redeemable debt. This debt has a coupon rate at 5% (pre-tax) and is redeemable in five years’ time at par. The current ex int market value is £91.

Assume a 30% rate of corporation tax.

REQUIRED  

  • Calculate the weighted average cost of capital (WACC) for Skyview ltd.
  • Explain the relevance of this WACC figure in relation to the investment decision, the financing decision and the dividend decision, and discuss the extent to which the decisions are inter-related.

  (c) Evaluate the main arguments in relation to an issue of bonds as a method of raising the finance for the expansion as opposed to an issue of equity shares.

  1. Experian Holiday Club is considering two potential investments to expand its holiday parks in Europe. Both investments will allow the company to use an existing holiday park for 5 years, after which time a new lease would need to be renegotiated. Details of the two projects are as follows:
  £000s £000s
Project:          A          B
Initial capital investment required: 65,000 140,000
     
Expected profits from the projects:    
Year 1 6,000 8,000
Year 2 13,000 29,000
Year 3 15,000 33,000
Year 4 45,000 85,000
Year 5 60,000 145,000
Internal Rate of Return (approx.) 31.35% 

In both cases, profits have been calculated by taking the projected cash flows from the projects and deducting depreciation of the initial capital investment on a straight-line basis over 5 years.  The normal policy of Experian Holiday Club is not to undertake any project with a payback of more than three years.  Because of the high commercial risks involved, funding for either project would only be available at a fixed rate of 20%.

REQUIRED:

  • Calculate the Accounting Rate of Return (ARR) and Payback Period of both projects.                                                                                                                                                  
  • Calculate the Net Present Value of both projects using the company’s required rate of return for discounting purposes.
  • Calculate the IRR for project B.                           
  • Assuming that Experian Holiday Club only wishes to undertake one of the projects, which of the two is preferable?  Give reasons for your decision and refer

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