Global finance

Description of the assignment:
Fitness Guru Plc is a research company specialising in the research and development of fitness gadgets. The company has already spent £3 million on R&D on a pet life style monitoring kit in the past few years. As a company director, you now face two mutually exclusive options (as follows) to exploit the financial potential of the new product. Ignore taxation and inflation.
Option 1:
Fitness Guru Plc could manufacture the pet life style monitoring kit itself. Manufacturing equipment will cost £40 million. The equipment would be bought on the last day of the company’s current financial year. £12 million in working capital is needed before the production can begin. The estimated scrap value of the equipment at the end of the production period is £5million. Fitness Guru Plc has a large warehouse which can be used as a factory for manufacturing the pet life style monitoring kit. The warehouse is currently leased to another company for £800,000 a year.
Fitness Guru Plc can sell the new product at £130 per unit in the first two years followed by a decline to £90 per unit for the remaining years. Variable cost are estimated to be £70 per unit. Marketing expenses including online advertising will be £12 million a year. Fixed costs will be £14.5 million a year including depreciation.
Fitness Guru Plc estimates the future sales from next year onwards as follows (assuming a product life of 5 years due to potential advances in technology):
Year 1 Year 2 Year 3 Year 4 Year 5
Number of units (000s) 500 1,200 1,500 2,000 600
Fitness Guru Plc plans to use the straight-line depreciation method on manufacturing equipment. The directors set a target accounting rate of return on investment of 15 per cent and a payback period of three years for all projects. The company currently uses a cost of capital of 10 per cent per year for all investments, but is considering using a cost of capital which reflects the capital structure of the company (the Weighted Average Cost of Capital).
The company’s current capital structure is:
Balance Sheet extract as at 31st December 2017
£m
Long-term Debt
7% Bonds 120
Issued Share capital
Ordinary shares (50p) 250
Additional Information:
The ordinary shares for Fitness Guru plc are currently trading at £0.9 and the market price of the bonds is £125
The return on Government bonds is currently 1.5%, the return on the market portfolio has been estimated at 7% and the company’s beta has been estimated as 1.3.
Option 2:
Fitness Guru Plc could sell the patent rights to another business that is specialising in manufacturing electronic products for £23 million. It will be payable immediately in a one-off instalment. Fitness Guru Plc will not be allowed to manufacture any of the new products once the patent is sold.
Required
Assume that you are an external consultant to Fitness Guru Plc. Prepare a report covering the following:
a) An investment appraisal of the two options: You are required to apply a range of methods to carry out the investment appraisal of the project and, based on your results, discuss which option the company should take. You are also required to evaluate the robustness of your findings, with reference to appropriate theory in investment appraisal, cost of capital and risk. (50 marks)
b) Advise the company on the financing options available. Your discussions should consider the implications for the company and the possible impacts on the cost of capital using theory where appropriate. (30 marks)
c) The Procurement department have recently identified an alternative supplier located in Belgium who could supply the component parts at a cost of 74.5 euros which at the current exchange rate of 1.12 euros/£1 would work out to be approximately 5% cheaper than the current UK suppliers.
Appraise the possible risks and management of those risks and advise the company accordingly. (10 marks)
plus 10 marks for presentation and referencing
Instructions
Make sure that you state any assumptions you have made and that you justify the techniques that you have used. You should minimise textbook descriptions of the methods you choose to use.
Include all workings related to the application of investment appraisal methods etc in an appendix. The report body should include only the final results of these calculations.
All information must be appropriately sourced and referenced using the Harvard referencing system, both in-text and in the references list. Please ensure that all information used is from an appropriate source. Inappropriate sources of information, such as Wikipedia, tutor2you, Investopedia, descriptive websites etc., may result in a loss of marks.
The word processed report should be 2,000 words (excluding references, appendices and tables) plus or minus 10 per cent. Reports outside this length may incur a penalty
Include your student number as well as the word count, on the front page of your report but do not include your name.
Please note that any suspected instances of plagiarism and/or collusion will be reported for investigation and action through the University’s academic conduct process.

 

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