Business Finance

FIN3120 – Business Finance

Individual Assignment – Part 1

Title: Time Value of Money, Investment Appraisal, and Analysing companies Financial Management

This is the first part of your individual assignment for the module and the objectives we are aiming to achieve with it are:

• Ensure you have understood the key concepts of time value of money and investment appraisal and are able to apply them

• Allow you to choose one company from a list of companies listed in the London Stock exchange to conduct the next two parts of the coursework assignment and final presentation

• Assess your ability to conduct the first stage of a company analysis for the purpose of valuation, i.e. ratio analysis

Don’t forget: anything you don’t know … you should research and try to find the answers of how to address it …

Requirement:

You are required to submit ONE excel spreadsheet answering the requirements of the three parts detailed below. You can (and I recommend you do) use as many tabs as you want but only one spreadsheet will be marked.

Marks will be mainly allocated to the answers provided to the questions, but the “quality” of the formulations developed in the spreadsheet, i.e. could they be reused with minimum additional work, will also be considered as part of a good submission.

Requirement 1 – Time Value of Money Calculations In your spreadsheet, calculate the answers to the following questions:

1. The amount paid after four years for a loan of £25,000 at an annual rate of 5.7% compounded quarterly, if the final payment includes both principal and interest.

2. The effective annual rate for an investment which pays interest monthly at an annual

nominal rate of 5%.

3. The required investment now if you want to collect £75,000 after ten years and can invest at an annual rate of 3.5% compounded continuously.

4. The amount of interest paid monthly on a £19,000 loan that charges an interest rate of

6.9% p.a., assuming simple interest.

5. The payback period for an investment with the following cash flows from years zero to six: -1800; 300; 700; 700; 700; 500.

6. The value today of a 4-year monthly annuity of £790, if the interest rate received is

4% p.a.

7. A customer has contacted a financial adviser to plan for the possibility of buying a flat in four years’ time given that he doesn’t have enough money to meet the 20% of the flat’s price necessary to be granted a mortgage. The customer is hoping to buy the flat in three years’ time and the following information is available:

o He has savings of £20,000, which are currently in a deposit paying 4% p.a.

compounded monthly, fixed for the three-year period; o He will be able to save £600 per month for the next 36 months, which will be

deposited in an investment account that pays interest at 4% p.a. compounded monthly;

o The mortgage rate expected to be available in three years’ time is 5.9% compounded monthly;

o Given the age of the customer and the location of the flat to be bought, he should be able to get at 30-year mortgage

Required:

i. Calculate the amount accumulated by in three years’ time and the maximum amount of the mortgage to be taken out.

ii. Calculate the monthly mortgage payment, assuming this maximum amount is borrowed (rounded to £’000s) and assuming the conditions above.

Requirement 2 – Investment Appraisal

The management of Make More plc, a manufacturer of low-cost electronic products, has seen a significant increase in the company’s activity despite the financial crisis that has affected business activity in the last two years.

They are now facing two decisions for which they have asked you to conduct the analysis and recommend the best course of action.

The first decision has to do with a potential investment to make three additional products using a new technology. In order to undertake this investment, Make More is looking to lease a new facility for the next six years, after which it is expected that the technology will be obsolete. The forecasts put together by the management of the business are as follows:

§ Sales of the three products in year one will be 100,000 units at an average price of £55;

§ Sales volume is expected to grow at 20% a year for the first three years, and decrease at 25% a year for the remainder of the project;

§ Cost of sales will start at 65% of sales price and efficiency improvements will lower it by 8 percentage e points from year three;

§ The company has ordered market research to be done for £750,000, which will be paid next month;

§ Selling and administrative expenses specific to this project will be £650,000 and there is an additional allocation of £450,000 from corporate overheads;

§ The lease rent of £300,000 will be payable from year 1, as the owner is waiving the rent for the initial period while refurbishment of the facilities and installation of the machinery is taking place;

§ In order to manufacture the three products, Make More is going to buy equipment worth £1.5m (a 5% deposit has already been paid). This equipment is expected to have a scrap value of £300,000 in six years’ time;

§ Working capital required for the project is £550,000 in year 1, changing in line with sales growth throughout the life of the project;

§ Annual inflation rate is expected to be 3.8%; § Corporate tax rate is 25% § The current cost of capital of Make More is 15%, but this project is considered to be

riskier and the cost of capital for companies with comparable levels of risk is 20% higher.

Required: Using the four methods discussed in class, assess this investment opportunity, and make a recommendation of whether the company should go ahead with it or not.

Requirement 3 – Aston Martin Lagonda’s Ratio Analysis

Required:

i. Collect the more recently published Annual Report; ii. Conduct a “good” (yes, you’ll need to decide what constitutes “good”) ratio analysis

for that company; iii. Briefly discuss what areas are of particular importance to analyse in trying to assess

the financial performance of a company operating in the industry your company is; iv. Very briefly discuss whether this company is performing well or not.