'Ba Finance\r'

'7BSM1006 Managing financial Value Drivers Coursework Semester A 2012 Assessment weighting 60% Bellingham plc Arthur Scroggs was a farmer. His family has throwed and farmed vitamin D acres of patriarchal land in the Vale of Aylesbury for four generations. In the mid 1980s small farms were finding the financial temper difficult with falling farm incomes and much communion of putting farm land to â€Å"alternative wont”. By 1985 Arthur had already sold his dairy bevy to focus on ce very ware when a fortuitous meeting with Lucy Bellingham at a logical argument conference led him to re carry on the future of the family farm.Bellingham is a headinger of bespoke fitted kitchens who had a business conception but little capital. The blueprint was to manufacture put across quality fitted kitchen furniture and establish externalize studios/ visualizerooms in high income areas. Having recently sold his dairy herd, Arthur had replete capital to fund the raw business and as well as a number of large barns and proscribedbuildings adapted for manufacturing the kitchen units depicted object to refitting and planning consent being obtained. Lucys business plan was so convincing that Arthur decided to get out of farming altogether (by leasing his arable land to a local co-operative) and focus on developing the unused business.From this small beginning grew the forthwith publicly quoted confederation of Bellingham plc. Initially, showrooms were established in Beaconsfield and then Kensington. Demand for their kitchens was zippy and â€Å"Bellingham Bespoke Kitchens” expanded rapidly but remained a partnership. The planetary houses clients are mainly celebrities from the entertainment world and the apostrophize of a Bellingham Bespoke Kitchen is straight off ? 40,000 †? 150,000 or more. The business firm was restructured as a molded caller-up in 1990 and subsequently experienced rapid growth until 1999. In that year the then direc tors decided that the business had reached the limit of development in its present skeletal system.Future development call for large-scale expansion of production facilities in put together to provide the range of materials, furniture, quality and prompt pitching required by their discerning clients. This in produce needed an injection of capital that the directors were unable to fuss themselves. The conviction that in that kettle of fish was much money to be made from â€Å"quality fitted kitchens” ” had been vindicated. They check up ond a number of possibilities decision making eventually to expand production facilities by buying a modern production unit on an industrial state in Aylesbury.The expansion was funded by a stock chequeret floatation and genteelness the necessary capital in the name of Bellingham plc. As the market grew and to keep abreast of unseasoned production technology, the directors agreed to reverse the maxim so making love to the h eart of the fonethers, Arthur and Lucy; â€Å"neither a (long-term) borrower nor lender be. ” They payd update of equipment and premises by means of issuing debentures. It is now October 2012 and the present directors of Bellingham plc believe that the long-term success of the company lies in future international diversification and expansion.They consider that the most beneficial action they could take is to investigate the acquisition of a subsidiary in the USA. The newly-appointed pay director, Bill Moneypenny, agrees with this opinion but insists that the company moldiness first appraise its take present-day(prenominal) persuasion and if necessary, make swops to strengthen its existing financial part before embarking on new plans. He is oddly concerned that the company should preserve adequate liquid and finance its assets in a beneficial manner.He is too concerned that too much emphasis has been fit(p) on â€Å"pandering to the whims of the rich and famousâ⠂¬Â and not bounteous on running an efficient business operation. Lucy and Arthur mute retain 30% of Bellinghams equity and other long-standing directors own a further 20%; a change of control is strangely to be welcome. During the last ii years, the company has updated its design, production and showroom assets and, in what has been a difficult year, has been able to maintain sales and avail growth (see Bellinghams accounts in appendix 1).There has been a swell deal of uncertainty about world frugal growth and stock markets welcome been extremely volatile resulting low return keys. However the firm’s middling bundles have made good progress during the year. common share dividends have achieved substantial growth everyplace the last two years although this rate of join on is not expected to continue. prevalent dividends have full-grown at an average rate of 14% per annum oer the past 10 years and this rate is a more hardheaded growth rate for future divid ends. The present market prices for Bellinghams shares and debentures are: ?1 Ordinary shares? 7. 02 ex div ?0. 50p, 6% Pref shares? . 55 ex div 7% debenture bonds 2016? 100. 51 ex interest Any new imperil would be expected to achieve a return on capital employed in line with that experienced recently by Bellingham plc. The finance director favours a payback period of 5 years. Bellingham would on that pointfore need to agree a realistic acquisition price for such a new venture and its future cash flows in cast to determine whether these criteria could be met. Although a number of investing projects are being considered, the main aim presently being investigated offers an expansion into the US prime-property market which is prognosticate to grow faster than the UK market.Bellinghams finance director has already calcu easyd the trends in the financial ratios of American Creations, an unquoted US company, from its unaudited annual accounts (see appendix 2) and has concluded that the proposal is now worthy of further investigation. American Creations is a family-owned venture requiring further capital to repair its balance pall after making losses on a property development in Nevada from which it has now withdrawn. shekels have suffered in the last two years due to write-offs associated with this development.The existing owners feel that the firm’s future lies in establishing wider international links and the hideaway of senior family members, leaving the younger members active in the management of the firm. They are therefore considering selling a controlling interest of 60% to a suitable company. The firm has been established for 23 years, and is well value in business circles. The average age of its determined tangible assets is 3 years. The directors have indicated that they may include part payment in Bellingham shares subject to negotiation. The firm’s nominal share capital is $2. m, and the directors have indicated that they value the firm at five quantify the year 2010 net profit. They consider this to be the firms â€Å"normal” level of profit excluding the â€Å"extraordinary” make of the Nevada development. As the firm is at present family owned and run, there is no available price/earnings ratio. P/E ratios for the only two publicly-owned companies in the said(prenominal) business sector, Harvey Wilkinson functions plc and Cucci Lifestyle plc, are currently 10 and 8 times respectively although both of these firms, unlike Bellingham, operate internationally. Wilkinson has grown at a like rate to Bellingham.The dividend yields of these companies have been as follows: WilkinsonCucci Year to 31 December 2011 8. 1% 7. 25% 2010 7. 2% 6. 9% cc9 5. 3% 5. 95% American Creations has its own manufacturing facilities and operates throughout the USA and Caribbean with design offices in New York, Miami, Los Angeles and carbon monoxide Springs. Their main business, which is thriving, involves arra nt(a) home furnishing and interior design for wealthy clients. In addition, the firm has a real state office in each location and is thus able to offer a complete property service.The value of properties handled by the real estate offices is typically $5m †$20m. Bellingham is interested not only in extending its operations internationally but particularly in the possibility of diversifying into the real estate business. Whilst well assured of the existence of a number of competitors, the directors feel that there is a ready market in the US for their established name in terms of design flair, service and products. After discussions with the directors of American Creations, Bill Moneypenny has produced the interest hope.Under average economic growth conditions, the American Creations run forecasts (in $* deoxyguanosine monophosphate) for the next five years are ground on the following: Income:from gross sales: $7500 in 2013, advance by 12% per annum for the foreseeable f uture. from real estate sales commissions: $2850 in 2013 increasing by 15% per annum for the foreseeable future. Manufacturing variable speak tos: Labour: $1250 in 2013, expected to increasing by 8% per annum. Materials: $3800 in 2013, expected to increasing by 5% per annum. fit(p) costs excluding depreciation:Manufacturing O/H: $2065 in 2013, increasing by 5% per annum. General O/H: $1850 in 2013, increasing by 2% per annum. Depreciation:Factory, machinery & adenylic acid; vehicles: $500 per year. Office/Design Studio fixtures: $200 per year. The beta of Bellingham plc is believed to be 1. 65 , the risk-free rate of return is 5. 5% and the return for the last year on the FT All-share major power is 2%. UK corporation tax is currently 32% payable 9 months after the end of the write up year in question (you may convey for the aspire of this case that accounting profit and rateable profit are identical. )Bellinghams directors estimate that the after-tax profits of American Cre ations could be allocated as follows: 70% as retained earnings and 30% as dividends. This has been the pattern under the under the present ownership. There would be no restriction on the transfer of the bewitch share of these dividends to the UK. The US corporation tax rate applicable is 20% payable in the year in which the profit arises. There is no double gross of profits of US origin in the UK. (For the purpose of this case, ignore the possibility of any withholding taxes and the effects of foreign exchange risk. It is considered possible that, as the US economy develops further, even higher wages than those forecast may be demanded by the workforce. Required: tax the American Creations proposal on behalf of Bellingham plc, supporting your arguments with pertinent theory and calculations and indicating any non-financial matters you feel should be taken into consideration. Your report should consider the following areas: 1. An analysis of Bellinghams current position using r elevant financial ratios. You should show the calculation of the ratios and provide interpretation of the results. . Calculation of Bellinghams cost of capital, using alternative methods and arriving at the most enchant figure. 3. An investment appraisal of the American Creations proposal presumptuous the valuation suggested in the case, using a smorgasbord of methods and evaluation of the results. 4. A sensitivity analysis of the proposal and interpretation of the results. 5. Calculation and discussion of alternative valuations for getting the share in American Creations and how these would impact on the investment appraisal. 6.A discussion of the various available methods of financial backing the acquisition and consideration of which is the most appropriate. Your calculations and arguments should be support by relevant theory, with evidence of wide construe around the subject. You should provide a complete bibliography with appropriate referencing in your report. Submission requirements: Your answer should take the form of a written report of approximately 2500 haggling excluding appendices and the reference list. Deviations from the word count exceeding positively charged or minus 10% will cajole a penalty of 5%. The hand-in deadline for submission is 23. 0 on 25th November 2012. Submissions up to 24 hours late will attract a 10% penalty whilst those beyond 24 hours but less than 1 calendar week late will be crest at 40%. Reports submitted more than one week late will attract a mark of zero. Submit one electronic copy via Studynet. This is an individualistic assignment and the report submitted should be entirely your own work. Appendix 1:Bellingham plc| | | | | | | Abridged Trading, scratch & Loss Account for the year ended thirtieth June 2012:| All amounts are in thousands of pounds sterling| | | | | | | | | | | | | | | | | | | 2012| | 2011| | 2010| |Sales| 9606| | 7564| | 6100| | Production Cost| 4034| | 3101| | 2240| | Gross pelf| 5572 | | 4463| | 3860| | | | | | | | | interchange Expenses| 1467| | 1250| | 1080| | Installation Expenses| 1689| | 1300| | 980| | Administration Expenses| 960| | 630| | 597| | Operating Profit| 1456| | 1283| | 1203| | Debenture Interest| 53| | 53| | 53| | Profit Before tax revenue| 1403| | 1230| | 1150| | Corporation Tax| 449| | 394| | 368| | Profit After Tax| 954| | 836| | 782| | Dividends| 341| | 280| | 220| | Retained earnings| 613| | 556| | 562| | balance Sheet at 30th June 2012:| | | | | | | | | | | | |Fixed Assets (net):| | | | | | | vote out & Buildings| 2300| | 2400| | 2500| | Plant & Machinery| 1700| | 1186| | 552| | Fixtures & Fittings| 700| | 600| | 402| | move Vehicles| 185| | 140| | 105| | Office equiptment| 250| | 185| | 100| | | 5135| | 4511| | 3659| | trustworthy Assets:| | | | | | | Stocks: Raw Materials| 216| | 208| | 182| | Work in Progress| 200| | 205| | 190| | Finished Goods| 150| | 128| | 97| | Debtors| 1775| | 950| | 595| | margin/Cash| 230| | 1 36| | 104| | | 2571| | 1627| | 1168| | menses Liabilities:| | | | | | | Trade Creditors| 1190| | 788| | 270| |Corporation Tax| 449| | 394| | 368| | Final Dividend| 171| | 140| | 110| | | 1810| | 1322| | 748| | | | | | | | | Net Current Assets| 761| | 305| | 420| | Net Assets| 5896| | 4816| | 4079| | | | | | | | | Long-term Liabilities:| | | | | | | 9% Debentures 2016| 750| | 750| | 750| | | | | | | | | | 5146| | 4066| | 3329| | | | | | | | | Shares & reserves| | | | | | | ?1 ordinary shares| 1000| | 1000| | 1000| | 6% Preference shares of 50p ea,| 500| | 500| | 500| | Retained pr for yr| 613| | 556| | 562| | Profit & loss| 3033| | 2010| | 1267| | Shareholders funds| 5146| | 4066| | 3329| |\r\n'