Advanced Corporate Finance

Anonymous
timer Asked: Nov 23rd, 2016

Question description

END OF FIRST SEMESTER EXAMINATION

TITLE OF PAPER:ADVANCED CORPORATE FINANCE (FINC 704)

LEVEL:MBA

INSTRUCTIONS

ANSWER ALL QUESTIONS


INDEX NUMBER......................................................

VENUE:

Case Study: Revive & Renew

Revive & Renew Pvt. is considering opening an Express Spa Centre within the terminal buildings of three very large international airports in India. Each centre would offer a range of short duration (30 – 90 minutes) treatments designed to meet the needs of long haul international travellers, especially those in transit between flights. The company have already conducted and paid for a research at a cost of $500,000 to assess how much to charge customers.

The Airport owners (who own all three airports and a number of others in India and SE Asia) are prepared to rent out appropriate floor space for an initial 5 year period. Rental at each location will be contractual for the full five year period and no refund is payable should Revive and Renew Pvt. withdraw.

Revive & Renew will have to meet all capital investment and operating costs for the Spa Centre.

Revive & Renew is currently financed via a mix of common stock (equity) and long term borrowings (debt). Equity accounts for some 40% of the capital structure and the recent dividend paid has averaged 10%. The remaining 60% of the structure is debt with a fixed rate (pre tax) of 12.23%.

Company policy is to depreciate new capital assets over their useful life on a straight line basis taking account of any relevant residual values at the end of this period.

Relevant capital investment, forecast revenues and operating cost data is set out overleaf.

Other than for calculations involving cost of capital, you may ignore taxation.

Revive & Renew Ltd: Selected Financial Data

  1. Forecast Revenues

No. of Treatments per week

Airport A200

Airport B180

Airport C150

Average Treatment price$25

It is anticipated that spa will operate for 50 weeks per year, the remaining 2 weeks being used for “deep” cleaning and routine maintenance.

  1. Forecast Costs (Applicable to each of the 3 Airport locations)

Average Variable Cost of Treatment $10

Annual Fixed Costs

Floor Space Rental$50,000

Other$10,000

  1. Investment Costs

Centre “Outfitting”$25,000

Centre Spa Equipment$125,000

Required

As an individual:

Prepare a report, in a format suitable for the directors of the company which recommends which if any of the three locations should be progressed.Your report should include:

1. An executive summary identifying the key issues arising from all of your analyses (including those in element 1) and your overall recommendation.

2. Financial analysis and interpretation, including:

  • Annual profit before taxation, but taking account of any relevant depreciation charge.
  • Annual cash flows and overall net annual cash inflow.
  • “Simple” Payback Period.
  • An initial NPV assuming the “forecast case environment.”
  • Appropriate supplementary capital investment appraisal calculations
  • Appropriate NPV sensitivity calculations

3. An evaluation of the potential impact of external and internal business context factors on the investment decision.

4.An appendix (maximum 500 words) which critically evaluates and illustrates by reference to your work, the strengths and weakness of the financial techniques you have employed.

Your report including the appendix at part 4, should not exceed 2,500 words (+ or - 10%).You may use additional appendices which will not form part of the word count.These must not exceed FOUR A4 sides.It is envisaged that most of the additional appendices will be used to present detailed calculations rather than have these in the main body of the report.

Guidance on Approach and Assessment

1. There is no “right” answer to this case study. The data allows for several assumptions and interpretations to be made; this is an attempt to duplicate the reality of management decision making where information is never complete. In marking the calculation elements credit will be given provided the approach adopted is reasonable and is justified. In assessing the report element, a logical flow of argument is expected, based on the supporting calculations and a synthesis of material to arrive at a sustainable recommendation.

2. It is essential that you document all assumptions underlying your analysis. Assumptions made must be realistic.

3. A critical awareness of the financial techniques used is required – their limitations and underlying assumptions.

4. Most data is based on estimates; how sensitive is your recommendation to the accuracy of these estimates – how much would they have to change for your recommendation to change?

5. Remember that investment decisions are not taken purely on the quantitative financial appraisal. Are there other qualitative factors which are important to identify in the report?

6. Ensure your conclusions and recommendations are justified and supported by the facts.

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