Analyse and advise whether or not DGP should undertake the investment in Dovolenka Land using the NPV, MIRR and duration appraisal techniques. All the workings are expected to be included in Appendices.
DGP should not carry out the proposed investment on the basis of the following grounds:
- Net present Value is negative (refer Appendix -1)
- Modified Internal Rate of return is 1% (refer Appendix-2)
- Duration exceeds 3 years (refer Appendix-3)
|
Sl no
|
Particulars
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Terminal Value
|
Final
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Initial payment of land
|
-250000000
|
-250000000
|
|
|
|
|
|
|
|
2
|
No of Tickets sold
|
|
|
6120000
|
6120000
|
6120000
|
6120000
|
|
|
|
3
|
No of Tickets sold to Adult
|
|
|
2142000
|
2142000
|
2142000
|
2142000
|
|
|
|
4
|
No of Tickets sold to children
|
|
|
3978000
|
3978000
|
3978000
|
3978000
|
|
|
|
5
|
Price of ticket for Adult
|
|
|
20
|
20
|
20
|
20
|
|
|
|
6
|
Price of ticket for Children
|
|
|
12
|
12
|
12
|
12
|
|
|
|
7
|
Tax deduction for market research
|
46000
|
|
|
|
|
|
|
|
|
8
|
Revenue from ticket sold to Adult
|
|
|
45008775
|
46133994.4
|
47287344
|
48469527.8
|
|
|
|
9
|
Revenue from ticket sold to Children
|
|
|
50152635
|
48929400
|
48929400
|
48929400
|
|
|
|
10
|
Revenue from food and drink
|
|
|
64298250
|
62730000
|
62730000
|
62730000
|
|
|
|
11
|
Cost of food and drink
|
|
|
-41793862.5
|
-40774500
|
-40774500
|
-40774500
|
|
|
|
12
|
Revenue from gift and souvenier
|
|
|
45008775
|
43911000
|
43911000
|
43911000
|
|
|
|
13
|
Expense of gift and souvenier
|
|
|
-22504387.5
|
-21955500
|
-21955500
|
-21955500
|
|
|
|
14
|
Maintenace Expense
|
|
|
-15000000
|
-19000000
|
-23000000
|
-27000000
|
|
|
|
15
|
Annual insurance cost
|
|
|
-2101250
|
-2153781.3
|
-2207626
|
-2262816.4
|
|
|
|
16
|
Existing General overheads
|
|
|
-2626562.5
|
-2692226.6
|
-2759532
|
-2828520.5
|
|
|
|
17
|
staff expense
|
|
|
-42025000
|
-43075625
|
-44152516
|
-45256329
|
|
|
|
18
|
Working capital outflow
|
|
-55000000
|
|
|
|
|
|
|
|
19
|
After tax realisable value of non current asset
|
|
|
|
|
|
|
250000000
|
|
|
20
|
Depreciation (note 1)
|
|
|
-125000000
|
-93750000
|
-70312500
|
-52734375
|
|
|
|
21
|
Net flow before tax
|
-249954000
|
-305000000
|
-34342595.5
|
-9457206.4
|
9935602.6
|
23467919.4
|
250000000
|
|
|
22
|
Tax
|
|
|
0
|
0
|
0
|
0
|
|
|
|
23
|
Working capital inflow
|
|
|
|
|
|
|
55000000
|
|
|
24
|
Net Inflow
|
-249954000
|
-305000000
|
90657404.5
|
84292793.6
|
80248103
|
76202294.4
|
305000000
|
|
|
25
|
Discounting Rate
|
|
7.15%
|
7.15%
|
7.15%
|
7.15%
|
7.15%
|
7.15%
|
|
|
26
|
Net present Value
|
-249954000
|
-284647690
|
78958606.58
|
68514854.3
|
60873344
|
53945911.3
|
215918734
|
-56390240
|
|
27
|
MIRR
|
1%
|
|
|
|
|
|
|
|
Depreciation Schedule
|
Sl no
|
Particular
|
Amount
|
|
1
|
Opening balance
|
500000000
|
|
2
|
Depreciation in Year 2
|
125000000
|
|
3
|
Closing Value in year 2
|
375000000
|
|
4
|
Depreciation in Year 3
|
93750000
|
|
5
|
Closing Value in year 3
|
281250000
|
|
6
|
Depreciation in Year 4
|
70312500
|
|
7
|
Closing Value in year 4
|
210937500
|
|
8
|
Depreciation in Year 5
|
52734375
|
|
9
|
Closing Value in year 5
|
158203125
|
|
10
|
Sale procceeds
|
250000000
|
|
11
|
Profit
|
91796875
|
Appendix -III
|
Computation of duration of project
|
|
Sl NO
|
Time period
|
Cash flow
|
Cumulative
|
Remark
|
Discounted Cash flow
|
Cumulative
|
Remark
|
|
1
|
0
|
-249954000
|
-249954000
|
|
-249954000
|
-249954000
|
|
|
2
|
1
|
-305000000
|
-554954000
|
|
-284647690.2
|
-534601690
|
|
|
3
|
2
|
90657404.5
|
-464296596
|
|
78958606.58
|
-455643084
|
|
|
4
|
3
|
84292793.56
|
-380003802
|
|
68514854.32
|
-387128229
|
|
|
5
|
4
|
80248102.6
|
-299755699
|
|
60873344.22
|
-326254885
|
|
|
6
|
5
|
76202294.37
|
-223553405
|
|
53945911.25
|
-272308974
|
|
|
7
|
Terminal Value
|
305000000
|
81446595
|
Greater than 5 years
|
215918734
|
-56390240
|
Never paid
|
|
|
|
81446595.03
|
|
|
|
|
]
|
|
Particulars
|
Rate
|
Weight
|
Net
|
|
Cost of Capital (proposed Strategy)
|
|
|
|
|
Cost of debt
|
5.8
|
35.60%
|
2.0648
|
|
Cost of equity
|
7.9
|
64.40%
|
5.0876
|
|
|
|
|
7.1524
|
Identify and discuss what other information would be useful to DGP in making the investment decision.
The critical factors that would be important in decision making includes:
- Organisation defined risk associated with the project i.e. Risk Score
- Criteria which are non-financial in nature like satisfaction of customer, retention of employees;
- Alignment with the vision of the company;
- Availability of suitable site location;
- Competitors strategy and profitability;(Anon., n.d.)
- Government rules and regulation and approach towards to themed parks;
- Safety issues;
- Environmental Constraints;
- Tax incentives if any;
- Availability of qualified personnel;
- Impact on other business of the company;(Anon., n.d.)
- Permission from required authorities etc.
- Critically evaluate the benefits for DGP of the proposed diversification and comment on the views expressed by the CEO (Klaus Worryington).
The benefits of diversification to DGP shall include:
- Minimisation of risk of loss as if one business fail company can look at other. In other view, loss from one can be offset form the profit of the other.(Johansson, 2017)
- It provides security and stability to the company;
- Creates employment opportunity and increases turnover and corporate image of the company;
- Create scope for further revenue generation and maximisation of stakeholder wealth;
- In alignment with the long term vision of the company.
The views expressed by Klaus Worryington are in alignment with the benefit of diversification as diversification always results in maximisation of wealth and reduces corporate risk of failure on account of changing business times. Further, the diversification maximises stakeholder wealth. On account of increase in stakeholder wealth, the company corporate image shall increase.
- Provide an assessment and evaluation of the specific points raised by Lesley in relation to technological developments in the world financial markets. You should focus on the following topics in particular:
- Cloud computing
Cloud Computing can be described as a means to efficiency, flexibility and savings in cost all bundled in one.
The benefits showered by cloud computing is highly touted. It allows users to have access to a range of virtual computing solutions encompassing network-accessible data storage, software development environment to a full-fledged application.(Mishra, 2016)
In order to analyse the benefits of cloud computing, a financial user must understand the impact of implementing different models of cloud computing system. A write blend of cloud model is must. (Anon., 2015)The cloud computing shall offer the following advantages:
- Improvement over existing premise systems;
- Streamlining of Finance functions;
- Cost reduction;
- Efficiency is business problem solutions;
- Off premise function;
- Can work under distributed environment, for instance shared services, local finance to end –to–end process.
- Core financial Management
- Big data analytics
The entire financial service industry depends on market intelligence. Any technology that provides a head front is a gold to the company. The big data ensures chances of procuring more customers aboard. The Big data helps in understanding customer data, measurement of risk, expectation of market and operating efficiency.
In terms of data reported by Price Waterhouse Coopers, the size of big data at present is USD 53.4 billion and is constantly growing. Further, it should be looked as valuable business tool. Big Data provides advantages in the following three areas:
- Monetizing data of customers: Big Data helps in analysing customer risk, need and preferences. They keep institution on track with satisfaction of customers as priority. It also helps to gauge the reason for loss of business in the past and avoid any such mishap in future.
- Developing models which are predictive for transactions and operations: They help in disclosing the need and preferences of customer. For instance What product appeals most to customer?. It helps to analyse the sentiment for new product and services. (Anon., n.d.)
- Reporting to regulatory and risk management optimisation: In today world, financial firm needs to manage risk under multiple dimensions. Big data helps companies to assess real time data streams such as news, research etc. It further combines regulatory data with document, supporting material and contracts. It helps in better regulatory risk management.
Thus, depending on need of the institution, Big data can be of great help for growth and success of the organisation as seen in the benefits detailed above.
Before detailing the benefits of block chain in financial industry, one needs to properly understand the mechanism of blockchain. A blockchain is a public digital ledger that can be verified by anyone. The ledger has been distributed globally across network of computers and devices. Further, there is no central authority to add new transactions to the ledger. (EYGM Limited, 2016)It is a highly secured mechanism. Block Chain shall provide the following advantages to financial institutions:
- Cheaper Banking as it insures distributed database;
- Delivery of statutory, management and regulatory reporting;
- Transparency of intercompany transactions;
- Reconciliation of transactions;
- Maintaining standards of financial data;
- Ensuring accuracy of source system;
Despite, the aforesaid advantages, the technology can still be delayed on grounds of scalability, novice and amateur technology, costly as cost of migration from legacy finance systems.(Dale, 2018)
Dovolenka Fly Plc (see Appendix 2 for Details)
- Estimate the current cost of equity for GreatFlight using the Capital Asset Pricing Model. Discuss any assumptions that you have made. All the workings are expected to be included in Appendices
|
Dovolenka Fly Plc (DFP)
|
|
Sl NO
|
Particulars
|
Rate
|
|
1
|
Long Term Growth rate
|
4%
|
|
2
|
Current Rate of Growth
|
6.30%
|
|
3
|
Growth continuity
|
5 years
|
|
4
|
Equity Beta
|
1.45
|
|
5
|
Risk Free Rate
|
3%
|
|
6
|
Equity Risk Premium
|
7%
|
|
7
|
Prevailing Share price
|
290p
|
|
8
|
P/E ratio
|
10
|
|
9
|
Cost of Equity in terms of CAPM
|
13.15%
|
The cost of Equity is 13.15% on the basis of the formula of Capital Asset Pricing Model(CAPM) i.e. Risk free premium+ Beta( Retrun on market- Risk free premium).
Thus, the return required is 13.15%.
The assumptions of the Capital Asset Pricing Model being an additive model include:
- The quantity of asset is given and fixed;
- Investor are rational and risk-averse;
- Investment has been diversified broadly;
- Investors are price takers i.e prices cannot be influenced;
- Unlimited lending and borrowing can be done at risk free rate;
- There is no transaction or taxation cost;
- Securities are highly divisible into smaller parcel;
- Expectation are homogenous;
- Market is efficient and all information is available to investors.
- Estimate and advise on the potential value of GreatFlight using the Free Cash Flows to Equity (FCFE) method. Explain the limitations of all the methods you have used and comment on the value computed. All the workings are expected to be included in Appendices.
The potential value of equity of Great Flight has been computed here-in-below based on the data provided in Appendix-II:(CFI Education Inc. , n.d.)
|
Sl NO
|
Particulars
|
Amount' in Million pounds
|
|
1
|
Net cash flow from operating Activities
|
210
|
|
2
|
Capital Expenditure
|
-120.2
|
|
3
|
Debt Repaid
|
-31
|
|
4
|
Net interest
|
1.5
|
|
5
|
Taxation
|
-4.1
|
|
6
|
Decrease in short term deposit
|
35.5
|
|
7
|
Free cash flow to Equity
|
91.7
|
|
8
|
Cost of equity
|
13.15%
|
|
9
|
Current Growth
|
6.30%
|
|
10
|
Long Term Growth
|
4%
|
|
11
|
Valuation using Current Growth
|
1338.7
|
|
12
|
Valuation using Long term Growth
|
1002.19
|
Assumptions Undertaken
- Interest received is a part of net cash flow from operating activity;
- Interest paid is a part of net cash flow from operating activity;
- Interest element is a part of net cash flow from operating activity;
- Taxation is a part of cash flow from operating activities;
- Proceeds from sale of JV is not a part of FCFE;
- Increase / decrease in short term deposit is a part of net cash flow from operating activity;
- Increase / decrease in cash is a part of net cash flow from operating activity.
- Cash flow computed is inclusive of growth.
The value computed on the basis of above methodology is Pound 1338 Million with current growth rate and Pound 1002.19 with long term growth rate. However, the market cap of the company is lower than the competitor based on above computation.
- Discuss the advantages and disadvantages of growth by acquisition as compared with growth by internal(organic) investment.
Growth by acquisition and diversification is known as external growth or inorganic growth while internal growth is known as organic growth.(Devenport, 2016) The key advantage and disadvantage of external growth has been detailed here-in-under:
- Growth take place in a short tenure of time;
- Quick changes is business to adapt to market changes and change in technology;
- Impact in market size and quick add to sales;
- Ambitious growth can be executed by acquiring a fast growing company;(soulsby, 2017)
- Expansion in asset;
- Advantage of expertise personnel through acquired business.
The disadvantages have been detailed here-in-under:
- Change in management style, business culture and ethics;
- Risk of failure of acquired business;
- Financing through debt can increase cost of capital of company;
- Difficult to maintain such growth;(soulsby, 2017)
- Lack of control as synergy cannot be estimated with 100% precision;
- There might me employee’s retrenchment.
Dovolenka Garden Ltd (see Appendix 3 for Details)
- Estimate the expected outcomes from hedging using:
- Interest rate futures;
- Interest rate options; and
iii. Forward rate agreements.
You must show the outcomes assuming that LIBOR interest were both to increase by 0.5% or decrease by 0.5%. Comment on the results and advise on the best hedging option. In the futures hedge, the expected basis at the close-out date should be estimated but basis risk may be ignored. In the options hedge, you should show the outcomes for all the multiple options available. All the workings should be included in Appendices
|
Particular
|
Amount in Pound Mio
|
Time period in months
|
|
Temporary Facilities
|
55
|
5
|
|
LIBOR
|
4.10%
|
|
|
Spread
|
1.35%
|
|
|
Loan rate
|
5.45%
|
|
|
Futures
|
Amount in Pound
|
No of contracts required
|
No oF lots
|
|
Contract Size
|
500000
|
110
|
5000
|
|
Tick Size
|
0.01%
|
|
|
|
Tick Value
|
12.5
|
1375
|
|
|
Value in December
|
96.05
|
|
|
|
Value in March
|
95.76
|
|
|
|
Value in June
|
95.54
|
|
|
|
Contract Value inDecember
|
52827500
|
Sell contracts as we fear rising interest
|
|
|
Contract Value in march
|
52668000
|
|
|
|
Contract Value in June
|
52547000
|
|
|
|
Profit in june
|
280500
|
|
|
|
Profit %
|
0.53%
|
|
|
|
Excessive interest ( LIBOR rise by 0.5%) (i)
|
45833.3
|
|
|
|
Reduced interest (LIBOR fall by 0.5%) (II)
|
45833.3
|
|
|
|
Profit Under scenario 1
|
23466.7
|
|
|
|
Profit Under scenario 2
|
326333..3
|
|
|
Options
|
Options
|
Amount in Pound
|
No of contracts required
|
No oF lots
|
|
Contract Size
|
500000
|
110
|
50
|
|
Tick Size
|
0.01%
|
|
|
|
Tick Value
|
6.25
|
687.5
|
|
|
-A Call (Long)
|
December
|
June
|
Profit/ (loss) per unit
|
Profit/(loss) per lot
|
Profit/(Loss) overall
|
|
-9400
|
1.505
|
1.67
|
0.165
|
8.25
|
412.5
|
|
-9450
|
1.002
|
1.17
|
0.168
|
8.4
|
420
|
|
-9500
|
0.502
|
0.685
|
0.183
|
9.15
|
457.5
|
|
-9550
|
0.252
|
0.285
|
0.033
|
1.65
|
82.5
|
|
-9600
|
0.002
|
0.07
|
0.068
|
3.4
|
170
|
|
-PUT(Sell)
|
|
|
|
|
|
|
-9550
|
0.06
|
0.165
|
0.06
|
3
|
150
|
|
-9600
|
0.2
|
0.71
|
0.2
|
10
|
500
|
The calculation has been done on the basis of following assumption:
- The size of option is 10000 pound thus for 55 million there are 5500 options.
- The profit has been computed based on the same methodology.
Forward Rate Agreement
|
Forward Rate Agreement
|
5.85%
|
|
Scenario -1
|
|
|
Excessive interest ( LIBOR rise by 0.5%) (i)
|
5.95%
|
|
Cost to Company reduced by 0.1%, Profit
|
9166.67
|
|
Scenario -12
|
|
|
Reduced interest (LIBOR fall by 0.5%) (II)
|
5.05%
|
|
Cost to Company increased by 0.8%, Profit
|
-73333.33
|
- Discuss the advantages for DGL of having a specialist centralised treasury department.
The advantages of having a specialist centralised department of treasury includes:
- Management of foreign currency becomes easier;
- Rate of interest on investment may be attained at a higher rate on account of large pool of cash available;
- The likelihood of making profit is higher as treasury department shall function as profit centre;(Anon., n.d.)
- Borrowing of group can be attained a lower rate on account of centralised function;
- Level of money maintained as buffer shall be reduced on account of centralization;
- Expert employees may be hired to manage resources.
References
Anon., 2015. Finance in the cloud. [Online]
Available at: https://www.ey.com/Publication/vwLUAssets/EY-finance-in-the-cloud/$FILE/EY-finance-in-the-cloud.pdf
[Accessed 13 August 2018].
Anon., n.d. Advantages of a centralised treasury department. [Online]
Available at: https://www.acowtancy.com/textbook/cat-ffm/a1-treasury-function/c1b-advantages-of-a-centralised-treasury-department/notes
[Accessed 14 August 2018].
Anon., n.d. Five key factors to assess when making an investment decision. [Online]
Available at: https://business.financialpost.com/investing/investing-pro/five-key-factors-to-assess-when-making-an-investment-decision
[Accessed 13 August 2018].
Anon., n.d. How to Benefit from Big Data in the Financial Industry. [Online]
Available at: https://www.ingrammicroadvisor.com/data-center/how-to-benefit-from-big-data-in-the-financial-industry
[Accessed 13 August 2018].
Anon., n.d. Non Financial Criteria and factors affecting project selection. [Online]
Available at: https://shodhganga.inflibnet.ac.in/bitstream/10603/43628/14/14_chapter%208.pdf
[Accessed 13 August 2018].
CFI Education Inc. , n.d. Free Cash Flow to Equity (FCFE). [Online]
Available at: https://corporatefinanceinstitute.com/resources/knowledge/valuation/free-cash-flow-to-equity-fcfe/
[Accessed 14 August 2018].
Dale, O., 2018. Benefits of Blockchain Technology For The Financial Services Industry. [Online]
Available at: https://blockonomi.com/blockchain-financial-industry/
[Accessed 14 August 2018].
Devenport, V., 2016. Organic vs Inorganic Growth in Business. [Online]
Available at: https://www.linkedin.com/pulse/organic-vs-inorganic-growth-business-victoria-menifee-cpa-mba
[Accessed 14 August 2018].
EYGM Limited, 2016. how blockchain technology could revolutionize the finance function. [Online]
Available at: https://www.ey.com/Publication/vwLUAssets/EY-chain-reaction/$FILE/EY-chain-reaction-how-blockchain-technology-could-revolutionize-the-finance-function.pdf
[Accessed 14 August 2018].
Johansson, A., 2017. The Benefits of Running a Diversified Company. [Online]
Available at: https://www.ibm.com/developerworks/community/blogs/cbadb250-3c1b-4f24-9ef5-c09bfe4be1b1/entry/benefits-diversified-company?lang=en
[Accessed 13 August 2018].
Mishra, N., 2016. Cloud Computing means Efficiency, Flexibility and Cost Savings all bundled into one. [Online]
Available at: https://www.netmagicsolutions.com/blog/cloud-computing-means-efficiency-flexibility-and-cost-savings-all-bundled
[Accessed 13 August 2018].
soulsby, t., 2017. Advantages and Disadvantages of Organic Growth over External Growth. [Online]
Available at: https://getrevising.co.uk/grids/advantages-and-disadvantages-of-organic-growth
[Accessed 14 August 2018].
