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Dovolenka Glam Plc

Requirements:

  1. a) 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. (13%)
  2. b) Identify and discuss what other information would be useful to DGP in making the investment decision. (7%)
  3. c) Critically evaluate the benefits for DGP of the proposed diversification and comment on the views expressed by the CEO (Klaus Worryington). (5%)
  4. d) 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:
  5. Cloud computing; (5%)
  6. Big data analytics; and (5%)

iii. Blockchain technology. (5%)

Your analysis should be relevant to the industry DGP and its group companies operate in and it should be focused on the finance function. You should also mention whether specific tools could be of any help to the company to achieve its objectives (in particular: growth).

Requirements:

  1. a) 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.

  1. b) 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
  2. c) Discuss the advantages and disadvantages of growth by acquisition as compared with growth by internal (organic) investment.

Dovolenka Garden Ltd (see Appendix 3 for Details)

  1. a) Estimate the expected outcomes from hedging using:
  2. Interest rate futures;
  3. 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.

  1. b) Discuss the advantages for DGL of having a specialist centralised treasury department.
Requirements

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:
  1. 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
  1. 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.

  • Blockchain technology.

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;

Answer

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:
  1. Interest rate futures;
  2. 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].

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[Accessed 20 May 2024].

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