N-Tech UK Ltd: A Board Meeting Report

Issue 1 - Bond Pricing Model

N-Tech UK Ltd is a company, based in Edinburgh UK and established in 2010, that produces smart phones components. It is a relatively small company, with a highly skilled work force. Despite the Brexit quagmire that impacted its supply/distribution chain the company is still profitable due to its excellent products and reputation for customer service.

 

N-Tech UK Ltd has six key departments – Marketing, Customer Support, Finance, Manufacturing, Research and Development, and HR. The company’s Mission statement is to be “Recognised by customers and employees as a progressive, high quality, supplier of innovative mobile products at affordable prices” The board meeting of the N-tech UK Ltd on 23 April 2021. You are the CFO of the company and you have to prepare a report to the board meeting answering the five critical issues. The board is consist with highly qualified and educated members. Therefore, your report should use academic and professional references to support the arguments. Moreover, your report should consist with clear structure and well written. The word count of the report should be maximum 3500. Please see the given formatting instruction end of this document.

You have read few journal articles to support your report and arguments. According to Hand, Holthausen, and LEFTWICH (1992) researchers investigating the impact of various economic or regulatory changes on debt securities have generally employed two types of bond pricing models: the absolute yield or the relative yield model. The literature relevant to financial bonds explores the behavioural implications of these two models and provides a theoretical and empirical examination of the contrasting specifications. Evidence is presented that suggests the relative yield model to be the more appropriate specification.

Moreover, bonds are the most important investment class that hardly any retail investor owns directly. Yet bonds are easy to buy and should be the bedrock for anyone trying to build up a nest egg, as they will provide steady returns upon which the rest of your portfolio can be built. When investors buy bonds they instantly lower their risk, reduce the chance of losses and ease those sleepless nights by creating a more balanced portfolio.

• how interest rate and inflation affect bond prices?
• What are the difference between secured bonds and unsecured bonds?
• Tesco plc has bonds on the market making annual payments, with 10 years to maturity, and selling for £1,050. At this price, the bonds yield 10 per cent. The par value of the bond is £1000. What must be the coupon rate on the bonds?
• You are considering buying debentures of Tesco plc which were issued some years ago in units of £100 each. This debt is due for redemption in seven years’ time. The rate of interest on this debt is 15% per year and the current market value per £100 of debt is £115. Calculate YTM. (Total Marks 25)

N-tech UK Ltd is planning to invest in Jumbo Plc. The assistant accountant provide following information regarding Jumbo Plc investment.

 

Jumbo Plc started trading seven years ago and has gone from strength to strength. Dividends are currently 5p per ordinary share, having grown at a 12% compound annual rate over the past ten years. This growth rate is expected to be maintained for the next four years, after which growth is expected to slow, and it is anticipated that dividends will only grow at 10% for the following three years. Thereafter Jumbo Plc’s dividends are expected to grow at 5% per year indefinitely.

Issue 2 - Investment in Jumbo Plc

You have to provide  the current value of 3,000 ordinary shares of Jumbo Plc’s , assuming the required rate of return is 18%.  (10 marks )

N-tech UK Ltd is planning to revise the existing performance management system. The fundamental goal of performance management is to promote and improve employee effectiveness. It is a continuous process where managers and employees work together to plan, monitor and review an employee's work objectives or goals and his or her overall contribution to the organization.

 

You have to educate board of directors important of the reviewing existing performance management systems and introducing Balance Scorecard to the organisation. (Marks 15)

N-tech UK Ltd is planning to investing in two projects. The capital budgeting decision evaluates combinations of investments when the cash flows are not known with certainty. Various probability concepts are employed; and combinations are evaluated according to their incremental contribution of expected net-present value and variance to the firm as a whole. It is shown that existing investment projects must be considered if the total risk of a particular combination of investment proposals is to be evaluated realistically. Through diversification of investments, a firm is able to obtain the most desirable combination of expected net-present value and risk ( Kida, Moreno, and Smith, 2001). 

 

Consider the following two mutually exclusive projects:

 

a. Whichever project you choose, if any, you require a 15% return on your investment. You have to evaluate the two project using following capital budgeting techniques: the payback criterion, the NPV criterion, IRR criterion and Profitability index criterion. You have to suggest to the board of directors most suitable investment.  

 

b. You have to educate the board of directors non-financial factors ( the qualitative factors) you consider to take the capital budgeting decisions. (25 marks)

You have identified an opportunity to manufacture and sell Perfume products. The financial manager provide you the following details for the financial analysis of the proposal.

• Market research is any organized effort to gather information about target markets or customers. Based on market surveys, it is forecasted that sales will be as follows over the three-year life of the project: £140,000 in the first year, £290,000 in the second year and £220,000 in the third year of the project.
• A variable cost is a corporate expense that changes in proportion with production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs are expected to amount to 25% of sales revenue, leaving a contribution of 75% to cover fixed costs and to provide an element of profit. 
• A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. Fixed costs directly associated with the product line are expected to amount to £4,000 per year. 
• This new Perfume products require a different packaging and the existing machines are unable to meet the needs. A new machine which costs £150,000 is purchased. With its useful life of 3 years, it is expected to have a cash residual value of £30,000 in the third year. Capital allowances are the sums of money a UK business can deduct from the overall corporate or income tax on its profits. These sums derive from certain purchases or investments, outlined in the Capital Allowances Act 2001. A capital allowance is given instead of depreciation for certain types of asset. Capital allowance can be claimed on this investment on an 18% reducing balance basis.
• The Company hired a Perfume production expert team to propose some unique ideas for its new product and will pay £75,000 for it in twelve months’ time. If production of the Perfumes goes ahead they will pay a further £25,000 to consultants in year 1 for costs to be incurred in the design of final packaging for the product.
• Advertising and marketing costs of £6,000 per year are expected to be incurred if the product range started produced.

Derek, a new Chief Financial Officer spoke to you last week and told you that the new products line should require an additional expenditure on general administrative costs.  However, Steve explained to you the company policy which dictates that a charge equal to 10% of sales is levied on all product lines each year, representing an allocation of the general administrative costs of the overall company.

 

Working capital requirements are for the new Perfumes:

 

Derek also informed you that a marketing firm was hired to do a pilot testing and they have charged £150,000 for their services.  Of this total £50,000 were paid three months ago and the remaining £100,000 will be paid next month.

• Taxes are levied on taxable profits at a rate of 20%.

You have to produce a statement of after-tax cash flows attributable to the proposed project for the new Perfumes brand for each year of the project’s life.  (Total Marks 25)