Valuation and Investment Analysis Coursework: SuperTyre Project

Upon completion of this piece of coursework, a student will be able to:

• LO1: Perform necessary calculations to facilitate managerial decisions
• LO2: Evaluate the importance of risk factors in making investment decisions
• LO3: Interpret firm valuation and capital structure decisions
• LO4: Develop extensive knowledge related to financial and investment decisions of firms
• LO5: Critically synthesize the academic literature
• LO6: Implement capital budgeting techniques

High ability in performing the necessary calculations

High standard of critical thinking

High presentation standard

Good standard in analyzing the relevant literature

Detailed Description

The coursework consists of two parts.

Choosing a firm of your choice proceed with a complete valuation and recommendation report in which you are expected to analyse the scope and performance of the business model of the firm. Based on the analysis, you are expected to conclude with your estimation of the fair value of the firm and the suggestion whether the firm may be a profitable choice for investment or not. A complete report is expected to include at least the issues of:

(a) Corporate governance

(b) Financial performance

(c) Risk profile

(d) Optimality of capital structure choices (e) Dividend policy

(f) Prospects and fair valuation of the firm using a valuation model (i.e. a dividend or a cash flow discount model)

Assume that a subsidiary of the aforementioned firm, Tires Inc., is considering proceeding with a new investment, producing and market a new type of tire the SuperTyre.

As a financial analyst, you have been asked by your CFO to evaluate the SuperTyre project and provide a recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately, assume all cash flows will occur at year-end.

Tires Inc. must initially invest € 200 million in production equipment to make the SuperTyre. This equipment would be sold for €50 million at the end of four years. Tires Inc. intends to sell the SuperTyre to two distinct markets:

1. The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large automobile companies (like General Motors) that buy tires for new cars. In the OEM market, the SuperTyre is expected to sell for €50 per tire. The variable cost to produce each tire is €30.
2. The replacement market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Tires Inc. expects to sell the SuperTyre for €70 per tire there. Variable costs are the same as in the OEM market.

Tires Inc. intends to raise prices at 1% above the inflation rate; variable costs will also increase at 1% above the inflation rate. In addition, the SuperTyre project will incur €30 million in marketing and general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years. Tires Inc. corporate tax rate is 40%. Annual inflation is expected to remain constant at 3%. The company uses a 15% discount rate to evaluate new product decisions.

Automotive industry analysts expect automobile manufacturers to produce 5 million new cars this year and production to grow at 2% per year thereafter. Each new car needs four tires (the spare tires are undersized and are in a different category). Tires Inc. expects the SuperTyre to capture 15% of the OEM market. Industry analysts estimate that the replacement tire markets will be 10 million tires this year and that it will grow at 2% annually. Tires Inc. expects the SuperTyre to capture a 10% market share. The appropriate depreciation schedule for the equipment is straight line and the investment will be fully depreciated during the four years period. The immediate initial working capital requirement is €10 million. Thereafter, the net working capital requirements will be 15% of sales. You are required to estimate the payback period, NPV and IRR on this project and decide whether to make the investment or not.

Students are asked to use current theoretical and empirical academic literature to support the analysis of the above issues.

Students must provide clear references to all books, journals, or any other publications used in the project including the use of electronic systems.

Students are expected to submit a hard copy in typed form (12 font, 1.5 spaced) of approximately 3,500 to 4,000 words.

Assignments that significantly exceed this word limit will be penalized 10%

All sentences or passages quoted in this coursework from other people's work should be specifically acknowledged by clear cross-referencing to author, work and page(s). Failure to do this amounts to plagiarism and will be considered grounds for failure in this coursework. It is on the instructor’s discretion to contact an oral examination, which will result to the award of the final grade to that particular piece of coursework.

Apart from the usual e-copy submission, this piece of coursework is required to be submitted to turnitin

plagiarism detection software at: www.turnitin.com