Part A
Requirements
1) Blockchains represent a novel application of cryptography and information technology to age-old problems of financial record keeping, and they may lead to far reaching changes in Corporate Governance. Many major players in the financial industry have begun to invest in this new technology.
Create a report where you will evaluate why good corporate governance is important for a business and how Blockchain technology can reduce corporate governance issues caused by fraud and the principal-agent problem.
(Approximately 800 words, 20%)
In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with the topic. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the topic. Attempting to evaluate within a practical, real-life business context through investigation of academic empirical findings will assist in developing the response.
Part B
Synopsis
It has been three months since your promotion to assistant financial manager at fashion company RR Ltd. RR Ltd is a fashion retailer listed on the AIM market. The firm was founded 10 years ago, after a short and successful period as a partnership between Rebecca and Roy Race. The company has grown rapidly and has two successful own brand labels, ‘RR’ catering for the middle-income woman’s market and ‘Racey’ aimed at younger women.
RR Ltd distributes its two major seasonal lines (spring/summer and autumn/winter) under the ‘RR’ label and its young women’s label ‘Racey’ through major high street retailers in the UK and United States. Sales are also generated through exhibits of new collections at clothing exhibitions and through a fledgling, but not dynamic online presence, and very occasional webcast fashion shows.
Task 1
RR Ltd has recently established a private pension scheme for its employees and the financial manager has asked you to provide a short report on why diversification generally leads to a reduction in risk relative to return. This report will be made available on the company website to inform employees on how the pension scheme manages both risk and return when selecting investable assets (including reference to forms of risk, covariance and CAPM). You will need to use the Portfolio that you have created using London Stock Exchange simulator to explain how a pension fund can minimise risk through diversification.
(Approximately 1000 words, 25%)
In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with the topic. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the topic. Attempting to evaluate within a practical, real-life business context through investigation of academic empirical findings will assist in developing the response.
Task 2
Currently, the management at RR Ltd are in preliminary decisions on a horizontal acquisition of ‘Sporty PLC’. Sporty PLC has an established men’s fashion brand; however, it is seen as a ‘Problem Child’ evidenced by relatively low market share in an industry segment that is experiencing growth. Industry analysts believe declining sales is principally due to not anticipating current tastes/trends and the financial manager has approached you for information on what value to place on Sporty PLC.
If the acquisition takes place, Sporty PLC will operate as a separate entity within RR Ltd. Existing designers at RR Ltd are very knowledgeable on the female market and believe they can transfer these skills to men’s fashion. Also, Roy Race is an ex-professional footballer and is passionate about men’s sport/casual wear. Both Rebecca and Roy are confident that synergies will improve economies of scale and scope, quality and in the medium-term, key performance ratios for Sporty PLC will be comparable to RR Ltd. RR Ltd’s share price is currently £12.00, and the company’s earnings per share stand at 30p. RR Ltd’s weighted average cost of capital is 12%.
The board estimates that annual after-synergy benefits resulting from the takeover will be £9m, that Sporty’s distributable earnings will grow at an annual rate of 6% and that duplication will allow the sale of £36m of assets, net of corporate tax (currently standing at 30%), in a year’s time. Information relating to Sporty PLC:
Financial Position Statement of Sporty PLC.
£m
Non-Current Assets 40
Current Assets 78
118
Equity:
Ordinary Shares (£1) 40
Reserves 3
43
Long-Term Debt 10
Current Liabilities 65
Total Liabilities 118
Statement of Profit or Loss Extracts
£m
Profit before interest and tax 10
Interest payments 4
Profit before tax 6
Taxation 1.8
Distributable Earnings 4.2
Other Information:
Current ex-dividend share price £4.00
Latest dividend payment 12.5p
Past four years’ dividend payment 9p, 10p, 11p, 11.5p
Sporty’s Equity Beta 1.30
Treasury bill yield 7%
Return of the market 11%
Required:
1) Given the information above, calculate the value of Sporty PLC using the following valuation methods:
a) Price / Earnings Ratio. (using RR Ltd’s P/E ratio)
b) Dividend valuation method.
c) Discounted cash flow method.
Based on your calculations, justify the value of Sporty PLC and the stated motives for this acquisition.
(Approximately 1,000 words, 25%)
(8 marks for calculation and 17 for the written part)
In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with the topic. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the topic. Attempting to evaluate within a practical, real-life business context through investigation of academic empirical findings will assist in developing the response.
Task 3
Designs for RR Ltd’s fashion lines are created inhouse and manufacturing takes place across numerous locations in Birmingham, however the company is keen to expand into Asian-Pacific markets and is considering a small manufacturing base in Vietnam.
The project will have an initial outlay of £1m and a 0.5 probability of producing a return of £800,000 in Year 1 and a 0.5 probability of delivering a return of £600,000 in Year 1. If the £800,000 result occurs, then the second year could return either £500,000 (probability of 0.8) or £300,000 (probability of 0.2). If the £600,000 result for Year 1 occurs, then either £600,000 (probability 0.7) or £400,000 (probability 0.3) could be received in the second year. All cash flows occur on anniversary dates. The discount rate is 12%
Required:
1) Calculate:
a) The expected NPV.
b) The standard deviation of NPV.
c) The probability of the NPV being less than zero assuming a normal distribution of return
– (bell shaped and symmetrical about the mean).
2) Based on your analysis of the macroeconomic risk factors, you believe that if the project was delayed by a year, RR Ltd would be able to improve the accuracy of the Year 1 probability estimates, which could lead to a reduced initial outlay and discount rate.
Upon finishing your calculations, a colleague states that the ‘traditional NPV method is just as effective as an NPV method incorporating probabilities and real option perspectives’. Critically evaluate this statement.
(Approximately 1,200 words including calculations, 30%)
(12 marks for calculations and 18 for written part)
In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with the topic. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the topic. Attempting to evaluate within a practical, real-life business context through investigation of academic empirical findings will assist in developing the response.
Guidance:
Students are encouraged to be inquisitive and innovative in their approach as to what should be included in this report the following may be of some use in providing guidance as to what could possibly be included, although this is in no way meant to be prescriptive.
As part of your work you should explore the underlying theory behind the key areas of investigation that you identify and appropriately referenced comments and quotes to sources to demonstrate wider reading.
Additionally, the inclusion of some practical/real world examples to act as support/explanation for your evaluative comments is encouraged. Numerical example for illustrative purposes may be of use but should not be the only element of the work; discussion and interpretation of models and concepts is also required.
With a word limit of about 4,000 you do not have a lot of room for long introductions so assume that you are writing to an audience who has a working knowledge of corporate financial management.
Please avoid relying too heavily on descriptive sections reproducing information available from the set text. It is your own logical, evaluation of the situation, the interpretation of course material and presentation, with critical analysis, of a coherent strategic report that will attract high marks.
Please note that the company names are fictitious and do not exist.
Word Limit:
The word count must be stated on the front page of your assignment.
Summarising and compressing the information in your assignment into the word limit is one of the skills that students are expected to acquire and demonstrate as part of the assignment process.
The word count does not include:
• Title page
• Reference list/Bibliography
• Appendices
• Appropriate tables, figures and illustrations
Please note, in text citations [e.g. (Smith, 2011)] and direct secondary quotations [e.g. “dib-dab nonsense analysis” (Smith, 2011 p.123)] are included in the word count.
The Use of Tables
Tables should not include large amounts of text which represent the main discussion and arguments, as these should be included in the main body of your work.
If tables are used inappropriately in this way the wording in question will be deemed to be part of the main body of the work and included in the word count (with the relevant penalty imposed where the maximum word count has been exceeded).
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