This assessment is in two parts, please answer all elements.
Part A carries a weighting of 30% and students should write 1,500 words (+10%). It is
recommended that this section of the assignment be completed using Microsoft
PowerPoint.
Part B carries a weighting of 70% and students should write 3,500 words (+10%). It is
recommended that this section of the assignment be completed using Microsoft Word.
Part A
Requirements
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.
The company’s investment priorities are to maintain its existing competitive position and identify valuecreating growth opportunities. The current low interest rates have incentivised RR Ltd management team
to consider raising debt finance to fund their investment priorities.
1) You have been asked to produce a PowerPoint presentation together with notes to the slides
which critically examines the benefits and risks to a company of incorporating corporate debt
into an existing portfolio of equity and debt. Please note you will not be required to present the
PowerPoint presentation
(Approximately 1500 words, 30%)
Part B
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).
(Approximately 1,000 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.
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 tales 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 £8.00, and the company’s earnings per share stand at 20p. RR Ltd’s weighted average cost of
capital is 9%
The board estimates that annual after-synergy benefits resulting from the takeover will be £7m, that
Sporty’s distributable earnings will grow at an annual rate of 5% and that duplication will allow the sale of
£25m 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
6
Other Information:
Current ex-dividend share price £2.00
Latest dividend payment 11p
Past four years’ dividend payment 8p, 9p, 10p, 10.5p
Sporty’s Equity Beta 1.20
Treasury bill yield 5%
Return of the market 12%
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, 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.
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 0.2 probability of producing a return of £800,000 in Year 1
and a 0.8 probability of delivering a return of £500,000 in Year 1. If the £800,000 result occurs, then the
second year could return either £700,000 (probability of 0.5) or £300,000 (probability of 0.5). If the £500,000
result for Year 1 occurs, then either £700,000 (probability 0.7) or £500,000 (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 1,500 words including calculations, 30%)
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.
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