Case study

CASE STUDY:

You have been retained by a company to advice on an investment proposal that the company is considering. The details of the proposal are as follows:

Project: Developing 100,000 sq. mts of land by constructing Green Houses (GH) for the purpose of cultivating fruits and vegetables.

Common Areas Allocation: 25%

Land is on long term lease with an annual lease rent of USD 2.5/- per sq mt.

Area of Each GH: 250 sq. Mts

Cost of Building each GH: USD 25,000/-

Cost of Developing Common Areas: USD 100/sq. mt

Life of the GH is five years

Each GH at 100% capacity can produce 25 Metric Tonnes (MT) of fruits per cycle and the duration of each cycle is 3 months.

The average selling price during the off season is USD 800/- per MT; and during peak season is USD 1,200/-. Half of the year is considered to be off season.

The record output in that area so far has been 22.5 MT per cycle per GH.

The per tonne direct cost of production USD 600 per MT.

Wastage of 5% is common.

Other Costs :

Selling & Distribution Costs : 10% of sales revenue.

Fixed Expenses : USD 2,000,000/-

Other Expenses (Semi Variable) – USD 2,000,000/- @ 100% capacity and USD 1,500,000/- @ 50% capacity.

Being a new player, the company expects the sales to be ramped over a period of three years to reach 90% capacity utilization.

Maximum Working Capital Requirement is USD 10.00 Million.

The company has resources to fund 40% of the total investment (capex+working capital) required and is looking at the following options to fund the balance. Face Value (FV) of each equity share is USD 1/-.

1. Debt Finance – Cost of funding @ 10% p.a. 2. Issue of convertible debentures (5% interest) –to be converted to equity shares (FV of USD 1/-)

after 5 years and the conversion to be done on a P/E multiple of 5 based on the previous two year’s average EPS (Earnings Per Share).

3. Issue of equity shares at par value to a group of investors with an option to buy back the shares after five years with a guaranteed IRR of 15% to the investors.

You are required to evaluate the above three options and advise the company on the best option with proper reasoning. You may include all your assumptions as part of your workings.