Order 2395253: Financial Management

Module Title:

Financial Management

Module Code:

5BUS1158

Assignment Format & Maximum Word count

An INDIVIDUAL Report, 1500 words (+/- 10%)

Assignment Weighting:

60%

Coursework Submission:

Time: by 20.00 hours Date: 6th May 2020 Method: Studynet

Coursework return Date returned to students:

:

Module leader

Dr. Nurgul Chambers

First marker

Dr. Nurgul Chambers

Internal Moderator

Approved ☐ Date:

Module Board name

External Examiner

Approved ☐ Date:

Module Board date

Assessment Criteria

Learning Outcomes: Knowledge and Understanding tested in this assignment:

· 1. Identify the sources of finance to a company and the reward of the providers of that finance;

Learning Outcomes: Skills and Attributes tested in this assignment:

· 4. Identify and apply appropriate techniques for choosing between alternative sources of funding;

· 3. Analyse the role of mergers and acquisitions in achieving the objectives of a company;

Feedback /Marking criteria for this Assignment

Performance will be assessed using HBS Grading Criteria and Mark scheme. Guidance for improvement will be given in writing on the Assessment Feedback Form or on the StudyNet Feedback Form within 4 weeks of submission.

For each day or part day up to five days after the published deadline, coursework relating to modules submitted late will have the numeric grade reduced by 10 grade points until or unless the numeric grade reaches 40 for levels 4, 5 and 6 or 50 for level 7 (PG). If a submission is more than 5 working days after the published deadline, a grade of zero will be awarded.

Where the numeric grade awarded for the assessment is less than 40 for level 4, 5 and 6, or 50 for level 7, no lateness penalty will be applied;

Detailed Brief for Individual/Group Assessment

Assignment Title: ``Ellingham plc. & Evaluation of the Financing Options``

Description of the assignment:

This is an individual report. In this report, students are expected to analyse a potential acquisition (take over) scenario. Students need to evaluate the financing options available for acquisition and recommend whether the company should go ahead with the acquisition and why/why not.

Ellingham Plc.

Edward Scruggs met with Laura Ellingham at a business conference which led him to reconsider future business opportunities. Laura Ellingham is a designer of bespoke fitted kitchens who had a business plan but little capital. The plan was to manufacture top quality fitted kitchen furniture and establish design studios/showrooms in high income areas. Arthur had enough capital to fund the new business. Laura's business plan was so convincing that Arthur decided to focus on developing the new business with her. From this small beginning grew the now publicly quoted company of Ellingham plc. The firm was restructured as a limited company in 1990 and subsequently experienced rapid growth.

During the last few years, there has been a great deal of uncertainty about world economic growth and stock markets have been extremely volatile resulting in low returns. However Ellingham’s ordinary shares have made good progress and dividends have achieved substantial growth over the last few years.

Ellingham`s current capital structure is shown in their balance sheet as below :

£000’s

50p Ordinary shares 20,000

Retained profit 35,000

12% irredeemable debentures 10,000

65,000

· Ordinary Shares: The current share price of the shares is £3.50 each. A dividend of £0.50 per share has just been paid and dividends are expected to grow by 5% per year for the foreseeable future.

· Bonds (debentures) : Irredeemable debentures at par value of £100 (each bond has nominal value of £100) with market price of £110.

Ellingham plc. pays corporate tax at 35%.

The present directors of Ellingham plc believe that the long-term success of the company lays in future expansion. They consider that the most beneficial action they could take is to investigate the acquisition of a subsidiary in the UK. After careful evaluation of several options, Ellingham`s finance manager has recommended the acquisition of Lotus plc.

Ellingham would therefore need to agree a realistic acquisition price for such a new venture and also make a decision on how to finance this acquisition. After serious negotiations, the acquisition price has been determined as £10m.

PART 1: FINANCING

Ellingham plc. have two options to raise the finance required which is £10m.

Option 1 : Raising equity finance - Rights issue

· Ellingham plc does have £2m in cash available from current retained profit and could use this in conjunction with raising equity finance.

· In this case Ellingham plc. needs to raise £8m (not £10m) and is planning a rights issue at a 8.6% discount to the current price of £3.50.

· There are 40 million shares currently in issue.

Option 2 : Raising debt finance - Debt issue

· They have negotiated a further/additional debt issue of 12% irredeemable debentures issued at par (nominal), for which the finance required is £10m. (You are not required to calculate the cost of debt for this additional debt.)

· However the maximum gearing allowed is 30% and should not be exceeded.

Ellingham`s financial manager is aware that when the firm’s capital structure changes, Weighted Average Cost of Capital (WACC) changes. For this reason the financial manager has calculated the new WACCs as follow.

· Option 1 : Equity finance : If Ellingham decides rights issue:

· New WACC is : 19.10%

· Option 2 : Debt finance: If Ellingham decides additional debt issue:

· New WACC is : 18.36%

PART 2: INVESTMENT

In terms of Ellingham`s acquisition project : NPV is £1.597.550, IRR is 22% and the payback period is 4 years, predetermined target payback period is 5 years.

Required:

You have been asked by the directors to evaluate the financing options available for the acquisition. Recommend the financing option that Ellingham plc. should use and also whether the company should go ahead with the acquisition and indicate why/why not. Produce a written report evaluating the proposed acquisition.

You are expected to cover the following points in your report :

· Calculate the current Weighted Average Cost of Capital (WACC) of Ellingham plc. (This is the WACC prior to any share or bond issue)

· If Ellingham plc. were to consider using a rights issue to fund the acquisition :

· Calculate the theoretical ex-rights price (TERP).

· If Ellingham plc. were to consider using a debt issue to fund the acquisition :

· Calculate the gearing ratio.

· Discuss the relative advantages and disadvantages of using equity and debt financing available to Ellingham plc. Furthermore, discuss whether a debt option is feasible or not for Ellingham plc.

· There are a number of deals in which mergers and acquisition (M&As) may be financed. Evaluate alternative funding methods that might be used in financing the acquisition.

Specific instructions: Your report might be structured as follows :

1. Title Page

2. Abstract

3. Table of Contents

4. Discussion & Analysis

4.1. Discussion of advantages and disadvantages of using equity and debt financing

4.2. Evaluation of alternative funding methods used in financing the acquisition (M&As)

5. Conclusion and recommendations

6. References

7. Appendices

Note :

· Make your calculations on an ``Excel spreadsheet`` (separate from your report).

· Copy/ paste of your ``Excel spreadsheet`` into your presentation is not going to be accepted and screenshots similarly are not acceptable. You must submit the original Excel spreadsheet.

· Upload both "Report and Excel spreadsheet" on Studynet.

· The words requirement is 1500 words.

· The words requirement could be 10% over or below (+/- 10%) the maximum words.

· Word count is not including ; abstract, table of contents, references, appendix and excel spreadsheet.

Title Page should include : Title of the report, ID number , Submission Date, Degree Programme, Module Name & Number, Module Lecturer, Word Count.

Guidelines:

· Follow a report format.

· Report should be submitted online with format at Arial font, word size 11.

· Please use 1.5 line spacing.

· You can write with headings and sub-headings.

· You can use graphs, charts and tables in your report.

· The report should not show your name as this is to be marked anonymously.

· Your work should include relevant research, appropriately sourced and referenced using Harvard referencing format.

· Please go to CASE for help if you are unsure about how to use Harvard referencing.

· Form a cohesive argument based on your analysis.

· You can use a variety of resources ranging from academic journals, textbooks, financial web sites, etc.

· Do not use non academic sources such as wikipedia, investopedia, etc.

Useful financial web sites :

· Financial Times, Bloomberg, Reuters, BBC Business, Yahoo Finance, Hargreaves Lansdowne, etc.

Marking & Feedback Criteria Assignment Weighting : 60%

Penalties for late submission :

· Please submit your assignment on time!

For each day up to five days after the published deadline, coursework submitted late (including deferred coursework, but with the exception of referred coursework) will have the numeric grade reduced by 10 points until or unless the numeric grade reaches or is 40 (UG).

Grades will be capped incrementally by 10 points per day, until as low as 40 for UG.

· After 5 days, late submissions not accepted.

· Canvas will cap automatically for online submissions, showing the original grade and the capped grade.

· Referred coursework submitted after the published deadline will be awarded a grade of zero (0).

Example: Students submit work awarded as a mark of 65 :

Student Support and Guidance

· For further help, contact your module leader in their drop-in hours or by email.

· Use the Grading Criteria and Mark Scheme to help improve your work.

· Go to CASE workshops, use the CASE website and drop-in hours www.studynet.herts.ac.uk/go/CASE/

· Academic English for Business support is available through daily drop-ins from the CASE office. See the CASE workshop timetable on the CASE main website page for details.

· Make full use of Library search to identify relevant academic material and the ‘Subject Toolkit for Business’ which contains links to other Information Databases and the Information Management contact details. (http://www.studynet1.herts.ac.uk/ptl/common/LIS.nsf/lis/4DAF5390094771C2802575ED004212BF)

· Some tutors allow students to test their work using Turnitin. Guidance on submission to Turnitin via StudyNet can be found by using the following link. http://www.studynet1.herts.ac.uk/ptl/common/asu.nsf/resource+library/TURNITIN+FOR+STUDENTS+2016+USER+GUIDE.pdf/$FILE/TURNITIN+FOR+STUDENTS+2016+USER+GUIDE.pdf