FIN6032 Corporate Financial Strategy Assignment Solutions

 

Assignment Detail:-

• Number of Words: 2000

 

 

Question 1

 

BIKO Plc is a large company which specialises in the manufacture of smart phones. The company was first established in 1970 by two brothers who subsequently listed it on the London Stock Exchange in 1980. In the year 2000, BIKO Plc developed a smart phone called the BIKO phone and every 2 years they upgrade it by adding applications and functions which have made it every individual’s necessity. In a market dominated by only 5 smart phone companies, the BIKO phone has become the best-selling smart phone in the world, with a market share of about 75%.

 

From its listing until about 2005, BIKO Plc never paid a dividend. Their finance director at the time, Mrs Delroy, initially argued that shareholders were not interested in dividends. Many of these shareholders were institutions. However, in 2010 Mrs Delroy was replaced by Mr Helliar, and he argued that “time was ripe for BIKO Plc to start to pay dividends”. He also pointed the board of directors to BIKO Plc’s competitor Mars Plc which had always paid a dividend ever since its listing on the London Stock Exchange in 1990. Mr Helliar said:

 

“We cannot continue to pretend that dividends do not matter. If a small company like Mars Plc can pay dividends surely, we should be able to do so. We have established ourselves very well and none of our competitors pose a meaningful threat”.

 

BIKO Plc’s past financial information is given below:

 

BIKO Plc
	2005	2006	2007	2008	2009	2017	2018	2019	2020	2021
	£m
Profit Before Tax	75	96	88	122	145	240	270	441	570	425
Dividends	18	26	17	12	22	72	86.4	104	345	82.8
Investments in Assets	22	36	48	72	83	15	20	22	23	21
No of Issued Shares	30	30	30	30	30	45	45	45	25	25
Share Price	£2.8	£4.3	£5.7	£7.4	£9.1	£15.3	£16.6	£15.2	£23.8	£19.3
Gearing (Debt/(Debt+Equity)	68%	61%	58%	41%	35%	38%	32%	34%	56%	51%

 

Additional Information:

BIKO Plc has consistently paid a corporation tax of 20% per annum throughout the whole period.

 

Required:

1. Identify and analyse the dividend policies that have been pursued by BIKO Plc from 2005 to 2009 and 2017 to 2021. What reasons could have driven the company to adopt such policies? Show relevant calculations to support your analysis.

 

2. Calculate the forecast dividend capacity of BIKO Plc for 2022.

 

3. Using relevant theory, evaluate the views expressed by the former and current finance directors about BIKO Plc’s dividend considerations.

 

Question 2

Vaccid Co is a pharmaceutical company which specializes in the development of vaccines. Recently, they secured a contract to develop a vaccine for the Covid-19 virus. Vaccid Co has estimated that the vaccine will cost about £12 million to develop. The company has also been advised by a corporate finance analyst that its gearing (debt/debt +Equity book values) is too high and is putting the company at a risk of bankruptcy. Therefore, there is a need to repay half of the loan notes. The finance required for the development of the vaccine and the repayment of debt will be raised through a 1 for 5 rights issue at a discount to the current share price of £5.00. Issue costs of the rights issue are estimated at £550,000. The capital structure of Vaccid Co is as follows:

 

	£m	£m
Equity
Ordinary Shares (50p)	20
Reserves	10
		30
Non-Current Liabilities
5% Loan Notes		30
	60

 

Each loan note is redeemable at a premium of 3%.

 

Required:

(a) Assuming the rights issue takes place calculate:

1. the subscription price of the rights issue
2. the theoretical ex-rights price (TERP) per share
3. the value of a right on one new share for Vaccid;
4. the new gearing (debt/debt+equity) after the rights issue

 

(b) Miss Wright currently holds 90 000 shares in Vaccid Co and is considering her Calculate, in the following scenarios, the effect of the rights issue on Miss Wright’s current wealth:

• If she takes up all the right;
• If she sells all the right;
• If she chooses not to take part in the rights

 

(c) Discuss the merits and demerits to Vaccid Co of paying back half the debt.

 

Question 3

Agricap Inc, a listed company, is considering taking over NBN Technology Ltd which is also listed but on a different stock exchange. A due diligence has been performed on NBN Ltd’s assets and liabilities and the directors are satisfied that they are correctly valued. However, they have just been advised that the asset valuation model is not a very reliable method to estimate the value of a company. Instead, it has been suggested that they can use either the free cash flow method or the dividend growth model. Previously, the NBN had a smoothed dividend policy.

Additional Information relating to NBN Ltd as at 31 December, 2021 is as follows:

 

Profit Before Interest and Tax	£125 million
8% Redeemable Bonds	£50 million
Market Capitalisation	£630 million
Number of Issued Ordinary Shares	280 million

 

The previous dividend pattern is as follows:

 

	2017	2018	2019	2020	2021
Dividend per share	10p	12p	13p	14p	15p

 

Agricap has also managed to estimate that NBN Ltd’s future free cash flows at the end of 2022 will be £7.2 million. At the end of 2023, the figure will grow to £8.6 million and will be £13.6 million by the end of 2024. Thereafter the cash flows will grow at a constant rate of 6% for the foreseeable future. The bonds will be redeemed in 2025 at par. Corporation Tax is estimated at 20% and the cost of equity is currently 14%.

 

Required:

1. Calculate the value of NBN Ltd using the constant dividend growth  model.
2. Estimate the value of NBN Ltd using the free cash flow method.
3. Discuss the strengths and weaknesses of the Asset Based Valuation method.

 

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