AME 5413 Corporate Finance
{`MASTER IN BUSINESS ADMINISTRATION
END SEMESTER ASSIGNMENT
SEMESTER FEBRUARY YEAR 2020/2021
ASSIGNMENT 1
PERSIARAN BESTARI, CYBER 11,
63000 CYBERJAYA SELANGOR
`}
- PalmEng is a Palm Oil engineering company that specialised in development of palm oil plants for their customers. You are the Corporate Affair Manager for last 3 years responsible for corporate finance matters of the company.
The Board of Directors of PalmEng recently appointed a new Chief Executive Officer (“CEO”) and all the managers are instructed to work together with the new CEO to bring the company to higher profile and valuation.
The Accountant of the company has prepared the summarised financial statement for the CEO review as below:
|
INCOME STATEMENT ($’000) |
Year 20x9 |
Year 20x8 | |
|
Revenue |
13,423 |
12,530 | |
|
Gross Profit |
4,215 |
3,660 | |
|
Depreciation |
1,779 |
1,575 | |
|
Finance Cost |
48 |
51 | |
|
Profit Before Taxation |
1,893 |
1,307 | |
|
Profit After Taxation |
1,420 |
980 | |
|
BALANCE SHEET ($’000) |
Year 20x9 |
Year 20x8 | |
|
Share Capital @ $1 each |
20,000 |
20,000 | |
|
Reserve |
8.055 |
6,635 | |
|
Shareholders’ Fund / Capital Employed |
28,055 |
26,635 | |
|
Plant Property & Equipment |
27,172 |
27,603 | |
|
Total Receivable |
2,400 |
1,640 | |
|
Cash and Bank |
1,352 |
724 | |
|
Total Current Assets |
4,583 |
3,075 | |
|
Total Payable |
2,503 |
2,763 | |
|
Total Bank Borrowings |
800 |
850 | |
|
Total Current Liabilities |
3,700 |
4,043 |
(i) You are to present a senior management paper explaining the performance of the company for the past 2 years in the form of Management Discussion & Analysis (“MDA”) supported with relevant financial ratios and analysis on the Profitability, Efficiency, Leverage and Earnings to the shareholders.
(20 marks)
(the following are in continuity of the statement given above….)
- ……6 months after, you received an email from the CEO below:
“Dear Managers,
We have recently received numerous request from some of the minority shareholders to buy back their shares in the company. Looking at the growing outlook and prospect in the near future, I would like to increase the gearing of the company and to repurchase partial of the said Equity. To achieve this, we would require to look into fund raising requirement of approximately $2,000,000.00 in the next 4 months.
Kindly explore on the projected outcome for options of fund raise, either by Equity or Debt, assuming the Risk fee interest and tax rate remained the same as per the historical records. The Cost of Equity for Ungeared Company is assumed at 15%”.
Please forward an email to CEO stating the explanation for the debt option above in following aspect:
- Comparison of financial ratio and analysis for year 20x9. (20 marks)
- Value of Ungeared (Vu) for the company, followed with Cost of Capital (WACC) and Cost of Equity (Keu), using Modigliani and Miller’s Model with corporate tax rate. (20 marks)
(the following are in continuity of the statement given above….)
(C) The CEO has subsequently instructed the Accountant to prepare the financial projections based on certain assumptions set by the CEO. The following has been produced subsequently:
You were informed by the Accountant that additional assumptions advised by the CEO as below:
- Perpetuity growth rate 5%.
- This new investment shall continue to generate income for very long period.
The CEO seems very unhappy with the financial projection and would like to terminate the above proposal.
- Based on the Cost of Capital that you derived in incident (B)(ii) above, use your knowledge that you have learned in “Time Value of Money” to justify whether you agree or not agree with your CEO on the above matters and why. (20 marks)
- Should the above new proposal are looking good, the CEO might call for a Management Buy-Outs (“MBO”) and take over the Company. What would you
advise the CEO on the potential Exit Strategies for MBO. (20 marks)
