Finance Course Work( Case Study)

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PGBS0132 Principles of Finance 2014-15

Individual Coursework Assignment

Scenario

Breaker Sports is a chain of retail shops which specialise in sports clothing and equipment,

in particular surfwear labels with innovative designs and a strong fashion elem ent. In

addition to selling well known brands, the company also supply ‘custom’ surf boards to

customers’ individual specifications and there is increasing demand for this. Currently all of

the shops are based in the South West of England , although the company also sells its

products via an internet website. The company has achieved strong growth in the past

few years and enjoys good relationships with both customers and suppliers.

Tim Lewis, a business graduate with a strong interest in outdoor sports, founded the

company in 2006 using equity finance raised from the sale of a previous, less successful,

business venture. Additional finance was provided in 2008 by venture capitalists. Internally

generated funds have been another important source of finance for the company: profits

were entirely reinvested in the early years, with dividend payments commencing only in

  1. Currently the company’s equity is owned 30% by a venture capital fund and the

remainder by the founder and his family and a few of the co mpany’s senior employees.

Tim Lewis believes there is further scope to expand the company, and market research

suggests that the company could achieve sales growth by establishing new retail shops in

other regions of the UK, outside South West England. On the basis of this and other

relevant information, he has drawn up plans for expansion. Since the venture capital fund

now wishes to liquidate its investment, and the company needs to raise additional equity to

finance its expansion plans, Tim Lewis is considering obtaining a listing for the company

on the Alternative Investment Market of the Stock Exchange. He has not yet obtained

detailed advice, but at this stage he plans to sell the venture capital fund’s shares and to

issue a further 4 million fully paid shares of 10p each.

Summarised financial statements for the company for the most recent three years of

trading are as follows:

Summarised income statements for the year ending 30 September:

2014 2013 2012

£000 £000 £000

Turnover 6,893 5,987 4,549

Cost of sales 6,357 5,537 4,210

Gross profit 536 450 339

Interest charges 76 42 24

Profit before taxation 460 408 315

Taxation 92 82 63

Profit for the year 368 326 252

Dividends 68 51 43

Retained profit 300 275 209

Summarised balance sheets (statements of financial position) as at 30 September:

2014 2013 2012

£000 £000 £000

Tangible fixed assets

Freehold land and buildings 595 286 286

Leasehold land and buildings 455 374 201

Store and office equipment 255 246 173

Motor vehicles 21 21 10

1,326 927 670

Current assets

Stock 1,472 1,138 867

Debtors 510 399 296

Cash 183 92 81

2,165 1,629 1,244

Creditors: amounts falling due within one

year:

Bank overdrafts 412 360 140

Creditors 1,217 993 861

Proposed dividends 68 51 43

Current taxation 92 82 63

1789 1486 1107

Net current assets 376 143 137

Total assets less current liabilities 1,702 1,070 807

Creditors: amounts falling due after more

than one year

538 167 179

Total net assets 1,164 903 628

Share capital and reserves

Ordinary shares of 10p each issued and

fully paid

102 102 102

Reserves 1,062 801 526

1,164 903 628

Since the most recent financial statements were prepared, arrangements have been made

for a qualified external valuer to revalue the firm’s assets, but this has not yet been carried

out.

The 2014 dividend has just been paid. The company expects to be able to pay a dividend

of 15p per share for the year ending 30 September 2015 and dividend payments are then

expected to grow at a rate of 9 per cent per annum for the foreseeable future, based on

estimated future earnings.

The following information relates to Sports and sports equipment retailers which are listed

on the London Stock Exchange:

Company Equity Beta Gearing % Price/Earnings

ratio

A 1.39 22.45   9.55

B 1.21   1.68   8.14

C 1.46 12.72 10.25

The gearing measures are based on book values of long term debt divided by long term

debt plus shareholder funds.

Assume that the expected return on the market portfolio is 10 per cent and the return on

risk-free securities is 4 per cent. The corporation tax rate is 20 per cent.

Required

(a) Using the data provided, calculate a price for the shares of Breaker Sports using

the following methods:

(i) Net assets valuation                   [5 per cent]

(ii) P/E method valuation                   [5 per cent]

(iii) Dividend growth model (Gordon growth model) valuation

[15 per cent]

(b) Assume now that the corporation tax rate may change in 2015 from 20 per cent to

18 per cent and remain at 18 per cent in subsequent years. By how much would this

change your valuation result using the dividend growth model? Comment on your result

[10 per cent]

(c) ‘Share valuation methods all rely on such unrealistic assumptions that they are of

little practical value.’

To what extent do you consider this statement to be correct? Illustrate your answer with

reference to the Breaker Sports case.                  [25 per cent]

(d)   Suggest and briefly justify a fair price for the shares of Breaker Sports, taking into

consideration the limitations of each valuation method used. What further information

would be helpful in estimating a fair value for the shares?           [20 per cent]

(e) Evaluate the advantages and disadvantages for Breaker Sports of their plan to

obtain a listing on the AIM.                     [20 per cent]

[Total 100 per cent]

For the computational tasks you should clearly state and justify any additional assumptions

you feel necessary. All workings should be clearly shown and explained.

Approximate word guidelines:

Part (c) 500 words

Parts (d) and (e): 400 words each

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