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Table of Contents

Table of Contents...................................................................................................1

Introduction........................................................................................................... 2

Calculation of WACC..............................................................................................3

Analyse the Project................................................................................................4

Sensitivity Analysis................................................................................................5

Management of working capital .........................................................................5

Profitability Ratios ..............................................................................................5

........................................................................................................................... 5

Capital structure.................................................................................................6

.............................................................................................................................. 7

Risk........................................................................................................................ 8

Short-term Action Plan .......................................................................................8

Competitors........................................................................................................... 8

Customers constitution..........................................................................................8

Quality Control.......................................................................................................8

Operational Management .....................................................................................8

............................................................................................................................. 8

Conclusion............................................................................................................. 9

Recommendations...............................................................................................10

Reduce risk....................................................................................................... 10

Using creditors..................................................................................................10

Credit Sale........................................................................................................ 10

Bibliography.........................................................................................................10
Introduction
Made-Up Plc has rapidly established itself as one of the top four supermarket chains in the
UK. It is currently highly profitable although there have been some rumours in the stock
market about a possible downgrade in its credit rating.
Calculation of WACC
1) Ordinary Share:

Made up Plc has 4600m shares @ 1.55 = £7130m

Required Return on Equity


Can apply the CAPM to equity
re = rf + βe(rm – rf)
re = Return on equity βe = The sensitivity to market risk
rf = Riskfree rate rm = Market return

In the market with target inflation of 2%, meanwhile the current rate of inflation is 1% (BBC
news 2009). As the interest rate at the moment of Bank of England is 0.95%. Therefore,
riskfree return is 0.95%.

The market risk premium is historically around 3 to 6%. On average from 1926-2003, the risk
premium is 5.6%.

The sensitivity of the company to market risk is rated BBB by Standard & Poor

2) Debt 7.5m bonds 9%, 5 year to maturity £100

All cashflows estimates growth rates are nominal figure based on 2% inflation.

 Value of bond = 9/(1.02) +9/(1.02)2 +9/(1.02)3+9/(1.02)4 + 109/(1.02)5 = 133

http://www.calculator.com/calcs/bondcalc.html

But how much people expect on the price of bond?

3) Preference Share

150m irredeemable £1 nominal 5% dividend and 68p market value.


Analyse the Project
The project of launching Made-Up Town Outlets with the aim of building 100 MUTOs
across towns throughout the UK, can be evaluate by Net Present Value, IRR and Payback
Period.

0 1 2 3 4 5 6 7 8 onward
£m £m £m £m £m £m £m £m £m
Net 372.787
Cashflow -60 -1300 -250 200 210 241.6 295.646 3
- - 188.464 194.007 218.824 262.525 324.533
PV -60 1274.5 240.29 5 5 6 2 7 16551.22
- -
NPV -60 1334.5 1574.8 -1386.34 -1192.33 -973.505 -710.98 -386.446 16164.77

As we can see from the net cash flow, there are heavily investment from the company to the project
from the research to the investment in equipment and development in from year 1. Even though the
profit is £2m per MUTO per year, the NPV for 7 years is still negative. It means that if the project is
run for 7 years, the company made a loss. As the assumption said that from year 8 onward, the net cash
flow is maintained at the same level as year 7, so let assume from year 8 onward the total present value
will be £16551.22m. With infinite time period, the project made the Net Present Value of £16164.77m.
Since the NPV is greater than zero, the company should to invest in the project rather than doing
nothing. In addition the corporation should invest in this project only if there is no higher NPV
alternative.

The payback period is 7.22217 years. In other words, it takes 7 years and 9 months to recover the total
investment. If the company do not agree with the project, we can assume that £60m at beginning for
research can be sunk cost; therefore, the payback period is 7 years and 7 months. The longer it takes to
cover the investment, the higher risk can occurs (Lin, Grier C. I.; Nagalingam, Sev V.2000). It can be
seen that profit is generate mostly from later stage.

The IRR shows 17.789% means that if all the positive cash flow be reinvested in the project, the profit
return will be approximately 17.79%. By reinvest in the project company can increase their
profitability.

Besides, the number of Made-Up Town Outlets depend on the availability of suitable premises.
Sensitivity Analysis
The profit is counted as the cashflow. It means that the profit based on cash transaction with
customer and creditors.

Management of working capital

Profitability Ratios

Per 1 MUTO Y3 Y4 Y5 Y6 Y7 Y8
£m £m £m £m £m £m
Sale revenues 100 110 121 133.1 146.41 146.41
73.03 77.416
COGS 65 68.9 4 04 82.061 82.061
47.96 55.683
Gross Profit 35 41.1 6 96 64.349 64.349
30.417 34.980 34.980
Staff Cost 20 23 26.45 5 13 13
Advertising 3 5 7 9 11 11
14.51 16.266 18.368 18.368
Net Profit before tax 12 13.1 6 46 87 87
Tax 10 11 12.1 13.31 14.641 14.641
2.9564 3.7278 3.7278
Net Profit after tax 2 2.1 2.416 6 73 73

35.00 37.36 39.64 41.84 43.95 43.95


Gross Profit Margin % % % % % %
Net Profit before Tax 12.00 11.91 12.00 12.22 12.55 12.55
Margin % % % % % %
Net Profit After Tax
Margin 2.00% 1.91% 2.00% 2.22% 2.55% 2.55%
12.00 11.91 12.00 12.22 12.55 12.55
ROS % % % % % %

The Gross profit margin shows that Made-up Plc has earned 35pences gross profit per £1 of
turnover our business is earning in year 3. The trend of the margin will be expected to grow
up to 43.95%. That improvement due to the cost of goods sold decreases. There are several
reason for that such as the reputation of company project increase so suppliers provide good
with discounts, the bulk buying discount or the company find new source of supplier with
lower price.

With the project expand, the cost of staff is expected to increase. The possible reasons for that
are the number of staff has increasing, the structure of organisation change due to
introduction of new supervision manager or the company provide bonus, training for
employee or all of those reasons.

In addition, the company continuous increase investment of advertising. That is the reason
why the rate of net profit margin does not increase much as the sale improving.

The Net Profit Margin shows that the cost of operation is high; therefore, the net profit is less
than half of the gross profit. If the company has to pay for the interest of loans or overdraft, it
may cause the problem.

Capital structure
There are many ways to structure capital such as issue preference share, ordinary share or
bond. Made-up Plc has capital structure based mostly on ordinary share issue with 86% of the
capital. It mean

The advantage of having Debt-equity is that the interest they will have to pay back to lender
is fixed and the term of lending is depend on company principle not on Banks. Besides, issue
bond can

The preference share has lowest percentage in the structure. With this kind of capital, if the
company is continuously growing, the dividends paid to shareholders are fixed; the company
can retain more profit. Otherwise, the company has to pay dividend on the loss of other
ordinary shareholders.
Risk

Short-term Action Plan

Competitors
The company plan for future does not consist of competitors’ awareness. If the competitors
do the same thing with larger scale, company may make a loss. As the retail super market,
Tesco, Asda and Sainbury has advantage of long last reputation and economies of scale. If
the company want to compete with them, they have to take the risk of being lost in
competition.

Customers constitution
The customer may change their tastes quickly, that is the problem with the company.

Quality Control
The company need to have the quality control in order to guarantee the best product will be
sold to customer.

Operational Management
Besides, the number of Made-Up Town Outlets depends on the availability of suitable
premises. As the figure below represent when the number of MUTOs is 8, the company can
still generate NPV of £21m. If the number of MUTOs falls below 8, company may face the
loss. In comparison with the expected number 100, the company might not facing the
problem of not enough suitable premises.

8
0 1 2 3 4 5 7 onward 6
£m £m £m £m £m £m £m £m £m
Net 26.608 33.550
Cashflow -60 -1300 -250 18 18.9 21.744 14 85
- -
1274. 240.2 16.96 17.460 19.694 23.627 29.208 1489.6
PV -60 51 92 18 68 21 27 04 1
- - - - - - -
1334. 1574. 1557. 1540.3 1520.6 1497.0 1467.8 21.759
NPV -60 51 8 84 8 9 6 5 88
Conclusion
Recommendations

Reduce risk
Because their rating only BBB. That means the risk of company can be reduced and
reputation of company will improve.

Using creditors
The company can buy goods on credit so that they can use their available fund to increase the
profit. The

Credit Sale
By introducing credit sale the company can increase their revenue. It will not only boost up
the number of customer who want to buy but also can reduce the advertising cost or makes
advertising more effectively.

Bibliography

Bank warns of recession into 2009 Wednesday, 12 November 2008

http://news.bbc.co.uk/1/hi/business/7724215.stm

http://www.iese.edu/research/pdfs/DI-0574-E.pdf

Lin, Grier C. I.; Nagalingam, Sev V. (2000). CIM justification and optimisation. London:
Taylor & Francis. pp. 36.

Advantage of Bond over Loans

http://www.allstargroup.com/Forms/CHURCH%20BOND%20vs.pdf

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