6 Palmerston Plc operates in both the UK and Germany. In attempting to assess its economic exposure,
Question:
6 Palmerston Plc operates in both the UK and Germany. In attempting to assess its economic exposure, it compiles the following data:
■ UK sales are influenced by the euro’s value as it faces competition from German suppliers. It forecasts annual UK sales based on three possible scenarios:
■ Revenues from sales made in Germany are expected to be £120 m p.a.
■ Expected cost of goods sold is £120 m p.a. from UK materials purchases, and ;200 m from purchases in Germany.
■ Estimated cash fixed operating expenses are £50 m p.a.
■ Variable operating expenses are estimated at 20 per cent of total sales value including German sales translated into sterling).
■ Palmerston is financed entirely by equity and shareholders require a return of 15 per cent p.a.
Required (i) Construct a forecast cash flow statement for Palmerston under each scenario.
(ii) Value Palmerston’s equity under each scenario, assuming a ten-year operating time horizon. Ignore terminal values.
(iii) Suggest how Palmerston might restructure its operations to lower its sensitivity to exchange rate movements.
Ignore taxation.
Step by Step Answer:
Corporate Finance And Investment Decisions And Strategies
ISBN: 9780273695615
5th Edition
Authors: Richard Pike, Bill Neale