ANY HELP IS MUCH APPRECIATED

PART A

Question 1 Discuss what is meant by agency theory and evaluate two strategies which could be used to resolve conflicts that arise under agency theory.

Question 2 Buying and selling a business can be a very risky step to undertake, with over half of all transactions failing. Carrying out proper due diligence is the most effective way to reduce that risk and to improve your chances of a successful transaction. Detail four specific matters to be included within a due diligence report and comment on their possible impact on the valuation of the company being acquired.

Question 3 Using real life examples, critically evaluate the reasons behind why companies merge/acquire.

PART B

Paltron Ltd is a Dublin-based firm that manufactures specialist products for the airline industry. Paltron Ltd most profitable product is its luxury passenger seat for first-class suites. The seats, which are manufactured with in-built entertainment systems and privacy screens, are shipped from the Dublin factory to customers across the world. A major aircraft manufacturer is launching a new aircraft, Jet365, and has requested that Paltron Ltd supply first-class passenger seats for the next five years. It is the policy of Paltron Ltd to accept such contracts assuming there is a positive net present value and a maximum payback period of three years. Details pertaining to the investment are outlined below: The Jet365 project would require the expansion of Paltron Ltd current production facility at an expected cost of 7 million to be paid by Paltron Ltd at the beginning of the contract. Paltron Ltd has a current working capital requirement of 10 million. Should the Jet365 contract be accepted, it is expected that the working capital requirement would increase by 2 million for the contracts five-year duration, returning to a 10 million requirement at the end of the contract. Under the terms of the contract, Paltron Ltd will sell 600 seats in the first year with a 10% increase in sales units expected in each subsequent year. The sales price per seat will be 10,000 in the first year and is forecast to increase in line with the 3% general annual rate of inflation. Manufacturing costs are expected to remain at 60% of sales revenue for the duration of the contract. The fixed costs of the new production facility will be 300,000 in the first year. These costs will increase in line with the 3% general annual rate of inflation. Paltron Ltd pays corporation tax one year in arrears at a rate of 20%. The production facility would attract capital allowances at a rate of 20% per annum on a straight-line basis over the five-year duration of the contract. Paltron Ltd has a weighted average cost of capital of 10%.

Requirement: a) Explain why inflation should be considered when appraising an investment project.

b) Calculate the net present value.

c) Calculate the Internal rate of return.

d) Calculate the payback period.