Consider yourself in the following situation as a member of the Financial Services Team of Rice Plc, which is a UK conglomerate. It owns companies across different industries, such as - car manufacturing, consumer goods, leisure, etc. You have been requested to provide meaningful financial analysis and information for decision-making concerning financing, performance, capital investment, constraints in production, budgeting, and sensitivity analysis.

Financial analysis related to Investment Strategy: Because of the climate change target of the UK (the road to net-zero targets), the company's newly appointed investment manager, Ms Kathryn, came up with a new investment strategy - closing five of the company's existing brands and focusing more on the company's most popular electronic vehicle brand in the UK. According to her assessment, this closing decision will generate around 80 million in free cash flow, which the company could reinvest to expand its popular brand - 'eMi Meta'. Kathryn suggests that the market survey indicates this is one of the most popular brands in England, and demand is increasing. The year-to-year sales of the 'eMi Meta' brand have increased by 35% (6,500 units in 2023 compared to 2022), which was higher than all of those five brands combined. Moreover, she indicated that the expansion decision would reduce overall costs while improving quality. This cost-quality dynamic will help the company face competition and achieve a larger market share. However, this expansion will cost the company 300 million, which requires rigorous strategic assessment, including financial viability. Now, she has approached you to evaluate this possible restructuring decision and whether it is a financially Page | 4 viable strategy. She also suggested that this expansion project will run for the next five years, and after that, the company will enter into a new strategic cycle. You have collected the following information from her to do the financial analysis for meaningful decisions. The expansion is expected to increase the sales of 'eMi Meta' by the following units. 9,000 units in 2024; 10,500 units in 2025; 11,500 units in 2026; 13,000 units in 2027; and 14,500 units in 2028. In 2023, the market price of this brand was 48,000, but the company wants to reduce it by 3,000 in 2024 and then will increase/decrease with the pace of the economy and the purchasing power of the consumers. The KPMG has projected that the Bank of England's base rate will remain at 5.25 per cent for the next couple of years, targeting the inflationary pressure. In line with this economic assessment, your company has decided not to increase the price for the next two years (i.e., till 2025), but from the third year (i.e., from 2026), a contingency plan is in place to increase the unit price by 2,000. The production cost is 22,000 per unit, which will increase in the line of inflation and other materials cost over the project's life at 10% each year starting from year two. The production involves fixed overhead expenditure of 25 million in 2024 and 2025, 20 million in 2026 and 15 million in 2027 and 2028. The project requires a working capital investment of 1,000,000 at the beginning, 40 per cent of which the company will recover at the end of the project's life. The cost of promotion and R&D will be 10 million, respectively, over the five years. Assume that there is no other cost involved in this investment. The company is currently following the straight-line depreciation method, and historically, 12% of the cost price of such investment is recovered in the final year. Choice of Financing: (the Board of Directors have agreed) The Board of Directors disapproved reinvesting the 80 million free cash flow from closing five existing brands into this project. Instead, they want to reserve this fund for future uncertainty/business disruption. For this expansion project recommended by Ms Kathryn,the Board has recommended raising capital from alternative financing from external sources. Page | 5 The company has three choices for financing this expansion: issuing new equity, issuing a bond, and issuing preference shares. Rice Plc's equity is trading on the LondonStock Exchange (LSE) with a face value of 200 pence. The market price of each share is as follows: 450p in April 2022, 620p in December 2022, 355p in July 2023, 350p in December 2023, and 348p to date. In the last fiscal year, the company had declared a 55p per share dividend (DPS). The company's investment banker, KPMG, always charges an issuing (i.e. flotation) cost of 5% on the face value to issue new common stock in the market. Historically, the company's earnings per share were 52p in 2019, 46p in 2020, 50p in 2021, 62p in 2022, and 55p in 2023. The company has also assessed the possibility of issuing a bond in the market. Currently, bonds of similar companies are selling at 98, slightly lower than their face value (i.e. 100), with a coupon rate of 11% and a maturity of 5 years. The company's third financing option is to issue preferred stock in the LSE. The industry average preferred dividend and the current market price of preference shares of similar companies are 8 and 102, respectively. You have also collected additional data on the UK financial market and the company. The 3- month UK Gilt yield is 6.0%, the FTSE 100 index has an average yearly return of 12%, and the average corporate tax rate in the UK is 25%. In addition, Rice Plc's beta is 1.6, which is slightly higher than the market beta of 1. For this new investment, the company wants to maintain its existing capital structure policy of 40% debt, 10% preferred equity and 50% common equity. Ms Kathryn has requested that you report based on the following queries so she can present it at the next board meeting.

1. What will be the cost for each source of financing? Consider the DDM (i.e., Dividend Discount Model) and CAPM (i.e., Capital Asset Pricing Model) methods for common equity. Please provide your comments on each approach's assumptions, merits, and limitations.

2. Determine the optimum cost of capital using the Weighted Average Cost of Capital (WACC) approach for the target capital structure. (Hints: Ms Madison would prefer to use CAPM over DDM).

3. Evaluate this possible restructuring decision's total value addition (i.e., total NPV) and breakeven rate (i.e., IRR). (Hints: Use the WACC as your discount rate to evaluate the investment projects)

4. Assume that the product lifecycle of five years is considered a safe bet, but the scale of demand for the product is highly uncertain, mainly due to possible COVID-19 and Energy Crisis. Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.

5. Explain how Artificial Intelligence (AI) could help manage financial resources, particularly capital investment decisions.