just question 1 the information needed is attached

calculates a range of possible valuations which prospective purchasers might make for the ordinary shares of the company, based on the following seven different methods of share valuation:

1. net asset value (market values)

2. P/E basis

3. dividend yield (no growth)

4. dividend growth valuation model (using your own assessments about future growth rates)

5. discounted cash flow (over a 12 year period)

6. ?super? profits (based on a fair return of 12.5% and using a multiple of 5.25 to value goodwill)

7. an earn-out arrangement based on an initial amount equal to the net asset value (market values) plus a deferred payment equal to 71.5% of the sum ofprojected profits after tax, interest and preference dividend for the years 2017, 2018, 2019 and 2020.(21%)

Fairweather Limited Assignment Guidance Note Use 'Word' to produce the report (if you wish to use Excel for the calculations, you should copy and paste the spreadsheet as an appendix into the same word document as your assignment to be submitted). Read each of the case questions carefully before starting the assignment. Be clear on what is required and answer the questions asked. Avoid rambling answers, irrelevant detail and simple lists of information - you must relate your views and any techniques used to the actual case study. You are advised to allot the time and wordage proportionately to the marks available for each question. There are four questions and the marks available for each question are clearly stated. Make sure that you answer all four questions. Remember it is easier to get the first 50% of marks for a particular question than it is for the second 50%. Make it easy for the marker, and yourself, by answering each question separately. Because of the nature of the case study, you are advised to tackle the questions in sequence, although you can of course come back and modify your answer to earlier questions as you work through the assignment. Show all your calculations / workings and ensure that any figures are correctly expressed. You can choose to include any detailed calculations as an appendix to your answer (and so exclude from the 2,500 word limit if you wish) or you can include them in the body of assignment itself. If you use an appendix, you must make appropriate references to it and include a summary of your valuations in a table in the main body of your assignment. You can produce your answer in essay layout or report-type format with tables and or graphics if you wish. You can use bullet points but do not overdo it. Don't forget to state the numbers of words at the end of your assignment. State clearly any assumptions that you make in formulating your answers. Recommend that you use 12 point font size and use plenty of paragraphs and \"white space\" to make you answer easier to read and follow. Use the spellchecker and thesaurus (where appropriate) Number the pages and make sure that you submit the complete assignment including any appendices via Turnitin with no missing pages. Check your email regularly during the coming weeks for any further general clarification. Ensure that you back up your work regularly on a USB port storage device and/or your university \"h\" drive. The key aspects of each question are: Question 1a: requires you to calculate a range of possible valuations for the ordinary shares of Fairweather. The seven specified different methods of share valuation to be used are clearly stated in the question - use these methods and no others. Make your own assumptions regarding future growth rates when using the dividend valuation model - whilst there has been no growth in dividends in recent years, remember that investors in a publicly quoted company will expect to see some level of growth in dividends. Do ensure that you clearly show your workings of each of the seven methods used in the share valuation. Although several years' financial information is shown, only one valuation is required for each method. Question 1b: requires you to critically appraise the valuation methods used and contrast the differences in the results arising from each of the seven valuation methods valuation used. 1 Make sure that you assess the relative importance of each of the methods used in the context of the case study and also interpret the differences in the results arising from the different methods. Question 2: requires you to comment on how the risk-adjusted, after-tax cost of capital rate of 14% might have been arrived at and provide a critical analysis of four of the alternative methods available that allow for risk. There are many ways of adjusting and allowing for risk when valuating projects such as this that we have covered in the lectures. This is your opportunity to demonstrate your understanding and relevance of these methods. Question 3: requires you to assume that you are an executive of the financial advisors to Chisso Corporation. You need to prepare a report for the MD of the company advising on the relative advantages and disadvantages of the various ways of financing a bid for Fairweather, taking account of the particular circumstances outlined in the case study. Question 4: requires you to evaluate possible synergies that might arise if Fairweather Ltd is taken over. You are also asked to highlight the potential problems that may occur in the achievement of such synergies and suggest how these might be overcome. We have covered the subject of synergy in the module but you have significant scope to research this topic in suitable textbooks and articles. It is important you relate your views to the specifics of this possible take-over. Remember to use all the information provided in the case study in formulating your answers. All the above topics have been covered in the module but do not just rely on the powerpoint handouts to formulate your answer. You should research the key issues and relevant techniques in suitable textbooks and academic articles. Use the various University approved databases to research suitable academic references. Ask at the library if you don't know how to access these databases. To obtain a high grade, you must research the key issues and relevant techniques in suitable textbooks / academic articles and cite suitable references to support your arguments. I would suggest citing between around twelve relevant separate references in your assignment but it is the quality rather than the quantity of the references that is important. Be aware that too much reliance on references is likely to be counterproductive. Lecture notes, Wikipedia and the like are not considered to be suitable academic sources for referencing purposes but the referencing of some good quality business articles is fine. Use a consistent cite-referencing system, preferably the Harvard system. This will be reflected in the marks awarded. Remember and observe the rules on plagiarism. Don't do it! Study carefully the Plagiarism Warning appendix attached to the assignment for further advice. The work submitted must be your own. Do not work with anybody else and all extracts from books and articles must be properly referenced. If you have more than one document, please merge before submission and ensure your assignment is submitted via Turnitin no later than 16.00 on Monday 24th April 2017. Make sure that you retain the submission receipt that is sent to your student inbox after submission. If you require any clarification on aspects of the assignment, just ask but do not email me a draft of your assignment 'to look through' as I am unable to review work before it is submitted. Finally, do not leave this assignment until the last minute - there is no reason why you cannot start working on it now. Paul Hammett March 2017 2 FAIRWEATHER LIMITED Fairweather Limited is a well-established, privately owned machine components distribution company which has been trading for 15 years. It has four shareholders, two of whom are full-time directors of the company, each holding 25% of the ordinary shares of the company. The company's accounting year end is 31 December. Summary financial information for the last four years is shown below. 2016 Actual m 115.0 2015 Actual m 102.0 2014 Actual m 98.0 2013 Actual m 87.0 Profit before tax and interest Exceptional Items Interest paid Corporation Tax Profit after interest and tax Preference Dividend Ordinary Dividend Retained Earnings 19.5 6.8 (2.4) (6.2) 17.7 (0.5) (8.1) 9.1 18.6 15.8 15.4 (2.1) (4.3) 12.2 (0.5) (8.1) 3.6 (4.1) 11.7 (0.5) (8.1) 3.1 (4.0) 11.4 (0.5) (8.1) 2.8 BALANCE SHEET (extracts) Assets Tangible Non-Current Assets Patents and Trade Marks Goodwill 77.0 11.5 7.0 74.7 8.0 9.0 40.3 7.0 11.0 38.1 6.5 13.0 Current Assets Current Liabilities 59.2 (48.7) 47.2 (41.9) 41.9 (36.8) 37.4 (34.7) 12 year bank loan Net Assets (30.0) 76.0 (30.0) 67.0 0.0 63.4 0.0 60.3 8.0 4.5 18.0 15.0 30.5 76.0 8.0 4.5 18.0 15.0 21.5 67.0 8.0 4.5 18.0 15.0 17.9 63.4 8.0 4.5 18.0 15.0 14.8 60.3 INCOME STATEMENT (extracts) Turnover Financing Preference Shares 6.5% Ordinary Shares Share Premium Capital Reserve Retained Earnings Shareholders' Funds Notes: The exceptional items, shown above, for 2016 comprise the profit on disposal of noncurrent assets of 9.8 million less redundancy and reorganisation costs incurred of 3.0 million. The nominal value of the preference shares is 1.00 each and of the ordinary shares is 0.25 each. The company has grown steadily for several years but increasingly competitive market conditions are forecast for 2017. The directors, the main shareholders, now believe it would be preferable if the company were to become part of a more internationally-based organisation in order to achieve greater efficiencies and to speed the development of new income streams. 2 The directors have now appointed Universal Bank as financial advisors and instructed them to search for companies who might be interested in buying the ordinary share capital of Fairweather. The company's four year plan forecasts a profit after interest, tax and preference dividend of 15.2 million for 2017, with a further projected increase of 5.25% a year over each of the following three years. As part of their preparations to sell the company, the directors of Fairweather have had all their land and buildings revalued in the Spring of 2017 by an independent expert, whose valuation is 4.5 million higher than the net book values reflected in the Balance Sheet as at 31 December 2016. Global Parts plc, Engineering Supplies plc, Euro Spares plc, Robinson Components plc and GB Replacement Products plc, five companies listed on the UK Stock Exchange are in the same industry as Fairweather Limited, and their latest key investor ratios are shown below: Dividend Yield 6.4% 5.7% 2.1% 6.1% 6.8% Global Parts plc Engineering Supplies plc Euro Spares plc Robinson Components plc GB Replacement Products plc P/E Ratio 12.0 13.5 21.0 12.5 10.5 Large companies in the same industry typically apply a risk-adjusted, after-tax cost of capital of about 14% to acquisition proposals. The estimated net cash flows which would accrue to a purchasing company, after allowing for interest charged, taxation, preference dividend and the capital expenditure required after the acquisition to achieve Fairweather's twelve year strategic plan, are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 14 million 19 million 21 million 23 million 27 million 28 million 31 million 29 million 35 million 37 million 39 million 42 million Chisso Corporation, an international publicly quoted Japanese-based replacement parts distribution company, has expressed an interest in buying Fairweather, as part of its strategic development plan to widen its component distribution business in the UK. Chisso Corporation has total shareholders' funds of 28 billion Yen and total debt of 24 billion Yen on its latest Balance Sheet. 3 Required: 1. Assume you are the appointed financial advisor to Fairweather Limited. Write a report to the board which: a) calculates a range of possible valuations which prospective purchasers might make for the ordinary shares of the company, based on the following seven different methods of share valuation: 1. net asset value (market values) 2. P/E basis 3. dividend yield (no growth) 4. dividend growth valuation model (using your own assessments about future growth rates) 5. discounted cash flow (over a 12 year period) 6. \"super\" profits (based on a fair return of 12.5% and using a multiple of 5.25 to value goodwill) 7. an earn-out arrangement based on an initial amount equal to the net asset value (market values) plus a deferred payment equal to 71.5% of the sum of projected profits after tax, interest and preference dividend for the years 2017, 2018, 2019 and 2020. (21%) b) critically appraises the valuation methods used and contrasts the differences in the results arising from each of the seven valuation methods in a). (27%) 2. Comment on how the risk-adjusted, after-tax cost of capital rate of 14% referred to in the question might have been arrived at and provide a critical analysis of four alternative methods available that allow for risk. (20%) 3. Assume you are an executive of the financial advisors to Chisso Corporation. Write a report to the Managing Director of Chisso Corporation advising on the relative advantages and disadvantages of the alternative methods available of financing a bid for Fairweather. (16%) 4. Evaluate the possible synergies that might arise if Chisso Corporation takes over Fairweather. You should also highlight the potential problems that may occur in the achievement of such synergies and suggest how these might be overcome. (16%) It is important that you research the relevant topics and cite appropriate literature to support your analysis, arguments and evaluations. This will be reflected in the marking. All work submitted must be typed using Word or Excel. Any handwritten work will not be marked. You must work on this assignment on your own. Evidence of collusion on any part of your assignment is academic misconduct. 4 Maximum Word Length: State the number of words used on the assignment front sheet. You may include diagrams, figures etc. without word penalty. A sliding scale of penalties for excess length will be imposed according to the amount by which the limit has been exceeded. 1-10% 11-20% 21-30% 31%+ point 4. excess excess excess excess no penalty 10% reduction in the mark 20% reduction in the mark the work will be capped at a pass i.e. 40% or grade NB. None of the above penalties will be used to change your mark which is above the pass mark, to one that is below the pass mark. Therefore the maximum penalty for exceeding the word limit will be a reduction to a pass grade. 6