Prior to the board meeting, you should take a look at and prepare the following financial information:

1. Analyse the liquidity ratios
2. Analyse the solvency ratios
3. Review the viability position of the two business divisions
4. Determine the current WACC and optimal WACC for the business
5. Determine the NPV for the two projects

Case Study ABCis a private company that provides refrigeration services to large shopping centres. The Board of Directors is currently in the process of reviewing their strategic plan for the next few years, and they have commissioned you as a business consultant to analyse their financial position and help them with some questions they have regarding the business and the strategy of the company. You will be meeting with the Board of Directors in one week's time. They have four specific questions for you and would like your advice on these matters. The Board of Directors is especially keen to have answers that are supported by the information provided within the financial information of the company. It is therefore expected that you will complete an analysis of the viability, liquidity, and solvency of the company prior to the meeting, as well as prepare some information for their Capital Expenditure Budget. The more preparation you do before the meeting with the Board of Directors, the better you will be able to answer their questions. Current strategic plan At the beginning of 2020, ABC held a market share of 35%. The company had been unable to increase its market share over the previous few years and had in fact, lost some market share to some emerging start-ups. ABC has two major competitors in the market, DEF and GHI Industries, both specialising in refrigeration services. In order to increase their market share, ABC decided to differentiate themselves in the marketplace by increasing their offerings from not just refrigeration installations but also to include air-conditioning installations. This would make them the only company in the market offering both refrigeration and air- conditioning services to supermarkets. The idea was that supermarkets would tend to use ABC as they would then only have to deal with one company for refrigeration and air-conditioning services. At the beginning of 2020, ABC invested heavily in equipment for the air-conditioning division and funded this almost entirely with debt. This is clear on the company balance sheet. ABC's marketing team recently conducted branding surveys with their customers and discovered that supermarkets were now confused about what services ABC actually delivered? There was a clear sentiment that customers were likely to go with one of the two main competitors as it was clear that they were refrigeration specialists. The Board of Directors, however, believes that the strategy of continuing to provide both refrigeration and air-conditioning services is the best strategy and will be backed up by the financial analysis of the business. The Board is, however, also looking at the possibility of selling the air-conditioning division and purchasing GHI Industries refrigeration business to increase their market share that way. 252.18 57.24 Profit and Loss report for the year 2020 (values in USD millions) Revenue Cost of Goods Sold Gross Profit Operating Expenses EBIT Interest Expense Profit before tax Tax Expense Net Profit 194.94 177.76 17.18 11.30 5.88 1.76 4.12 Balance Sheet as at 31st December 2020 (values in USD millions) 2020 2019 Assets 13.10 11.20 4.90 5.23 3.10 2.14 18.69 42.26 3.08 3.15 22.77 45.1 Current Assets Cash Cash Equivalents Marketable Securities Accounts Receivable Inventory Total Current Assets Non-Current Assets Plant and Equipment Accumulated Depreciation Intangible Assets Total Non-Current Assets Total Assets Liabilities Current Liabilities Accounts Payable Short-term debts Total Current Liabilities Non-Current Liabilities Long-term debts 282.83 (78.71) 3.87 77.60 (31.26) 4.31 50.65 95.75 207.99 250.25 16.02 55.32 71.34 11.14 28.97 40.11 134.3 7.45 134.3 7.45 205.64 47.56 Total Non-Current Liabilities Total Liabilities Shareholders' Equity Common stock Retained earnings Total Equity 30.51 14.10 44.61 28.21 9.98 48.19 Notes on the financial statements 1. The short-term debt is a line of credit at 10% interest rate 2. The long-term debt is a secured bank loan at 4.3% interest rate 3. In 2020 the company engaged in an aggressive growth strategy investing in new equipment that would help them set up the air-conditioning division. This accounts for the increase in Non-Current Assets and long-term debts The short-term debts were increased to cover additional wage costs to cover the expected increase in production 4. Viability The company has broken down its viability by division. Therefore, there is viability information for the new air-conditioning division as well as the original refrigeration division. Viability Air-conditioning Division The break-even sales for the Air-conditioning division is 846 units sold. The table below shows the sales units for 2020 and the expected sales units for 2021 2022. Year 2020 2021 2022 Unit sales 403 450 500 Viability refrigeration Division The break-even sales for the refrigeration division is 374 units sold. The table below shows the sales units for 2020 and the expected sales units for 2021 2022. Year 2020 2021 2022 Unit sales 908 940 945 Capital Structure The following table shows how their cost of equity and cost of debt is affected by the percentage of debt. The Board of Directors does not have the information on the WACC column. You will need to calculate this yourself. Proportion of Debt Debt-to-Equity Cost of Equity Effective Cost of Debt Cost of Financial Distress WACC 0% 0 10% 4.6% 10% 0.11 11% 4.6% 20% 0.25 12% 4.6% 30% 0.43 13% 4.6% 40% 0.67 14% 4.6% 50% 1.00 15% 4.6% 60% 1.50 16% 4.6% 70% 2.30 17% 4.8% 1% 80% 4.00 18% 5.2% 3% 90% 9.00 19% 6.1% 9% 100% 7.0% 14% Future Cash Flows Air-conditioning division When ABC originally purchased the equipment for the air-conditioning business division in 2020, they bought cheap machinery and have now realised that the quality of work they are doing is substandard. In order to continue running this division, the company would need to reinvest in better equipment in order to achieve higher quality results. The equipment has a lifetime of 5 years before it will need to be replaced. The table below shows the predicted revenue and expenses for the air-conditioning division over the next five years. Amounts in the table are in USD millions. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Equipment Investment 25.00 Predicted revenue 62.54 76.00 92.00 106.00 122.00 Predicted operating expenses 81.00 81.00 81.00 81.00 81.00 You will need to use the WACC that you calculated in the previous table based on the company's current proportion of debt to determining the Net Present Value. Acquiring GHI Industries One of the potential options the ABC board is investigating is what would be the outcome if they sold the air-conditioning unit and instead purchased their nearest competitor GHI Induistries: The business would be purchased for $53 million. The expected net cash inflows from this project are provided for the next five years in order to determine the Net Present Value of this purchase. Amounts in the table are in USD millions. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment 53.00 Predicted cash inflows 15.00 23.00 24.00 26.00 28.00 Case Study ABCis a private company that provides refrigeration services to large shopping centres. The Board of Directors is currently in the process of reviewing their strategic plan for the next few years, and they have commissioned you as a business consultant to analyse their financial position and help them with some questions they have regarding the business and the strategy of the company. You will be meeting with the Board of Directors in one week's time. They have four specific questions for you and would like your advice on these matters. The Board of Directors is especially keen to have answers that are supported by the information provided within the financial information of the company. It is therefore expected that you will complete an analysis of the viability, liquidity, and solvency of the company prior to the meeting, as well as prepare some information for their Capital Expenditure Budget. The more preparation you do before the meeting with the Board of Directors, the better you will be able to answer their questions. Current strategic plan At the beginning of 2020, ABC held a market share of 35%. The company had been unable to increase its market share over the previous few years and had in fact, lost some market share to some emerging start-ups. ABC has two major competitors in the market, DEF and GHI Industries, both specialising in refrigeration services. In order to increase their market share, ABC decided to differentiate themselves in the marketplace by increasing their offerings from not just refrigeration installations but also to include air-conditioning installations. This would make them the only company in the market offering both refrigeration and air- conditioning services to supermarkets. The idea was that supermarkets would tend to use ABC as they would then only have to deal with one company for refrigeration and air-conditioning services. At the beginning of 2020, ABC invested heavily in equipment for the air-conditioning division and funded this almost entirely with debt. This is clear on the company balance sheet. ABC's marketing team recently conducted branding surveys with their customers and discovered that supermarkets were now confused about what services ABC actually delivered? There was a clear sentiment that customers were likely to go with one of the two main competitors as it was clear that they were refrigeration specialists. The Board of Directors, however, believes that the strategy of continuing to provide both refrigeration and air-conditioning services is the best strategy and will be backed up by the financial analysis of the business. The Board is, however, also looking at the possibility of selling the air-conditioning division and purchasing GHI Industries refrigeration business to increase their market share that way. 252.18 57.24 Profit and Loss report for the year 2020 (values in USD millions) Revenue Cost of Goods Sold Gross Profit Operating Expenses EBIT Interest Expense Profit before tax Tax Expense Net Profit 194.94 177.76 17.18 11.30 5.88 1.76 4.12 Balance Sheet as at 31st December 2020 (values in USD millions) 2020 2019 Assets 13.10 11.20 4.90 5.23 3.10 2.14 18.69 42.26 3.08 3.15 22.77 45.1 Current Assets Cash Cash Equivalents Marketable Securities Accounts Receivable Inventory Total Current Assets Non-Current Assets Plant and Equipment Accumulated Depreciation Intangible Assets Total Non-Current Assets Total Assets Liabilities Current Liabilities Accounts Payable Short-term debts Total Current Liabilities Non-Current Liabilities Long-term debts 282.83 (78.71) 3.87 77.60 (31.26) 4.31 50.65 95.75 207.99 250.25 16.02 55.32 71.34 11.14 28.97 40.11 134.3 7.45 134.3 7.45 205.64 47.56 Total Non-Current Liabilities Total Liabilities Shareholders' Equity Common stock Retained earnings Total Equity 30.51 14.10 44.61 28.21 9.98 48.19 Notes on the financial statements 1. The short-term debt is a line of credit at 10% interest rate 2. The long-term debt is a secured bank loan at 4.3% interest rate 3. In 2020 the company engaged in an aggressive growth strategy investing in new equipment that would help them set up the air-conditioning division. This accounts for the increase in Non-Current Assets and long-term debts The short-term debts were increased to cover additional wage costs to cover the expected increase in production 4. Viability The company has broken down its viability by division. Therefore, there is viability information for the new air-conditioning division as well as the original refrigeration division. Viability Air-conditioning Division The break-even sales for the Air-conditioning division is 846 units sold. The table below shows the sales units for 2020 and the expected sales units for 2021 2022. Year 2020 2021 2022 Unit sales 403 450 500 Viability refrigeration Division The break-even sales for the refrigeration division is 374 units sold. The table below shows the sales units for 2020 and the expected sales units for 2021 2022. Year 2020 2021 2022 Unit sales 908 940 945 Capital Structure The following table shows how their cost of equity and cost of debt is affected by the percentage of debt. The Board of Directors does not have the information on the WACC column. You will need to calculate this yourself. Proportion of Debt Debt-to-Equity Cost of Equity Effective Cost of Debt Cost of Financial Distress WACC 0% 0 10% 4.6% 10% 0.11 11% 4.6% 20% 0.25 12% 4.6% 30% 0.43 13% 4.6% 40% 0.67 14% 4.6% 50% 1.00 15% 4.6% 60% 1.50 16% 4.6% 70% 2.30 17% 4.8% 1% 80% 4.00 18% 5.2% 3% 90% 9.00 19% 6.1% 9% 100% 7.0% 14% Future Cash Flows Air-conditioning division When ABC originally purchased the equipment for the air-conditioning business division in 2020, they bought cheap machinery and have now realised that the quality of work they are doing is substandard. In order to continue running this division, the company would need to reinvest in better equipment in order to achieve higher quality results. The equipment has a lifetime of 5 years before it will need to be replaced. The table below shows the predicted revenue and expenses for the air-conditioning division over the next five years. Amounts in the table are in USD millions. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Equipment Investment 25.00 Predicted revenue 62.54 76.00 92.00 106.00 122.00 Predicted operating expenses 81.00 81.00 81.00 81.00 81.00 You will need to use the WACC that you calculated in the previous table based on the company's current proportion of debt to determining the Net Present Value. Acquiring GHI Industries One of the potential options the ABC board is investigating is what would be the outcome if they sold the air-conditioning unit and instead purchased their nearest competitor GHI Induistries: The business would be purchased for $53 million. The expected net cash inflows from this project are provided for the next five years in order to determine the Net Present Value of this purchase. Amounts in the table are in USD millions. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment 53.00 Predicted cash inflows 15.00 23.00 24.00 26.00 28.00