Task Criteria

1. Identify the sources of finance to a company and the reward of the providers of that finance;

2. Discuss the sources and evaluation of risk;

3. Analyse the role of mergers and acquisitions in achieving the objectives of a company;

4. Identify and apply appropriate techniques for choosing between alternative sources of funding;

5. Identify and apply appropriate methods for making long and short-term asset allocation decisions;

6. Apply different methods of incorporating risk into financial decision-making models;

You are required to resubmit the original coursework which is;

• Investment Appraisal Analysis & Havin plc.

The following changes have been made regarding the Ref & Def Coursework:

In respect of Havin plc.:

• Changes to the figures relating to theoperating costs and revenues.
• The project would be expected to achieve a maximum payback period of 3 years.
• The company's cost of capital is 12%.
• Market research has been omitted.

Description of the Task:

In this task, you needs to analyse a potential investment scenario, appraise the options available and recommend whether the company should go ahead with the project and why. The task also encompasses an evaluation ofhow to finance the investment and evaluation of therole of an acquisition in achieving the objectives of a company.

Havin plc.

In 2015 Danny and Doris Havin, enthusiastic surfers, started a small surfboard production business in the South West of England. Their business expanded as surfing became more popular and demand for their hand-crafted surfboards increased. From their small beginnings grew the now publicly quoted company of Havin plc.

In recent years the directors, have decided that the business has reached the limit of development in its present form. The directors believe that the long-term success of the company lies in future improvement and expansion. Future development requires large-scale expansion in order to compete with the cost base of mass-produced surfboards.

They have investigated a number of possibilities, deciding eventually to expand their production facilities and their distribution system so that their newly 'branded' products could be sold by independent, quality retailers around Great Britain. They consider that the most beneficial action they could take is to investigate an acquisition (take over) of a company in UK. After having serious and lengthy discussions in the Executive Board Committee they made a decision on the acquisition of a company.

The project involves the acquisition of a company which has a larger production and distribution facility in the local area. The cost of the acquisition is 15,000,000 and needs to be paid immediately. If Havin plc. decided to proceed with this project, this would involve transferring some of the current production to this new facility and selling the rest of the current production immediately. In regards to this sale process, they have been offered an estimate of 7,750,000. Furthermore, new machinery and equipment would need to be purchased at a cost of 9,500,000 before production could begin. This machinery and equipment would be sold at the end of the ten-year period for an estimated scrap value of 2,500,000. In order to assess the building and investment costs of the project, professional fees of 50,000 will be incurred at the start of the project and payable immediately. The directors want to evaluate over 10 years of the acquisition.

The directors expect an increase in share prices after the acquisition and estimate that this acquisition project potentially might add value to Havin plc.The project would be expected to achieve a maximum payback period of 3 years.The company's cost of capital is12%.

Operating costs and revenues relating to the project are as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
	000	000	000	000	000	000	000	000	000	000
Sales revenue	5000	7570	7000	7500	8000	8500	9000	9500	8000	7500
Variable costs	1500	1750	2200	2500	2750	2900	3000	3100	3200	3600
Fixed costs	1500	1500	1500	1500	1500	1500	1500	1500	1500	1500

Havin plc.'s equity and borrowing are currently made up as follows:

	000
Share Capital (1 shares)	2,500
Share premium	4,375
Retained earnings	10,460
Long term bank borrowing	3,750
Current gearing ratio (debt to equity)	22 %

In order to raise the funds required for investment in the expansion, the board of directors will consider both increasing borrowing and an issue of new shares. However, the level of gearing must not exceed 40%.

REQUIRED:

You have been asked following to report to the directors which will:

a) Evaluate the viability of the project by using appropriate investment appraisal techniques

b)Evaluate the alternative sources offunding(debt & equity) byincorporating risk and reward into financial decision. (Evaluation of how to finance the investment.)

c)Evaluate therole of the acquisition in achieving the objectives of the company

(Evaluation of the potential value enhancement to the company by applying related theory.)

Any specific instructions: Your report covered following main points

1.Introduction

2. Abstract(Tells the reader what they will find in the report)

3. Table of Contents (Tells the reader where everything is)

4. Discussion&Analysis

4.1. Evaluation of investment appraisal techniques

4.2. Evaluation of the alternative sources offunding(debt & equity)

4.3.Evaluation of the role of the acquisition

5. Conclusion and recommendations

6.References

7.Appendices(if required)

Important Notes:

• All calculations on an ``Excel spreadsheet`` (separate from your report).
• Excel Spreadsheet must provide
• You do not need to calculate the weighted average of cost of capital (WACC) of the company.