Valuation is an important topic area for both accountants and financial specialists to understand As you will see, corporate valuation is part science and part educated guess work Since nobody knows what the future will bring, it is impossible to value cash flows that stretch out to infinity with a high degree of precision Regardless, the attempt to understand the drivers of value is of great importance To make this a more meaningful assignment, the scenario presented is based on current realworld events The agriculture industry in Canada was, and continues to be, impacted by the COVID19 pandemic Due to the health guidelines issued by the Government of Canada, many people chose to stay at home during the height of the pandemic, and many people are choosing to spend more time at home even after health restrictions have lifted As a result, many people turned to backyard birdfeeders for enjoyment which unexpectedly increased demand for sunflower seeds 10 15 in 2020 Canadian farmers have needed to adapt to this change in consumer demand Crops have grown and prices have increased Sunflower seeds increased in price from $0 25 lb to as much as $0 40 lb (range $0 10 lb $0 15 lb increase) during 2020 https www citynews1130 com 2020 08 29 increase in backyard birdfeeders driving demandfor sunflower seeds https agriculture canada ca en news news releases and statements 2020 news releases In 2020, Canada was poised to see its largest sunflower crop in years if environmental conditions cooperated Sunflower crops increased to 365 km2 in 2020 from 200 245 km2 in previous years Farmers were being asked to increase sunflower yields 10 (or slightly more) in 2021 to meet the increase in demand According to Statistics Canada, Canadian farmers intended to seed 104,400 acres of sunflowers in Spring 2021, which would be up 36 over 2020 and represent the largest acreage base for the crop in a decade https www agcanada com daily bigger sunflower crop expected for 2020 https www realagriculture com tag national sunflower association of canada The Manitoba Crop Alliance, an amalgamation of 5 provincial commodity associations, became operational August 1, 2020 Mandatory check off amounts from the sales of sunflowers, wheat, barley, corn, and flax remained the same post merger https www realagriculture com 2020 07 manitoba crop alliance receives checkoff approvaland announces management team The majority of Canadian sunflower crops are found in Manitoba Farmers produce sunflowers primarily for domestic end users Historically, sunflowers have been produced for confectionary 80 roasted snack seeds, 1 baking with shell, 3 baking without shell), birdfeed (4 a smaller variety of seed), vegetable oils (8 ) and animal consumption (4 ) Canadians produced 63Kt of sunflower seeds for the 2019 2020 growing season Per unit prices were forecast to be higher in the 2021 2022 and 2022 2023 growing seasons, while yield was forecast to decline https en wikipedia org wiki Agriculture in Canada https www150 statcan gc ca n1 en type data text 10010 sourcecode 3438 https agriculture canada ca en sector crops reports statistics https agriculture canada ca sites default files documents 2022 04 canada outlook principal field crops 2022 04 eng pdf The Canadian farming industry has also been impacted by climate change, with agriculture considered extremely vulnerable to warming conditions Dry conditions and lack of adequate irrigation are among many factors challenging crops and yields https climateatlas ca agriculture and climate change https agriculture canada ca en environment climate change climate scenarios agriculture https www cbc ca news science climate change farming 1 5461275 https harvest usask ca bitstream handle 10388 etd 05252010 102012 Thesis Afshin Amiraslany pdf sequence 1 isAllowed y For this assignment, you will be taking the role of a professional advisor, assisting your client in making a strategic business decision based on the results of your valuation and analyses It is now 2023 Your client is a grain supplier from Manitoba who owns 200 (100 Class A voting common shares, 100 Class B non voting common shares, 500,000 Redeemable preferred shares) of an incorporated private farm (Muddy Boots Farm Ltd ) that currently grows sunflowers, wheat, barley and flax on 2,650 acres of farmland Adjacent to the farmers farmland is a production facility that sits on 50 acres of land All land and buildings are fully owned by your client through inheritance of the farm through generations of the family The production facility is running at 78 capacity The production facility is able to convert harvested grain to a sellable product within two days During the 2021 2022 growing season, the farmland was allocated at 25 per each of 4 crops sunflowers, wheat, barley, and flax Current rate of return is 15 The farmer currently has $55,000 cash in the bank The clients succession plan is to hand over the company to his her son in 8 years, while maintaining a percent ownership in the farm to fund his her retirement annually with $45,000 pre tax The farmers son is actively involved in the farming operations and is a reasonable choice to run operations after his parents retirement The neighbour is selling 650 acres of adjacent farmland for $3,200 acre (firm) cash on the transaction date The neighbouring farms soil is ready for crops and the soil nutrients are suitable to grow corn or barley Your client is considering purchasing the land to increase agriculture production Your client has been approached by a fellow farmer in the local community who is interested in sharing the production facility for his own harvest, starting next year If new systems are installed to the production facility to allow for more efficient production, it will cost $250,750 in upgrades The more efficient systems will result in 8 pre tax cost savings of grain processed for each year thereafter The farmer has legal contractual agreements for the next 4 years with grain distributors to supply the following percentage of annual production 40 sunflower seeds (at standard mix), 70 wheat, 55 barley, and 40 flax The remaining crop is sold through the Manitoba Crop Alliance at fair value Corporate tax is 28 See Crop Production Costs https www gov mb ca agriculture farm management production economics cost ofproduction html https www gov mb ca agriculture farm management production economics pubs cop cropproduction pdf As the professional advisor, you are required to draft a comprehensive memo, addressed to The Owner, Muddy Boots Farm Ltd and answer the following questions 1 CROP ALLOCATION AND PROFIT a Based on the information currently available to us, would it be financially beneficial for a farmer to redistribute his crops What would be the percentage distribution of the crop mix to maximize profits What would be the financial benefit, if any b What are risks of the crop mix distribution that maximizes profits How does the farmer mitigate the risks Is there a more beneficial crop mix based on the balance between risk and profits c What is the break even price of each crop currently What is the break even price of the recommended crop mix 2 NEIGHBOURS LAND a Should the farmer buy his neighbours adjacent land to grow crops If so, what crop should the farmer grow on the land Why Provide a financial analysis to support your discussion b Assume the farmer decided to buy the neighbours land How should he fund the purchase of his neighbours land What are his options Be specific c When will the farmer break even if he buys the neighbours land 3 PRODUCTION FACILITY a Should the farmer invest in upgrades to his prodcution facility Provide a financial analysis to support your discussion b Should he allow the fellow farmer access to production and for much 4 RETIREMENT a Will the farmer be able to retire in 5 years and live comfortably Provide a financial analysis to support your discussion 5 OTHER a Are there any other suggestions you have for your client to add to his wealth In this section, you should showcase your knowledge of course materials Choose 3 robust topic areas to provide financial analyses and in depth discussion to assist the farmer in his decision making The more robust your answer, development of quantitative analyses, and integration across topic areas, the higher you will score Show all calculations Support all of your answers State all assumptions necessary for the farmer to confidently proceed with his business Reference any research sources cited

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 07, 2024

Valuation is an important topic area for both accountants and financial specialists to understand. As you will see, corporate valuation is part science and part

Valuation is an important topic area for both accountants and financial specialists to understand. As you will see, corporate valuation is part science and part educated guess-work. Since nobody knows what the future will bring, it is impossible to value cash flows that stretch out to infinity with a high degree of precision. Regardless, the attempt to understand the drivers of value is of great importance. To make this a more meaningful assignment, the scenario presented is based on current realworld events. The agriculture industry in Canada was, and continues to be, impacted by the COVID19 pandemic. Due to the health guidelines issued by the Government of Canada, many people chose to stay at home during the height of the pandemic, and many people are choosing to spend more time at home even after health restrictions have lifted. As a result, many people turned to backyard birdfeeders for enjoyment which unexpectedly increased demand for sunflower seeds 10-15% in 2020. Canadian farmers have needed to adapt to this change in consumer demand. Crops have grown and prices have increased. Sunflower seeds increased in price from $0.25/lb to as much as $0.40/lb (range: $0.10/lb-$0.15/lb increase) during 2020. https://www.citynews1130.com/2020/08/29/increase-in-backyard-birdfeeders-driving-demandfor-sunflower-seeds/ https://agriculture.canada.ca/en/news/news-releases-and-statements/2020-news-releases In 2020, Canada was poised to see its largest sunflower crop in years if environmental conditions cooperated. Sunflower crops increased to 365 km2 in 2020 from 200-245 km2 in previous years. Farmers were being asked to increase sunflower yields 10% (or slightly more) in 2021 to meet the increase in demand. According to Statistics Canada, Canadian farmers intended to seed 104,400 acres of sunflowers in Spring 2021, which would be up 36% over 2020 and represent the largest acreage base for the crop in a decade. https://www.agcanada.com/daily/bigger-sunflower-crop-expected-for-2020 https://www.realagriculture.com/tag/national-sunflower-association-of-canada/ The Manitoba Crop Alliance, an amalgamation of 5 provincial commodity associations, became operational August 1, 2020. Mandatory check-off amounts from the sales of sunflowers, wheat, barley, corn, and flax remained the same post-merger. https://www.realagriculture.com/2020/07/manitoba-crop-alliance-receives-checkoff-approvaland-announces-management-team/ The majority of Canadian sunflower crops are found in Manitoba. Farmers produce sunflowers primarily for domestic end-users. Historically, sunflowers have been produced for confectionary 80% roasted snack seeds, 1% baking with shell, 3% baking without shell), birdfeed (4%; a smaller variety of seed), vegetable oils (8%) and animal consumption (4%). Canadians produced 63Kt of sunflower seeds for the 2019-2020 growing season. Per unit prices were forecast to be higher in the 2021-2022 and 2022-2023 growing seasons, while yield was forecast to decline. https://en.wikipedia.org/wiki/Agriculture_in_Canada https://www150.statcan.gc.ca/n1/en/type/data?text=10010&sourcecode=3438 https://agriculture.canada.ca/en/sector/crops/reports-statistics https://agriculture.canada.ca/sites/default/files/documents/2022- 04/canada_outlook_principal_field_crops_2022_04-eng.pdf The Canadian farming industry has also been impacted by climate change, with agriculture considered extremely vulnerable to warming conditions. Dry conditions and lack of adequate irrigation are among many factors challenging crops and yields. https://climateatlas.ca/agriculture-and-climate-change https://agriculture.canada.ca/en/environment/climate-change/climate-scenarios-agriculture https://www.cbc.ca/news/science/climate-change-farming-1.5461275 https://harvest.usask.ca/bitstream/handle/10388/etd-05252010- 102012/Thesis_Afshin_Amiraslany.pdf?sequence=1&isAllowed=y For this assignment, you will be taking the role of a professional advisor, assisting your client in making a strategic business decision based on the results of your valuation and analyses. It is now 2023. Your client is a grain supplier from Manitoba who owns 200 (100% Class A voting common shares, 100 Class B non-voting common shares, 500,000 Redeemable preferred shares) of an incorporated private farm (Muddy Boots Farm Ltd.) that currently grows sunflowers, wheat, barley and flax on 2,650 acres of farmland. Adjacent to the farmer’s farmland is a production facility that sits on 50 acres of land. All land and buildings are fully-owned by your client through inheritance of the farm through generations of the family. The production facility is running at 78% capacity. The production facility is able to convert harvested grain to a sellable product within two days. During the 2021-2022 growing season, the farmland was allocated at 25% per each of 4 crops: sunflowers, wheat, barley, and flax. Current rate of return is 15%. The farmer currently has $55,000 cash in the bank. The client’s succession plan is to hand-over the company to his/her son in 8 years, while maintaining a percent ownership in the farm to fund his/her retirement annually with $45,000 pre-tax. The farmer’s son is actively involved in the farming operations and is a reasonable choice to run operations after his parent’s retirement. The neighbour is selling 650 acres of adjacent farmland for $3,200/acre (firm) cash on the transaction date. The neighbouring farm’s soil is ready for crops and the soil nutrients are suitable to grow corn or barley. Your client is considering purchasing the land to increase agriculture production. Your client has been approached by a fellow farmer in the local community who is interested in sharing the production facility for his own harvest, starting next year. If new systems are installed to the production facility to allow for more efficient production, it will cost $250,750 in upgrades. The more efficient systems will result in 8% pre-tax cost savings of grain processed for each year thereafter. The farmer has legal contractual agreements for the next 4 years with grain distributors to supply the following percentage of annual production: 40% sunflower seeds (at standard mix), 70% wheat, 55% barley, and 40% flax. The remaining crop is sold through the Manitoba Crop Alliance at fair value. Corporate tax is 28%. See Crop Production Costs: https://www.gov.mb.ca/agriculture/farm-management/production-economics/cost-ofproduction.html https://www.gov.mb.ca/agriculture/farm-management/production-economics/pubs/cop-cropproduction.pdf As the professional advisor, you are required to draft a comprehensive memo, addressed to: The Owner, Muddy Boots Farm Ltd. and answer the following questions: 1. CROP ALLOCATION AND PROFIT a. Based on the information currently available to us, would it be financially beneficial for a farmer to redistribute his crops? What would be the percentage distribution of the crop mix to maximize profits? What would be the financial benefit, if any? b. What are risks of the crop mix distribution that maximizes profits? How does the farmer mitigate the risks? Is there a more beneficial crop mix based on the balance between risk and profits? c. What is the break-even price of each crop currently? What is the break-even price of the recommended crop mix? 2. NEIGHBOUR’S LAND a. Should the farmer buy his neighbour’s adjacent land to grow crops? If so, what crop should the farmer grow on the land? Why? Provide a financial analysis to support your discussion. b. Assume the farmer decided to buy the neighbour’s land. How should he fund the purchase of his neighbour’s land? What are his options? Be specific. c. When will the farmer break-even if he buys the neighbour’s land? 3. PRODUCTION FACILITY a. Should the farmer invest in upgrades to his prodcution facility? Provide a financial analysis to support your discussion. b. Should he allow the fellow farmer access to production and for much? 4. RETIREMENT a. Will the farmer be able to retire in 5 years and live comfortably? Provide a financial analysis to support your discussion. 5. OTHER a. Are there any other suggestions you have for your client to add to his wealth? In this section, you should showcase your knowledge of course materials. Choose 3 robust topic areas to provide financial analyses and in-depth discussion to assist the farmer in his decision-making. The more robust your answer, development of quantitative analyses, and integration across topic areas, the higher you will score. Show all calculations. Support all of your answers. State all assumptions necessary for the farmer to confidently proceed with his business. Reference any research sources cited.