## CFM Assignment 2020

**In Module** **Assessment: **Individual coursework

**Submission Date**: 17^{th} November 2020 (* Learning Week 9*)

**Provision Marks and Feedback Date**: 8^{th} December 2020 (* Learning Week 12*)

**Where to Access the Feedback:** Module Blackboard Site

**Feedback Method: **Mixture of Formative and Summative Assessment Feedback. Students receive comments on their ability to link theory into practice in terms of applying and interpreting “Shareholder Value Analysis” to a selected company.

**Assignment Outline:**

The assignment is an ** individual report** on shareholder value analysis of an approved listed company. The company chosen should be one of the

**top 350 listed UK companies**in the

**London Stock Exchange**. Please confirm with your seminar Tutor that your chosen company is appropriate.

**Coursework Assignment Outline:**

Assume that you are working in the corporate financial advisory services department of a large investment bank and your director (who has read extensively about shareholder value analysis) has asked you to prepare a shareholder value analysis and a short-term valuation report on your chosen company using the following basis for your valuation:

- Planning period is to be set at five years
- A residual value based on constant cash flows from year five onwards (infinite life) will be estimated at the end of this five-year period
- Beta factor to be obtained using current information held on Bloomberg, DataStream or other sources
- FTSE All-share return to be taken as 10%
- Risk free rate to be taken as 3%
- The target capital structure to be set based on the company last financial year (preferably 2019)
- The gross cost of debt over the financing period is to be estimated at 6% per annum
- As for the other key value drivers (forecast sales growth rate, operating margins, tax rate, incremental working capital requirements and incremental fixed asset investment) you are required to decide these yourselves. The director has advised you to review the latest annual report and accounts of your chosen company and use the data therein and other financial journalistic analysis and intelligence that you consider appropriate to help you decide upon the growth levels of your chosen drivers.

**Required:**

- Using the information on certain key drivers already given above together with the other key driver figures decided upon by yourselves, prepare a spreadsheet using the
**shareholder value analysis model**to determine a purchase price for your chosen company. A short report explaining how the valuation method works and the purpose of each stage in the spreadsheet calculations should support the model.

**(Marks allocated: 70% - 700 words excluding appendices)**

- Review the certain value driver’s assumptions given above and growth levels suggested by you for other drivers and write a brief report justifying or criticising the growth levels of the chosen drivers.

**(Marks allocated: 30% - 300 words excluding appendices)**

An electronic copy of your assignment should be submitted via the module blackboard site.

To ensure anonymous marking **Do NOT** include your name or student number within the file name or anywhere within your submission. The submission will be subject to anonymous marking. Having logged into Turnitin on Blackboard, the system will record your details anonymously and tutors will only see your name after the entire submission has been assessed and provisional marks have been released to all students at the same time.

You are expected to make full use of all the facilities offered by the University libraries and other sources. Examples of other sources of information include the Financial Times, the Economist, Investors’ Chronicle, Fame database, Bloomberg, DataStream, Excel cards and databases.

**Individual Assignment Further Instructions**

**What is the planning or the forecast period?**

This is the next five years taking into account the last year of the published accounts used. Example 2019-2023.

**How to compute growth rate in sales?**

You need to use the sales (turnover) figure for let say the past five years and then compute the growth rate based on these figures either manually or using the nth root formula.

Example:

Manually: [Sales (2015) – Sales (2014)] / Sales (2014) x 100% = g1

[Sales (2016) – Sales (2015)] / Sales (2015) x 100% = g2

[Sales (2017) – Sales (2016)] / Sales (2016) x 100% = g3

[Sales (2018) – Sales (2017)] / Sales (2017) x 100% = g4

Average growth rate is = g1 + g2 + g3 + g4 / 4

Using nth root formula:

Average growth rate = - 1

**How to compute operating profit margin?**

Operating profit margin = operating profit / sales

You do need to compute the average operating profit margin for let say the past five years which is the operating profit margin for each year divided by five.

**How to compute incremental fixed investment percentage?**

You first need to know your total fixed assets or non-current assets which can be found in the balance sheet or statement of financial position of your chosen company.

Then use the figures to compute the percentage change in the fixed assets (FA) or non-current assets (NCA) values as shown below:

Manually: [FA (2015) – FA (2014)] / FA (2014) X 100% = r1

[FA (2016) – FA (2015)] / FA (2015) X 100% = r2

[FA (2017) – FA (2016)] / FA (2016) X 100% = r3

[FA (2018) – FA (2017)] / FA (2017) X 100% = r4

Average growth rate is = r1 + r2 + r3 + r4 / 4

Using nth root formula:

Incremental fixed investment percentage rate = – 1

**How to compute working capital investment percentage rate?**

First you need to compute the working capital which is total current assets less total current liabilities. If working capital figures are given for your chosen company then do use them as given.

Then use the figures to compute the percentage change in the working capital (WC) values as shown below:

Manually: [WC (2015) – WC (2014)] / WC (2014) X 100% = r1

[WC (2016) – WC (2015)] / WC (2015) X 100% = r2

[WC (2017) – WC (2016)] / WC (2016) X 100% = r3

[WC (2018) – WC (2017)] / WC (2017) X 100% = r4

Average growth rate is = r1 + r2 + r3 + r4 / 4

Using nth root formula:

Incremental working capital investment percentage rate = – 1

**How I compute tax rate?**

Tax rate = Tax / Profit before tax.

Values for tax and profit before tax to be obtained from the income statement or profit and loss account.

Use the average tax rate for the last five years which equals to tax rate for each year of the last five years divided by five.

**How I should compute the weighting or percentage of debt and equity?**

First obtain the figures for total non-current liabilities (debt) and shareholders equity (equity). This can be obtained from the balance sheet or statement of financial position of your chosen company.

Total capital = debt + equity

% debt = debt / total capital

% equity = equity / total capital

**What is the value of debt?**

This is the total value of non-current liabilities which can be found in the balance sheet or statement of financial position of your chosen company.

**Where do I find the beta of my company?**

Do use Bloomberg, Thomson Reuters, yahoo finance, google finance, datastream, FAME and sometimes the annual reports of the company to find the recent beta of your chosen company.

**What do I need to do in question 1?**

You need to create the SVA model, covering all the steps, for your chosen company and explain each step of the model. Refer to lecture / workshop and seminar of week 4 in which SVA model is fully explained and applied to hypothetical mini case study.

*Please remember that you do need to know all the key values before starting the SVA model. Refer to the table given in the mini case study of seminar 4 for guidance.*

**What do I need to do in question 2?**

You need to comment and analyse the value drivers used for your chosen company and how these affect shareholder value? Refer to the current financial and investment status of the company and key factors driving its shareholder value (e.g. increase in sales, decrease in costs, high debt, raise in investments etc).