CASE STUDY – MADISON PLC
Students are required to submit an individual report before the deadline with a maximum of 2500 words based on the following case study. You will also be required to make a 5 to 6 Minutes presentation as summary of your report in week 10 just before submission. You will be required to send your presentation slides to your Tutor a day before presentation. The slides should not be more than 6. CASE STUDY – MADISON PLC Madison plc is a public limited company, whose shares are quoted on the Alternative investment Market in London and has been operation in the UK for the past 10 years. Madison plc provides intellectual property to Oil and gas companies, HR consultants, Marketing companies, Tourist companies and investment property funds all over the UK. For the past 10 years, Madison plc has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the Finance director of Madison has recently engaged your firm to help them source Finance for their expansion plans. New Software The current software product that Madison has been selling to companies is now deemed to be outdated and the company is looking to invest in a new product, and there are two proposals on offer. The details of these two proposals are outlined below. Madison Super Madison super is the first of the two proposals. The expected life of this product is 5 years and its working capital requirements and the cost of new software, expected revenue, components cost and overheads are as below: Madison Super Draft Figures £‘000 Year 0 1 2 3 4 5 New Software Cost 5,500 Working Capital 400 550 700 850 1,000 Sales Revenue 5,500 6,500 7,700 8,750 9,800 Less: Component A (670) (800) (950) (1,100) (1,350) Component B (1,070) (1,500) (1,800) (2,100) (1,800) Overheads (275) (325) (385) (438) (490) 2 All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In addition Revenues, overheads and working capital are expected to rise by 3% per year from year 1. The cost of component A and component B are expected to rise in line with inflation of 4% per year from year 1. The cost of senior technology officers, who have come from the US have not been taken into consideration in the forecast and are as follows: – Senior Technology Officer 1: Will be paid £200 per hour and expected number of hours for STO 1 are 1,470. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 2% per year, every year from year 2 onwards. Senior Technology Officer 2: Will be paid £100 per hour and expected number of hours for STO 2 are 1, 700. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards. Depreciation is straight line over the life of the software, and the software is not expected to have any salvage value at the end of year 5. The company gets an annual capital allowance of 25%. Corporation tax is 33% and any tax benefit or tax expense is settled one year in arrears. Ignore depreciation when calculating corporation tax payable/receivable, but take the capital allowances into account. If Madison plc invests in Madison Super then the discount rate that would be required to assess the NPV would be 14%. 3 Madison Platform: Madison Platform is the second of two proposals, the expected life of this software will also be 5 years and its working capital requirements, the cost of the new software, expected revenue, components cost and overheads are as follows: Madison Platform Draft Figures £‘000 Year 0 1 2 3 4 5 New Software Cost 8,500 Working Capital 500 653 806 959 1,112 Sales 6,200 7,564 9,001 10,531 12,006 Less: Component A (341) (529) (810) (1,053) (1,441) Component B (1,320) (1,875) (2,250) (2,723) (2,945) Overheads (186) (227) (270) (316) (360) All of the above estimates have also been prepared in terms of present day costs and prices. Assume that the cash flows arise at the end of each period. In addition, you will need to take the costs of senior technology officers and capital allowances, inflation and the rise in the revenue, overheads and working capital into consideration, which are the same for the Madison Super. Corporation tax rate is 33%, and tax benefit or tax expense is steeled one year in arrears. If Madison plc invests in Madison platform then the discount rate that would be required to assess the NPV would be 13%. New Company Acquisition Madison plc is also considering to grow its operations across continental Europe, and at the moment there are two potential target companies that can help Madison plc in creating a presence in Europe, Puteaux digital France and Melia Portfolio Research Spain. For the purpose of this analysis, assume that the required investment funds will be provided by way of a capital loan from the parent entity or other sources of finance; however Madison plc is willing to acquire only one of the companies. The data for the past three years is given below: 4 2011 2012 2013 2011 2012 2013 Turnover 9,406 10,812 11,516 15,529 17,849 20,516 Administrative Expenses (7,012) (7,643) (8,102) (16,926) (19,455) (22,362) Operating profit/ (loss) 2,394 3,169 3,414 (1,398) (1,606) (1,846) Interest receivable and similar income 12 14 32 30 34 39 Interest payable and similar charges (39) (44) (26) (19) (22) (26) Profit/ (Loss) on ordinary activities 2,368 3,138 3,421 (1,387) (1,595) (1,833) Tax (710) (942) (1,026) Net profit/(Loss) 1,658 2,197 2,395 (1,387) (1,595) (1,833) Fixed Assets Intangible fixed assets 4,720 5,426 3,577 3,235 3,718 4,274 Tangible fixed assets 1,458 1,676 2,250 5,785 6,649 7,643 6,179 7,102 5,827 9,020 10,368 11,917 Current assets Debtors: amounts falling due after more than one year 467 536 409 579 666 765 Debtors: amounts falling due within one year 2,679 3,080 6,322 3,847 4,422 5,083 Cash at bank and in hand 732 842 1,599 1,298 1,350 1,404 Creditors: amounts falling due 3,879 4,457 8,330 5,724 6,438 7,252 within one year (2,184) (1,490) (1,693) (9,834) (13,490) (17,687) Net current assets/(liabilities) 1,695 2,967 6,637 (4,110) (7,052) (10,435) Total assets less current liabilities 7,873 10,069 12,464 4,910 3,315 1,482 Net assets/ (liabilities) 7,873 10,069 12,464 4,910 3,315 1,482 Capital and reserves Called up share capital (£1 nominal shares) 100 100 100 450 450 450 Share premium account 1,805 1,805 1,805 Capital redemption reserve 2 2 2 Profit and loss account 5,965 8,162 10,557 4,460 2,865 1,032 Shareholder’s funds/(deficit) 7,873 10,069 12,464 4,910 3,315 1,482 Puteaux France £’000 Melia Spain £’000 5 Required: Draft a report to the Finance Director of Madison plc, in which you: (1) Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages and make recommendations as to how the company can manage the same to help in the planned expansion program. [20 marks] (2) Comment and provide recommendations on how efficient working capital management can improve a firm’s cash flows? [5 marks] (3) Analyse the two Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Madison may use, and the limitations of using those techniques. If Madison plc has capital rationing problems where it has only £5.5 million of funds available for the new investment, suggest which software the company should opt for. Use IRR to support your decision and assume that the second rate of NPV as 10% for the Madison Super Software and 11% for the Madison Platform Software. [20 marks] (4) You would also be required to explain how the company can use Break-even analysis as a tool to aid them in making a decision as to which software to produce. You will be required to come up with an example with your own numbers and draw up a break-even chart in explaining the same [10 marks] (4) What other factors may a firm take into account when making investment decisions? [10 marks] (5) Based on the information provided and to the extent possible, perform ratio analysis and make recommendations as to which company they should be looking to invest ¡n. What other information will help you in making an informed decision on ratio analysis. [10 marks] (6) Presentation of your work (summary – key is the NPV computation and decisions made) (15 marks) Clearly state any assumptions that you make Total marks: 90 Individual Coursework This is individual coursework which contributes 60% to the overall module mark. Submission This assignment must be submitted by 9.00 a.m. on the deadline day via Turnitin. Word limit (excluding tables, charts, references and appendices): 2,500 words 6 Style and Format Style : Report Font size : 12 (preferably Arial) Line spacing : 1.5 lines References : Harvard style Learning outcomes being assessed: 1. Understand the different sources of funding/ finance. 2. Making use of different appraisal techniques and ratio analysis in making Investment decisions. Assessment criteria (i) Detailed explanation of sources of finance with academic reference 20% (ii) Efficient working capital management 5% (iii) Investment appraisal 20% (iv) Other factors to consider when making investment decisions 10% (v) Breakeven analysis 10 % (v) Ratio analysis 10% (vi) Presentation 15% (vii) Professional format 10% Total 100% PLAGIARISM WARNING! —Assignments should not be copied in part or in whole from any other source, except for any marked up quotations, that clearly distinguish what has been quoted from your own work. All references used must be given, and the specific page number used should also be given for any direct quotations, which should be in inverted commas. Students found copying from the Internet or other sources will get zero marks and may be excluded from the university. Word Count – Any work submitted with more than 2500 words will be have 15 marks deducted. The presentation The allocation of marks will be based on the Assessment Rubrics for the Regular Assignment. Location: Room TBC Time slots arrangements: TBC Please note that you should arrive in good time before your session starts. Students who are absent or late will receive a zero mark.