Strategic Risk Management for a Growing Company
Added on 2019-09-30
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Running head: EVALUATING AN INVESTMENT IN EXPANSIONHANSSON PRIVATE LABEL, INC.Evaluating an Investment in ExpansionStudent Name:Course work:University:
EVALUATING AN INVESTMENT IN EXPANSION11.IntroductionIn this present paper, we will analyze the Hansson private limited which is a manufacturing company. The paper analyzes the market and risk for the private label brands, free cash flow analysis, the cost of capital analysis, cash flow analysis. The sensitive and scenario analysis is done and on the basis of the analysis, recommendations have been made.The Hansson private label manufactures different types of personal care products such as sunscreen, shampoo, soap and others. It is one of the major national manufacturers, and now the owner of the company wants to increase the share of the company which is a very critical situation for the company. The expansion needs $50 Million, and it doubles the debts of the company. The analysis helps to analyze the justification of return on investment to cover the risk and investment of funds. The sensitive analysis helps to analyze the key drivers of the projects, and scenario analysis is used to find the comprehensive perspective.2.HPL & its positionOpportunities in the existing marketThe market is increasing with the stable rate in the last four years. The private label products are increasing due to acceptance by the consumers, and the growth of the privatelabel products is less than five percent which means there is a potential growth of the industry. A large number of sales of the company is derived through mass merchants whoare approximately 40% of the total sales. The company is launching 80,000 products yearly which create an intense competition among the shelf space. The collaboration of
EVALUATING AN INVESTMENT IN EXPANSION2the consumers with the company would remove the concern about the next three years and the intense competition for the shelf space shows that the consumers want to increasethe share of the company (Tuškej et al., 2013).Underlying riskThis is the first time for the company to invest a huge amount of $50 Million, so the business risk of the company increases. The debt increases in the capital structure which significantly increases the annual fixed cost of the company and leads to financial distressby increasing the cost or decrease in the sales volume. The current debt-equity ratio of theindustry is 32.9%, and the company's debt-equity ratio is 9.7% whereas the current ratio of the company is 2.85 which indicate that the liquidity of the company is good. Both the ratios indicate that the company is able to raise the debt and expand the shares of the company. The change in consumer taste and preference is another risk and the payback period for the company is 7 years which is a concern for the company whether the consumers will continue the relationship after three years. There is a risk of lowering the utilization capacity of the resources due to constraints in the sales. The success of an investment is very important because the company's financial position is depending on it and the owner personal wealth is also invested, so there is also a personal risk in the investment.
EVALUATING AN INVESTMENT IN EXPANSION33.Evaluation of the projectCost of capital analysisThe Dowling fund analysis sets a firm foundation. It includes the calculation of industry’saverage asset beta which is an unleveraged beta of the industry and it represents the business risk of the industry. Then, with the use of asset beta the cost of equity is calculated according to the different debt-equity ratios. The cost of capital is calculated using CAPM equation in which cost of debt for all the firms is 7.75% with the debt-equity ratio is less than 25% after the discussion between Dowling and bankers. The results of WACC analysis is directly applied generally (Magni et al., 2015). However, it might be possible that Dowling has taken risk-free rate and market premium so the will be further discussed in the sensitivity analysis.Cash flow analysisThe initial cash is $10,000 for facility expansion, $20,000 for manufacturing equipment’s, and $15,000 for packaging equipment’s, total is $45,000. The increase in working capital is $12,817 which will be treated as a cash outflow in 2009. According to the depreciation schedule, the depreciation is $4,000. It is assumed, that the project will be over in ten years. The book value of facility expansion is considered as salvage value which is $5,000; it is assumed. The recovered net working capital will be $8,285.30. Thisamount will be equal to the balance of the account receivable and account payable. For the cash flow analysis please refers to Appendix.
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