Financial Analysis of Freedom Foods Group Limited's UHT Milk Processing Capacity Expansion

This report provides a financial analysis of Freedom Foods Group Limited's proposed expansion of its Ultra-High Temperature (UHT) milk processing capacity. The report includes an analysis of the Net Present Value (NPV) after considering the proposed outflow and inflow of the proposed expansion, opportunity cost, and terminal cash flow. The report also includes a percentage return on asset, share valuation, and key risks associated with the equity investment and markets.

1Strictly Privileged and Confidential
FUNDAMENTALS OF BUSINESS FINANCE
AUTUMN 2018
GROUP ASSIGNMENT
1.0 Background
1.1 Freedom Foods Group Limited (hereafter known as “Freedom”) common shares are
listed on the Australian Stock Market. Freedom has invested over $300 million in
recent years and plans further capital expenditure to increase financial returns by
increasing its Ultra-High Temperature (UHT) milk processing capacity by expanding
the existing footprint.
1.2 In this regard, a financial analysis has been undertaken whereby the proposed
acquisition prospects have been analysed in terms of Net Present Value (NPV) after
considering the proposed outflow and inflow of the proposed expansion. Further,
opportunity cost has been taken into consideration while evaluating the NPV and sunk
cost are avoided as they are not significant in decision making.
1.3 Outflow:
Initial outflow of resources comprise capital expenditure on building, refrigeration and
incremental working capital.
1.4 Inflow in year 1 to 10
The sales value add upto major component of revenue. Further, no raw material cost
has been provided in the question thereby creating a significant inflow and having a
huge impact on NPV. Further, the other associated costs are not significant and does
not contribute to a major outflow and a tax shield is created on depreciation on assets.
The net impact of above adjustment results in a significant cashflow after adjusting for
tax.
1.5 Terminal Cash flow
Terminal cash flow is net of tax w.r.t the disposal value of assets and a decrease in
working capital requirement.
1.6 Analysis
On the basis of above analysis, a view may be taken that the project is viable as the
cash inflow from the said project is positive (1,514) mostly on account of
unavailability of data pertaining to raw materials.
The project must be accepted as it is highly profitable and has a high NPV.
1.7 Percentage Return
The percentage return on asset has been computed on the basis of capital appreciation
and dividend declared during the concerned period and yield a return of 21.45%
Opening value : 4.291 (3rd Jan, 2017)
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2Strictly Privileged and Confidential
Closing Value : 5.169 ( 30Th Dec, 2017)
Dividend: .0425
Appreciation + yield= .09205
1.8 Share Valuation
The valuation of share has been computed on the Discounting Cash Flow Technique
under multiple dividend discount model and a terminal flow. Accordingly, the
valuation has been determined.
(Amount in
Cents)
Particulars 2017 end 2018 2019 2020 2021 2022 2023
Dividend 6.5 12.5 12.5 12.5 12.5 13.25
Terminal Value 441.6667
Present Value 5.963303 10.521 9.652294 8.855315 8.124142 287.053
Value of equity 330.1691
1.9 Key risk
Credit Risk
• Conditions of Credit market and the operating performance of Freedom Foods will
influence borrowing costs along with its capacity to payback, refinance and further
enhance its debt.
RISKS IN RELATION TO EQUITY INVESTMENTS AND MARKETS
• Investors should be apprised with the risks associated with any securities listed on
the stock market. Share value may increase above or may dip below the Equity
Raising price, relying on the financial and operating performance of the company.
Further, other factors may influence price at which Shares trade on exchange over
which the Key Managerial Personnel may have no control.
• These factors shall include:
- geographical conditions of economy in Australia and rest of world;
- sentiment of investors domestically and internationally;
- fiscal policies, monetary policies, other government policies including regulatory;
and
- terrorism and other geopolitical issues.
1.10 Reason for equity raising
The issue of New Shares shall not have any material impact on the control of the
company.
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