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Evaluation of Takeover Proposal for Newton Co.

   

Added on  2019-09-26

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HIGHER EDUCATION ASSESSMENTSchool:Professional StudiesAwarding Body:Lancaster UniversityModule Code:BFM502Programme Title:FdA in Business and Financial ManagementOccurrence:2016/17Module Title:Financial ManagementWeighting:50%Assessment Title:Written reportAssessment No.1 of 2Tutor DetailsNameDavid RobinsonTelephone No.504475Emaildavid.robinson@blackpool.ac.ukRoomSO20Internal Verification (IV)For Staff Use OnlyAssessment Brief IVMust be internally verified prior to distribution to studentsIV Name:Toby WeymouthDate:3 October 2016Student Submission IVTo be completed if the assessment submission forms part of the IV sampleIV Name:Date:Distribution Date:10 October 2016Submission Time:23.55 hrs.Submission Date: 13 November 2016Submission Point/Location:Upload to MoodleFeedback Week Commencing:28 November 2016Student Number:Student Name:Assessment RecordFor Staff Use Only. All assessment grades are subject to ratification by the College board of examiners and the awarding body.GradeAwarded:Submitted: On Time Late ___ days (days NOT working days)Date:Penalty:Student Declaration By submitting work for this assignment I acknowledge that the content is entirely my own work and that it has not been submitted whole or in part for the award of a degree or other qualification by me or any other person. I confirm that that all sources have been properly cited and referenced. I understand that this work may be checked for plagiarism through an online detection service and that I am aware of the College’s Student Misconduct Procedures relating to plagiarism.Page 1 of 7
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Learning Outcomes Assessed12LO1 Identify and describe shareholder wealth and profit maximizationLO4 Evaluate a range of short term and long-term sources of finance available to businessesAssessment BriefTask The word count for this assignment is 2,000, and you must stay within 10% of that word count. Failure to do this will result in the deduction of 10% of the available marks. Provide a response to the assessment tasks in report format:Scenario for Newton Co.The company was formed four years ago by three friends, who own 20% of the equity capital in total, and a consortium of five business Angel organisations, who own the remaining 80%, in equal proportions. The company also has a large amount of debt finance in the form of variable rate loans. Although initially the amount of annual interest payable on these loans was low and allowed the company to invest internally generated funds to expand its business, recently, due to a rapid increase in interest rates, there has been limited scope for future expansion and no new product development. The Board of Directors, consisting of the three friends and a representative from each business angel organisation, met recently to discuss how to secure the company’s future prospects. Two proposals were put forward, as follows: Proposal 1: To accept a takeover offer from Mille and Co, a listed company, which develops and manufactures specialist machinery tools and parts. The takeover offer is for £2·95 cash per share or a share-for-share exchange where two Mille Co shares would be offered for three Newton shares. Mille would need to obtain the final approval from its shareholders if either offer is accepted. Proposal 2: To pursue an opportunity to develop a small prototype product that breaks even financially, but gives the Company exclusive rights to produce a follow-on product within two years.The meeting concluded without agreement on which proposal to pursue.After the meeting, Mille and Co was consulted about exclusive rights but they indicated that they had notconsidered the rights in their computations and were willing to continue with the takeover offer on the same termswithout them.Currently, Mille and Co has 10 million shares in issue and these are trading for £4·80 each. Mille and Co’s price to earnings (P/E) ratio is 15. It has sufficient cash to pay for Newton’s equity and a substantial proportion of its debt, believing that this will enable Newton to operate on a P/E level of 15 as well. In addition to this, Mille believesPage 2 of 7
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that it can find cost-based synergies of £150,000 after tax per year for the foreseeable future. Mille’s current profitafter tax is £3,200,000.The following financial information relates to Newton Co and to the development of the new product.Extract from the most recent income statement: £’000 Sales revenue 8,780 Profit before interest and tax 1,230 Interest (455) Tax (155) Profit after tax 620 Dividends NilExtract from the most recent statement of financial position: £’000 Net non-current assets 10,060 Current assets 690 ––––––– Total Assets 10,750 ––––––– Share capital (40c per share par value) 960 Reserves 1,400 Non-current liabilities: Variable rate loans 6,500 Current liabilities 1,890 ––––––– Total liabilities and capital 10,750In arriving at the profit after tax figure, Newton deducted tax allowable depreciation and other non-cash expensestotalling £1,206,000. It requires an annual cash investment of £1,010,000 in non-current assets and workingcapital to continue its operations.Newton’s profits before interest and tax in its first year of operation were £970,000 and have been growing steadilyin each of the following three years, to their current level. The cash flows grew at the same rate as well, but itis likely that this growth rate will reduce to 25% of the original rate for the foreseeable future.Newton currently pays interest of 7% per year on its loans, which is 380 basis points over the government baserate, and corporation tax of 20% on profits after interest. It is estimated that an overall cost of capital of 11% isreasonable compensation for the risk undertaken on an investment of this nature.New product development (Proposal 2):Developing the new follow-on product will require an investment of £2,500,000 initially. The total expected cashflows and present values of the product over its five-year life, with a volatility of 42% standard deviation, are asfollows: Year(s) Now 1 2 3 to7 (in total) Cash flows (£’000) – – (2,500) 3,950 Present values (£’000) – – (2,029) 2,434Page 3 of 7
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