International Finance - Report

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Author Note

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Executive Summary:
The report highlights the effective use of investment appraisal technique such as payback
period, net present value and international rate of returns. The business proposal of Superior
Equipment Ltd directly violates the corporate social activities attributes, as large chunk of the
workforce would be laid off after the implementation of the project. In addition, the proposed
project aims to reduce the expenses of wages and salaries for Superior Equipment Ltd, while
boosting their net profits in the process. Thus, appropriate investment appraisal techniques
have been used for determining the significance of the proposed investment and the benefits
it could generate in the long run.

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Table of Contents
Introduction:...............................................................................................................................3
a. Completing an up to date estimation of the company’s cost of capital by utilising publicly
available data:.............................................................................................................................3
b. Using the spreadsheet model forecasting that have an impact on the 5 years business case
proposal:.....................................................................................................................................5
c. Utilising the investment appraisal techniques and critically analysing the project:...............6
d. Depicting the measures that the company could utilise for meeting the funding
requirements of the project:.......................................................................................................8
e. Analysing the corporate social responsibility issues that is raised from the proposal:........10
f. Providing recommendations for the organisation:................................................................11
Conclusion:..............................................................................................................................12
References and Bibliography:..................................................................................................13
Appendices:..............................................................................................................................15

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Introduction:
The report focuses on analysing the activities of Superior Equipment Ltd is a UK-
based privately-owned manufacturing company for the current financial year. Furthermore,
the stagnation in the overall performance of the organisation is mainly analysed and
evaluated to determine the best possible investment options, which can be used for improving
their income in the long run. From the analysis of the case study, it has been detected that the
company can cutdown on their current employee by automating their manufacturing process,
which increases their savings. Thus, appropriate investment appraisal techniques have been
used for determining the significance of the proposed investment and the benefits it could
generate in the long run.
a. Completing an up to date estimation of the company’s cost of capital by utilising
publicly available data:
In context with appendix 1, the overall valuations that has been used for calculating
the cost of capital is appropriately depicted in the tables. The data presented in the tables
directly portray the level of alternative capital that is used by Superior Equipment Ltd for
appropriately supporting their capital requirements. The cost of equity is mainly required by
for detecting the appropriate level of cost of capital for the organisation, which is used in the
investment appraisal techniques such as Net present value. Thus, the data is presented for
detecting the level of debt, loan stock and equity that is being used by Superior Equipment
Ltd for supporting their privately-owned manufacturing process. Hence, the calculations in
appendix 1 directly highlights the level cost of equity, cost of loan stock and cost of debt by
adequately utilizing the company data. Baum and Crosby (2014) stated that with the use of
appropriate data investors are able to determine the level of cost that is associated with
different source of finance used by the company.

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The overall cost equity formula is mainly depicted in the above figure, which can be
used by companies for directly detecting the level of cost that is associated with their equity
capital. Therefore, the formula that is used for calculating the overall cost of equity is by
dividing the dividend per share with the current market value of the stock after which growth
rate of dividends is added to the derived value. The overall analysis mainly helps to
determine the level of equity cost, which is further used in the preparation of the Weighted
Average Cost of Capital method. Caglayan and Demir (2014) indicated that using the WACC
calculations, companies are able to determine the minimum rate of return that is needed from
a project. Thus, it is essential to derive the correct values, as it would allow them to make
appropriate investment decisions. The cost of equity has been calculated by using the
dividend growth rate of AB Dynamics Plc, which is at the levels of 2.18%
(Londonstockexchange.com 2020).
In the similar context, appendix 2 provides information regarding the overall
Weighted Average Cost of Capital calculation, which helps in determining the minimum
level of expected return from a project. The capital structure of the organization is mainly
taken into consideration while deriving the values of WACC, as cost of each section needs to
be evaluated. From the analysis, it has been detected that both bank loan and loan stocks are
taken into consideration for determining the level of cost that is associated with the sources of
finance. Thus, the table states that the cost of equity values is at the level of 14.18%, while
the cost of loan stock is at 5.50% and cost of debt is at 4%. The combination of different cost
of capitals are mainly valued at their capital contribution, which is derived as weights of the

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investment. These weights of each investment are multiplied with their respective cost of
capital for deriving the appropriate level of WACC of the organization.
Thus, the overall calculations have mainly indicated that the WACC is at the levels of
12.19%, which has been derived by utilizing the values of 20% tax rate. The analysis has
mainly indicated that the company would only conduct investments in a project if the
minimum returns are higher than 12.19%. Thus, Superior Equipment Ltd would only allow
projects that have higher returns from their WACC value, as it might help them to generate
higher returns and support their cost of capital (Corsatea, Giaccaria and Arántegui 2014).
b. Using the spreadsheet model forecasting that have an impact on the 5 years business
case proposal:
The appendix 3 mainly provides information regarding the forecasting model that has
been developed for understanding the level of benefits, which might generate higher returns
in the long run. The case study has mainly indicated that the overall revenues and profits of
the company has not provided higher level of income for the investors. Thus, appropriate
investment needs to be conducted by Superior Equipment Ltd for increasing their revenues
and minimizing the level of expenses from their operations. The calculations have mainly
utilized the growth rate of 3% for determining the level of benefits that would be generated
by the company in the next 5-year time period. The analysis of the table in appendix 3 mainly
indicates about the overall level of expenses and income that would be generated by the
company in the next 5 financial years. However, the table has indicated in the first year of
operations the company would incur losses, as high level of expenses would be conducted to
improve their internal working conditions (Crosby and Henneberry 2016).
The proposal made to Superior Equipment Ltd was to minimize the level of levels that
is current being used by the company by 50%, as it would reduce the salaries and wages

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expense. This reduction in expenses is mainly considered to be a boost to the overall income
that would be generated by automating the operations of the company and minimize the
exposure of high-end employee and payments within the company. The aim of the project is
to minimize the total level employees from 450 to 250, which would allow the company to
minimize the level of workers expenses and improve the income in the process. Thus, the
reduction in the number of employees would mainly allow the company to improve their net
profits, while benefiting from the reduction in excessive expenses. Thus, the reduction in
expenses would mainly allow the company to generate an income of $54,770,813, after
incorporating an expense of $27,750,000 for the new automated system that would be used
by the workers of the organization. This implementing of the new system would mainly
increase efficiency and reduce the level of workforce that is currently being used by the
organization, Thus, it would allow the company to improve the level of work force
efficiency, while minimize the number of employees within the workforce.
Thus, the total revenue structure focuses on the benefits that would be generated by
Superior Equipment Ltd after implementing the new technology. Moreover, the growth in
new income of the company is due to the low level of expenses that has been conducted in
the salary and wages section. This reduction is part of cost control measures that can be
implemented by companies for securing their benefits and maximin the level of work output
by automating maximum of the operations. Hence, the new business proposal is benefiting
Superior Equipment Ltd and allowing the management to boost their revenues despite not
taking any kind of adverse marketing or price cut strategies (Enever, Isaac and Daley 2014).
c. Utilising the investment appraisal techniques and critically analysing the project:
The analysis of appendix 4 has mainly stated about the overall investment appraisal
techniques, which has been used for gauging into the efficiency of the business proposal. The

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tables also provide in-depth calculations on the deprecation schedule for both the computers
and automated welders and robots that would be bought for the proposed investment option.
The depreciation is essential, as it would allow Superior Equipment Ltd for taking the tax
benefits from the initial investment and appropriately safeguard the benefits from the overall
proposed project. Thus, the overall depreciation is mainly conducted for next five years of the
organization, as it would determine the benefits that would be incurred from the reduction in
wages and salaries expense. Therefore, the calculations analyze each aspect of the revenues
and expenses that would be affected by the new proposed business operations, while
determining the level of growth that would be seen in their net profits.
Hence, the calculations have indicated that overall benefits that would be provided by
the new business proposal is immense, as the reduction in employee expense would raise
profitability of the company. In addition, the deployment of the initial investment is adequate,
as per the net present value calculations, whose value is at the level of 248,679. The proposed
project has an internal rate of return of 12.63%, while the overall payback period is at the
levels of 3.3 years. These values have mainly indicated that the proposed project returns are
mainly high and would allow Superior Equipment Ltd to improve their benefits from the
investment. García (2017) mentioned that with the implementation of the investment
appraisal techniques companies are able to detect the best possible investment options, which
could generate higher benefits in the long run. Thus, the overall investments within the
organization would mainly allow the management to be benefits from the overall operations.
Henceforth, Superior Equipment Ltd should accept the overall proposal of the new automated
system, as it would increase the total benefits from operations.

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d. Depicting the measures that the company could utilise for meeting the funding
requirements of the project:
The analysis of the case study has mainly stated that relevant funds are needed by
Superior Equipment Ltd for supporting the new investment proposal. The evaluation of
different levels of sources of finance would mainly support the management of Superior
Equipment Ltd to gather the required level of funds for their future operations. Harris (2017)
indicated that the different sources of finance are mainly evaluated by the management to
determine the level of cost that would be associated with the sourced capital. On the other
hand, Kim, Li and Li (2014) criticizes that sources of finance that are not backed by adequate
research and analysis does not allow the organization to support the new business venture,
while increasing risk and cost for the company. Thus, the different sources of finance that
Superior Equipment Ltd can use for supporting their new business proposal are depicted as
follows.
Issuing Corporate Bonds:
One the of the major sources of finance that can be used by Superior Equipment Ltd is
the issue of corporate bonds, which would be rated from the rating agencies. The rating
agencies would mainly rate the corporate bonds of the company, which would help in
smoothly selling the securities to the investors. This method of investment directly increases
the level of debt for the company and imposes constant interest payments, which might have
negative impact on the net profitability of the organization.
Taking Bank Loan:
The second option that can be used by Superior Equipment Ltd is the bank loan,
which can be taken by using appropriate mortgage method. Bank loan is considered to have
fixed interest rates, which needs to be paid on yearly basis. Therefore, from the analysis, it

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has been detected that using the bank loan would ensure Superior Equipment Ltd to gather
the quired funds that is needed for initiating the proposed project of making the production
system automated. Thus, using the bank loan option would also allow the company to take
the tax advantage and minimize the cash outflow from the organization.
Debentures or Loan stock:
The third option that is presented to Superior Equipment Ltd is the debentures or loan
stock, which can be issued by the company to specific investors to gather the required funds
for the proposed project. This source of finance mainly has higher level of interest rates,
which might have negative impact on the overall operations and probability of the company.
Hence, the continued dividend payment is ensured in this type of sources of finance, while
there will be no lineage provided in the tax calculations. Therefore, the company utilizing the
investment option can gather the required funds for initiating the automated system in
Superior Equipment Ltd (Nofsinger 2017).
Issue of Equity:
The last source of financier that can be used by Superior Equipment Ltd is the issue of
equity shares, which could allow the company to become public and enlisting in the stock
market. This method would ensure that the company acquires the appropriate level of funding
for their shares, while paying the dividends to be investors on yearly basis. However, there
are some flaws in the method, where Superior Equipment Ltd cannot take tax advantage on
the dividends that would be paid to be investors.
After analysing the different sources of finance, it could be detected that Superior
Equipment Ltd should utilize the bank loan and corporate bond option. This would help the
company to gather the required funds for supporting the business proposal, while minimising

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the total expense conducted on wages and salaries. On the other hand, the use of equity shares
or loan stocks would have direct impact on the share valuation of the company, which might
have negative impact on its valuation and capability to secure appropriate funding’s for the
new investment option. Thus, Superior Equipment Ltd should utilize the bank loan or
corporate bond system for supporting the new business proposal.
e. Analysing the corporate social responsibility issues that is raised from the proposal:
There is certain concern regarding the proposed project that has been provided to
Superior Equipment Ltd, as it would force the organization to lay off more than 50% of their
current employees. The proposed project is to automate the production process of the
organization, while it would make the company reduce their expenditure on wages and
salaries of the employees. Thus, by deploying the proposed business project Superior
Equipment Ltd would mainly violate certain corporate social responsibility conditions.
Hence, the project is not accepted in accordance with the corporate social responsibility
measure, where the company is increasing unemployment by automating their production
process and minimizing expense on employees.
In this context, Pawel (2014) indicated that companies following the corporate social
responsibility guidelines need to improve the benefits that would be provided to the society
by taking appropriate managerial decisions. However, in case of Superior Equipment Ltd the
management is taking adverse actions, which is in contrast with the corporate social
responsibility of the organization. Therefore, under the guidelines, it is detected that one of
the major social responsibility of companies is to improve on the employment process, which
would benefit the society in the process. Furthermore, the adoption of proposed project would
initiate the grievance listing program, where employees would not be treated fairly. In
addition, the method would directly focus on laying-off 250 employees from the

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organization, while hampering their CSR activities. The following CSR activities issues
would be faced by the organization after deploying the proposed project.
 Corporate governance: The major problems after the adoption of the new proposed plan
would be on the corporate governance, as the unethical activities would be conducted by
seniors or manager level employees. The 250 workers layoff would instigate fear and
uneasiness within the work force, which can be manipulated by the high-level employees
to secure their personal gains. Hence, the implementation of new automated machinery
would have negative impact on the corporate governance structure of the organization.
 Human rights: The second violation is mainly conducted on human rights, where the
employees would be terminated from the job to increase profits. Therefore, from the
analysis, it has been detected that the implementation of the new proposed method would
have negative impact on the employees of the organization.
 Labor: The labor rights will be exploited by initiating the new automation system within
the organization, as large number of employees would be terminated for the purpose of
making addition profits by cutting down on expenses. Hence, trust issues within the
employee could also increase due to the wrongly actions taken by the company when they
were making profits from their operations (Tai and Chuang 2014).
f. Providing recommendations for the organisation:
The analysis of the investment appraisal techniques has mainly indicated that Superior
Equipment Ltd should accept the proposal, as it would allow the management to minimize
their cash outflows, while generating higher revenues in the process. The proposed project
has been analyzed on the next 5 years operations, which might have direct impact on their
income generation capability. The net present value of the proposed project is at the levels of
248,679, while the present value is at 27,998,679. In the similar process, the calculations have
mainly indicated that the overall internal rate of return of the project is at the levels of

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12.63%, while the payback period is at 3.3 years. However, in context to the corporate social
responsibility the proposed project cannot be selected, as it would force the company to lay
off 250 of their employees.
Conclusion:
The report highlights the use of investment appraisal techniques for evaluating the
proposed investment project for automating the production process of Superior Equipment
Ltd. The method such as payback period, net present value and international rate of returns
has been used for analysing the proposed project, which could reduce the expenses of wages
and salaries for Superior Equipment Ltd, while boosting their net profits in the process. The
proposal has been analyzed on the basis of the corporate social responsibility radar for
detecting the negative impact it might have on the society. Lastly, the corporate bonds and
bank is selected to be the best possible source of finance for Superior Equipment Ltd, as it
would support the company to gather the required level of funds for investment.

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References and Bibliography:
Londonstockexchange.com. 2020. AB DYNAMICS share price (ABDP) - London Stock
Exchange . [online] Available at: https://www.londonstockexchange.com/exchange/prices-
and-markets/stocks/summary/company-summary/GB00B9GQVG73GBGBXASQ1.html
[Accessed 9 Feb. 2020].
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Caglayan, M. and Demir, F., 2014. Firm productivity, exchange rate movements, sources of
finance, and export orientation. World Development, 54, pp.204-219.
Corsatea, T.D., Giaccaria, S. and Arántegui, R.L., 2014. The role of sources of finance on the
development of wind technology. Renewable energy, 66, pp.140-149.
Crosby, N. and Henneberry, J., 2016. Financialisation, the valuation of investment property
and the urban built environment in the UK. Urban Studies, 53(7), pp.1424-1441.
Enever, N., Isaac, D. and Daley, M., 2014. The valuation of property investments. Estates
Gazette.
García, F.J.P., 2017. The WACC. In Financial risk management (pp. 345-351). Palgrave
Macmillan, Cham.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
Kim, Y., Li, H. and Li, S., 2014. Corporate social responsibility and stock price crash
risk. Journal of Banking & Finance, 43, pp.1-13.
Nofsinger, J.R., 2017. The psychology of investing. Routledge.

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Pawel, I., 2014. The cost of storage–how to calculate the levelized cost of stored energy
(LCOE) and applications to renewable energy generation. Energy Procedia, 46, pp.68-77.
Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.

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Appendices:
Appendix 1:
Particulars Value
Share valuation 220,000,000
Total share 20,000,000
Share price 11.00
Dividend per share 1.32
Growth 2.18%
Cost of equity 14.18%
Year Dividend (AB DYNAMICS PLC)
2018 3.67
2017 3.31
Growth rate 2.18%
Particulars Value
Loan stock 25,000,000
Cost of loan stock 5.50%
Particulars Value
Bank loan 30,000,000
Cost of debt 4.00%
Shareholders Value No of shares
Paul 20% 4,000,000
John 20% 4,000,000
Senior executives 5% 1,000,000
Senior executives 5% 1,000,000
Senior executives 5% 1,000,000
Senior executives 5% 1,000,000
Alpha 40% 8,000,000
Total share 100% 20,000,000
Appendix 2:
Particulars Value
Share valuation 220,000,000
Loan stock 25,000,000
Bank loan 30,000,000

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Total 275,000,000
WE 80.00%
WL 9.09%
WD 10.91%
Cost of equity 14.18%
Cost of loan
stock
5.50%
Cost of debt 4.00%
Tax rate 20.00%
Cost of capital 12.19%
Appendix 3:
Particulars Value Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 156,000,000 160,680,000 165,500,400 170,465,412 175,579,374 180,846,756
Salary 13,500,000 6,300,000 6,450,000 6,600,000 6,600,000 6,600,000
Other expenses 127,500,000 131,325,000 135,264,750 139,322,693 143,502,373 147,807,444
Project expenses 28,250,000 500,000 500,000 500,000 500,000
Operating profit 15,000,000 (5,195,000) 23,285,650 24,042,720 24,977,001 25,939,311
Expenses 7,000,000 7,210,000 7,426,300 7,649,089 7,878,562 8,114,919
Net profit 8,000,000 (12,405,000) 15,859,350 16,393,631 17,098,439 17,824,393
Appendix 4:
Depreciation Schedule computer
Yea
r Opening value Depreciation Ending value
1 4,000,000 1,200,000 2,800,000
2 2,800,000 840,000 1,960,000
3 1,960,000 392,000 1,568,000
4 1,568,000 313,600 1,254,400
5 1,254,400 250,880 1,003,520
Depreciation Schedule Automated welders and robots
Yea
r Opening value Depreciation Ending value
1 20,000,000 8,000,000 12,000,000
2 12,000,000 4,800,000 7,200,000
3 7,200,000 2,880,000 4,320,000

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4 4,320,000 1,728,000 2,592,000
5 2,592,000 1,036,800 1,555,200
Year Cashflow Cum-cashflow
0 (27,750,000) (27,750,000)
1 13,560,000 (14,190,000)
2 6,530,000 (7,660,000)
3 5,846,800 (1,813,200)
4 5,591,040 3,777,840
5 5,427,712 9,205,552
PV 27,998,679
NPV 248,679
IRR 12.63%
Payback period 3.3 Years