Finance for Global Business: Investment Appraisal of Fitness Guru PLC

This report provides a detailed financial analysis of Fitness Guru PLC, focusing on investment appraisal techniques, financing options, and risk management strategies. It begins by calculating revenues, costs, and profits to determine cash inflows and outflows, followed by discounted cash flow analysis, including Net Present Value (NPV) and Payback Period calculations, to assess the viability of a project. The report also analyzes the company's cost of capital, including the cost of equity and debt, and calculates the Weighted Average Cost of Capital (WACC). Furthermore, it explores different financing options such as debt and equity funds, trade-off theory, and pecking order theory. Finally, the report addresses potential risks, including foreign exchange risk, interest rate risk, leverage risk, and transaction risk, and advises the company on managing these risks effectively. The conclusion summarizes the key findings and recommendations based on the financial analysis.

Finance for Global Business

TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
1. Applying a range of method and carry out the investment appraisal of the project and
evaluating robustness of the findings with appropriate theory in investment appraisal,cost of
capital and risk............................................................................................................................4
2. Advising the company on the financing option available and implication of those option and
evaluating the cost of capital possible impact :-........................................................................9
Appraising the possible risks and management of those risks and advise the company
accordingly................................................................................................................................11
Conclusion..........................................................................................................................................12
REFERENCES...................................................................................................................................13

INTRODUCTION
Financial management means planning, organizing, directing, controlling of financial
activities for as procurement and optimum utilization of resources of the organisation. Finance is a
field that contains topics such as landing of money and greater return on the funds. Finance allows a
company to pay debt and expenditure without giving the ownership right. Finance is needed in to
promote business strategies, acquiring fixed assets in global scenario. In this context fitness guru plc
stats the investment appraisal and evaluating of the result including the assumption and techniques
with respect to appropriate theory which are helpful in identification and evaluation of additional
risk.

SECTION A
1. Applying a range of method and carry out the investment appraisal of the project and evaluating
robustness of the findings with appropriate theory in investment appraisal,cost of capital and
risk
1. Calculation of total revenues :-
year No. of units selling price variable cost per unit revenue
1 500 130 70 65000
2 1200 130 70 156000
3 1500 90 70 135000
4 2000 90 70 180000
5 600 90 70 54000
2. calculation of total cost :-
variable cost fixed cost marketing expenses total cots
35000 7500 12000 54500
84000 14500 12000 110500
105000 14500 12000 131500
140000 14500 12000 166500
42000 14500 12000 68500
3. calculation of profit (revenues – total cost):-
revenue Total cost Profit
65000 54500 10500
156000 110500 45500
135000 131500 3500
180000 166500 13500
54000 68500 -14500

4. calculation of cash inflow (adding depreciation)
profit depreciation Cash inflow
10500 10500
45500 7000 52500
3500 7000 10500
13500 7000 20500
-14500 7000 -7500
5. adjusting the working capital requirement in the end of financial year.
Cash inflow Working capital. Adjusted amount
10500 10500
52500 52500
10500 10500
20500 20500
-7500 800 -6700
6. calculation of discounted cash inflow :-
year CIF discounted discounted cash inflow
1 10500 0.909 9545.4545454546
2 52500 0.826 43388.4297520661
3 10500 0.751 7888.8054094666
4 20500 0.683 14001.7758349839
5 -6700 0.621 -4160.1728644963
7.calculation of payback period :-
year CIF Cumulative Amount

amount recover
1 10500 10500 -
2 52500 63000 41500
3 10500 73500 0.8
4 20500 94000
5 -6700 87300
The amount of initial investment recovered in 1.8 years.
8. calculation of net present value:-
Total discounted cash inflow Initial investment Net present value
70664 52000 18664
After all analysing the cost structure that the operating revenues is downfall as comparison
to previous year. The equipment would bought on last day of the company's financial year that
means depreciation for the first year exempted. after that the company calculated discounted the
cash inflow and initial investment and calculated net present value of the company. Working capital
of £12 million adjusted in current financial year. And separately segment of fixed cost, variable
cost, and marketing expenses which include include online advertising include. The initial
investment of the fitness guru plc that is 52000 € have been recovered in 1.8 months. Total cost
include fixed cost, variable and marketing expenses. €12 million in working capital adjusted in
current financial year. The calculation of depreciation is calculated by cost of equipment (€40m.)
less scrape value (€5m.) by divided the assuming product life cycle that is 5 years . The
depreciation amount charge €7million annually by using straight-line method but in first year
depreciation will not be charged because the equipment would be bought on last day of the current
financial year.
Cost of equity
Particulars Figures
Share Price 0.9
Shares O/S 500
Market Cap (E) 450
Stock Beta 1.3

Risk Free Rate 0.015
(e.g. return on 10 year treasury bonds)
Required Market Return 0.07
Market Risk Premium 0.055
Cost of Equity 8.7%
Cost of debt
Particulars Figures
Face Value of Bond 100
Bonds O/S 1.2
Coupon Rate 0.07
Market Price of Bond 125
Coupon 7
Market Value 125
Corporate Tax Rate 0.19
Cost of debt 5.7%
Calculation of WACC
Particulars Figures
V 575
weight of equity 0.78
Weight of Debt 0.22
cost of equity 0.09
cost of debt 0.06
WACC 8%
The above depicted table shows that cost of equity implies for 8.7%, where as Kd accounted
for 5.7% significantly. Hence, considering such data set it can be mentioned that WACC of Fitness
Guru Plc implied for 8%.
Computation of NPV when cost of capital is 8%
Year
Cash
inflows
PV factor @
8%
Present value of cash flows
(in £)
1 10500 0.926 9722.22
2 52500 0.857 45010.3
3 10500 0.794 8335.24
4 20500 0.735 15068.1
5 -6700 0.681 -4559.9

Total discounted cash inflow 73576
Initial investment 52000
NPV: Total discounted cash
inflow - II 21576
By applying investment appraisal tool, it has assessed that, when cost of capital is 10%, then
NPV implies for £18664000 respectively. On the other side, result of sensitivity analysis shows that
NPV is £21576000 significantly when pv factor is 8%. Hence, net present value of the product
increases when PV factor declined from 10% to 8%.
Option 2.- if fitness guru plc sells the patent right to another business that becomes beneficial for
the company because according to upper financial statements analysis company net present value
estimates £18 million and the other business makes good deals in by offering £23 million. Fitness
guru financial statements not shown the future potential about cash flow and company cash flow
downgrade year over year. In ordering to calculating the operating profit financial statements stats
the decreased the revenue and net profit which can be shows negative aspect of the company. All
expenses which include direct, variable and fixed cost which increasing year over year. For
instance: the discounted cash inflow decreasing year over year. In company point of view the deal
should be accepted.

SECTION B
2. Advising the company on the financing option available and implication of those option and
evaluating the cost of capital possible impact :-
Debt and equity fund:- after the analysing the financial statement company can use the debt
equity fund. The total liabilities of the company is 370 m And shareholders equities in company as
£ 250. for calculating the debt equity ratio :- total liabilities/ shareholders equities that means
1.48%. debt equity may include all long term debt and also exclude long term debt near maturity
period. Debt fund include fixed instruments like government bonds, non convertible debenture
(Jakhotiya, 2002). for instance in balance sheet fitness guru have a government bond is currently
trading £0.9. the ideal ratio between debt & equity is .5:1 that shows company stability.
Trade off theory:- in trade of theory fitness guru plc can choose how much cost of debt
finance and equity finance to use by the maintaining the cost and benefits. It explain the financially
partly with debt and partly with equity. It indicating the advantage the financing along with debt.
Trade of theory states that capital structure is trade off among the savings and distress cost of debt.
Fitness guru plc have higher debt ratio which can be not capable for payment in long term debt.
This theory determined by a single period trade off among the tax benefits of debt and the cost of
bankruptcy (Kawai, Mayes and Morgan, 2012). By adopting this theory helped in cost benefits,
trade of between debt and equity, tax saving and direct cost. Trade-off theory directly effect upon
company's debt level:- increase in financial distress, increase in the debt level at optimal capital
structure.
pecking order theory :- it stats the cost of financing increase with asymmetric information.
Hierarchy of pecking order theory depends upon three factors which consists:-1. Internal financing
2.external financing debt 3.external financing equities. This hierarchy help to risk increase so cost
of finance increase. Lopsided information favours the issue of debt over equity as the issue of debt
signals. In this theory there are three sources of funding available to the organization Retained
earning, debt and the equity .retained earning have not untoward selection problem. Equity that
contains to untoward selection problems while debt refers to minor untoward problem (Kunc and
Bhandari, 2011). This theory assumes that there is no target capital structure. Due to untoward
company prefer internal and external finance. By adopting this strategies fitness guru plc can
differentiate the inverse relationship between debt ratios and profitability. This strategies
emphasizes on internal financing and dividend payout ratios of their investment opportunities .
Sticky dividend policy means overall internally cash flow generated. If external finance is
compulsory that means company issues safety security first.

Retained profit:- retained earnings is a long term internal source of finance for a company
there is no compulsory methods like term loans and debenture. No additional equity issued or not
transfer of ownership. in retained profit there is no fixed obligation of interest and periodically basis
payment. Internally sources of finance retained earnings are cost effective and get better internal
rate of return as compare to return on investment (Thomas, 2009). Assuming that the generated
funds are belonging to shareholders so that cost of fund becomes equivalent to equity.

SECTION C
Appraising the possible risks and management of those risks and advise the company accordingly.
Foreign exchange risk it means when a financial transaction is put forward in a monetary
system other than that of the base currency of the company. If fitness guru plc importing the
component part in euros that may influence by many factors:-
1. Exchange rate risk :- this risk be caused by volatile movement in globally market by
supply and demand power of foreign exchange market. For the certain time period traders
position is superior and subject to all price changes. Forex is mostly unregulated and no
daily price are limited and exist for the future exchange. For instance fitness guru can import
cheaper component from the Belgium which gave him good offering price but with future
instability by the global marke. Fitness guru plc can trying to control exchange rate risk by
measuring their intended gain against possible outcomes.
2. Interest rate risk :- if the country interest rates high that means the exporter county
dominant the other country (Newell and Seabrook, 2006). For instance if Belgium
government induce new EXIM policy that may cause be hike price in component which
fitness guru import from belgium. In nature of interest rate risk roundabout effect of
exchange rates. The difference between currency value can be reason to downfall of forex
prices change.
3. Leverage risk :- this required a small investment known as margin to gain access for
substantial trades in foreign market. Small prices fluctuation causes by margin calls where
the fitness guru may pay an additional margin that may be causes by during the volatile
market position.
4. Transaction risk :- this risk associated with rime period that may cause in the beginning of
the contract and when the deal is locked. Currencies may be traded at a different prices at
different time period. The greater time settling in a contract that can be cause the higher
transaction risk. A currency crisis can occurred due to frequent balance of payment and
bring negative and deficit valuation in currencies (Peirson and et.al., 2014). Foreign
exchange trading may be larger then the initially renounced and while forex assets have
higher trading risk that can be caused to transaction risk.
5. Counterparty risk :- this may be caused by risk of bankruptcy of dealer or brokers in a
particular transaction. In forex trades future and pot market on currencies not bonded by an
transaction. In time of volatile conditions the counter party may be not capable to match to

transaction. The counterparty risk can be reduced by building a top strategies which lead to
take advantage of long and short term trades.\
CONCLUSION
By summing up this report, it has been concluded that investment appraisal tools and
techniques are highly significant which helps in making selection of suitable project. It can be seen
in the report that option 2 will prove to be more fruitful for Fitness Guru plc. Moreover, such option
is offering high return to the company such as 23 million. Further, it has been articulated that
company should keep in mind the ratio of .5:1 while raising funds.