Financial Management Report: Analysis of Newton Co. for BFM502 Module

This financial management report analyzes Newton Co., a company facing critical decisions regarding its future. The report examines both short-term and long-term financing options available to businesses in the specialist machinery tool and parts industry. It then provides a generic overview of an acquisition proposal. The core of the report evaluates two proposals facing Newton Co.: a takeover offer from Mille and Co. and the development of a new product. The analysis includes estimating the current value of a Newton share using the free cash flow to firm methodology, calculating the percentage gain in value for both Newton Co. and Mille Co. shares under each payment offer, and assessing the potential value of the follow-on product. Finally, the report discusses the likely reactions of shareholders to the takeover offer, considering the assumptions made and how the follow-on product's value can be leveraged by Newton Co. The report aims to provide the Board of Directors of Newton Co. with the information needed to make informed decisions about the company's future.

HIGHER EDUCATION ASSESSMENT
School: Professional Studies
Awarding Body: Lancaster University Module Code: BFM502
Programme Title: FdA in Business and Financial Management Occurrence: 2016/17
Module Title: Financial Management Weighting: 50%
Assessment Title: Written report Assessment No. 1 of 2
Tutor Details Name David Robinson Telephone No. 504475
Email [e-mail] Room SO20
Internal Verification (IV)
For Staff Use Only
Assessment Brief IV
Must be internally verified prior to
distribution to students
IV Name: Toby Weymouth
Date: 3 October 2016
Student Submission IV
To be completed if the assessment
submission forms part of the IV sample
IV Name:
Date:
Distribution Date: 10 October 2016
Submission Time: 23.55 hrs.
Submission Date: 13 November 2016
Submission Point/Location: Upload to Moodle
Feedback Week Commencing: 28 November 2016
Student Number:
Student Name:
Assessment Record
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the awarding body.
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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.
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Learning Outcomes Assessed
1
2
LO1 Identify and describe shareholder wealth and profit maximization
LO4 Evaluate a range of short term and long-term sources of finance available to businesses
Assessment Brief
Task
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 not
considered the rights in their computations and were willing to continue with the takeover offer on the same terms
without 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 believes
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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 profit
after 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 Nil
Extract 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 10,750
In arriving at the profit after tax figure, Newton deducted tax allowable depreciation and other non-cash expenses
totalling £1,206,000. It requires an annual cash investment of £1,010,000 in non-current assets and working
capital to continue its operations.
Newton’s profits before interest and tax in its first year of operation were £970,000 and have been growing steadily
in each of the following three years, to their current level. The cash flows grew at the same rate as well, but it
is 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 base
rate, and corporation tax of 20% on profits after interest. It is estimated that an overall cost of capital of 11% is
reasonable 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 cash
flows and present values of the product over its five-year life, with a volatility of 42% standard deviation, are as
follows:
Year(s) Now 1 2 3 to7 (in total)
Cash flows (£’000) – – (2,500) 3,950
Present values (£’000) – – (2,029) 2,434
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Required:
Prepare a report for the Board of Directors of Newton Co that:
(a) Identifies and discusses both short –term and long-term sources of finance available to a business involved in
the design and development of tools and parts for specialist machinery; (25 marks)
(b) Provides a generic outline of an acquisition proposal; and (20 marks)
(c) Considers and evaluates the proposals facing Newton Co, particularly providing: (12 marks)
(i) Estimates of the current value of a Newton share, using the free cash flow to firm methodology;
(10 marks)
(ii) Estimates of the percentage gain in value to a Newton Co share and a Mille and Co share under each
payment offer; (8 marks)
(iii) Estimates of the percentage gain in the value of the follow-on product to a Newton Co share, based on its
cash flows and on the assumption that the production can be delayed following acquisition of the
exclusive rights of production; (8 marks)
(iv) Discusses the likely reaction of Newton Co and Mille and Co shareholders to the takeover offer, including
the assumptions made in the estimates above and how the follow-on product’s value can be utilised by
Newton Co. (12 marks)
Professional marks will be awarded for the presentation, structure and clarity of the answer. (5 marks)
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Lancaster University Grade Descriptors
The descriptions below provide an indication of the requirements for each grade boundary for this assessment
Excellent Excellent skills of evaluation and judgement evidenced with analytic and interrogative rationales provided to identify sources of data. Clear and professionally
presented thoroughly justified evaluation of statistical analysis principles. Excellent application and calculation of data wholly suitable to an employment situation.
A cohesive discussion encompassing all intended learning outcomes and executed to a very high standard
Good Evaluation and judgement evidenced and some attempts to analyse and interrogate information through a well written rationale supporting the evaluation of
statistical principles. Good planning skills evidenced with some detail and appreciable understanding in application of employment data. A structured discussion
which encompasses all the learning outcomes and executed to a good standard
Satisfactory Limited evaluation of characteristics and descriptive rationale which explains statistical principles. Limited and brief key features. Some planning skills evidenced. A
planned assignment with some structure showing variable depth of understanding and application of employment data. Some attainment of the learning outcomes
Weak A limited number of characteristics discussed and little evaluation evidenced. Rationale is generally weak but goes some way to explaining application of data. .
Some evidence of planning but with limited understanding. Satisfactory attainment of learning outcomes.
Fail Brief attempt at rationale and evaluation to identify sources of data. Documents poorly presented and content incomplete with little understanding and
application of employment data. Poor attainment of the learning outcomes.
Additional Assessment Requirements (where applicable)
This section describes any additional assessment requirements which may be identified by public statutory and regulatory bodies
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ASSESSMENT FEEDBACK
Outcome Feedback
1
2
3
Overall Feedback
Areas for Future Development
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Student Assessment Submission
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