QUESTION
London School of Business & Finance
MBA/ MSc Finance Programme
CORPORATE FINANCE STRATEGY
Students MUST answer ALL sections
Issued: 23rd March
Due Date: 23rd April
SECTION A
This section comprises two case-problems
(60 marks)
Problem 1 (30 marks)
Llewellyn Jones, CFA, an analyst with City Capital, is considering buying a Hudson
Chemical corporate bond. He has summed up the following balance sheet and income
statement information for Hudson Chemical as shown in Exhibit 1. He has also calculated
the three ratios shown in Exhibit 2, which indicate that the bond is currently rated “A”
according to the firm’s internal bond-rating criteria shown in Exhibit 4.
Jones has decided to consider some off-balance-sheet items in his credit analysis, as
shown in Exhibit 3. Specifically, Jones wishes to evaluate the impact of each of the offbalance-sheet
items
on each
of the
ratios
found in
Exhibit
2.
1. Calculate the combined effect of the three off-balance-sheet items in Exhibit 3 on
each of the following three financial ratios shown in Exhibit 2:
a. EBITDA/interest expense
b. Long-term debt/equity
c. Current assets/current liabilities
1
2. State and justify whether or not the current credit yield premium compensates Jones
for the credit risk of the bond based on the internal bond-rating criteria found in
Exhibit 4.
Exhibit 1 – Montrose Cable – Year Ended March 31, 1999 (US$ Thousands)
Balance Sheet
Current assets 4,735
Fixed assets 43,225
Total assets: 47,960
Current liabilities 4,500
Long term debt 10,000
2
Total liabilities: 14,500
Shareholders Equity 33,460
Total liabilities and Shareholders equity: 47,960
Income Satement
Revenue 18,500
Operating and Administrative expenses 14,050
Operating Income: 4,450
Depreciation and amortization 1,675
Interest expense 942
Income before income taxes: 1,833
Taxes 641
Exhibit 2 – Selected Ratios and Credit Yield Premium Data for Montrose
Net Income: 1,192
EBITDA / interest expense 4.72
Long-term debt / equity 0.30
Current assets / Current liabilities 1.05
Credit yield premium over US Treasuries 55 bps
Exhibit 3 – Hudson Chemical off-balance sheet items
1
2
3
Hudson Chemical has guaranteed the long-term debt (principal only) of an
unconsolidated affiliate. This obligation has a present value of $995,000.
Hudson Chemical has sold $500,000 of accounts receivable with recourse at
a yield of 8 percent.
Hudson Chemical is a lessee in a new non-cancellable operating leasing
agreement to finance transmission equipment. The discounted present value
of the lease payments is $6,144,000 using an interest rate of 10 percent. The
annual payment will be $1.000.000.
3
4
Problem 2 (30 marks)
International Spirits Inc. is the world’s leading premium drinks business with an
outstanding collection of brands across spirits, wines and liqueurs categories. The
company is a global company, trading in over 180 markets around the world. The
company is listed on both the London Stock Exchange and the New York Stock
Exchange.
It employs over 22,000 talented people worldwide with offices in around 80 countries. It
has manufacturing facilities across the globe including Great Britain, Ireland, United
States, Canada, Spain, Italy, Africa, Latin America, Australia, India and the Caribbean.
The company’s strategy is to drive organic growth in premium spirits. It will invest to
take leadership positions in every category, market and consumer occasion in which it
chooses to compete.
From 2009, it will look for opportunities in emerging markets – Brazil, Russia, India and
China are current examples of markets it is building now to drive growth tomorrow. It
will also seek out selective acquisitions to support its brands’ growth, its innovation and
its customer focus strategies where they can add shareholder value.
Andrew Tallents is the Executive Director in charge of the company’s strategy
implementation, and he is in charge of preparing a report to the Board with respect to the
company’s market standing.
You have been freshly hired as an associate in the international department and you will
have to prepare a comparative analysis of the global positioning.
1. Evaluate the Net Profit Margin, the Total Asset Turnover and the Financial Leverage
Multiplier of the company. Then, calculate the Return on Equity of the company by
applying the DuPont System (Please make use of the Exhibit 1 and 2).
2. Based on the information as it appears on Exhibit 4, calculate the Return on Equity
for the company’s main competitors using the same methodology as above. Give a
comparative analysis of your findings.
3. Using Exhibit 3, calculate the Cash Flow Coverage Ratio and the Cash Flow Long
Term Debt Ratio of International Spirits Inc. and give an analysis of the cash flow
situation of the company.
4. Based on the information, as it appears on Exhibit 2 and 5, calculate each company’s
potential growth rate and compare with clear explanation the potential growth rate of
the peers-group.
5
Exhibit 1 – Five-Year Balance Sheet Reports – 2003 to 2007
International Spirits Inc.
ASSETS 12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
(In millions USD)
Cash 219.20 225.80 228.10 191.10 188.90
Marketable Securities
Receivables 720.20 681.40 696.10 669.40 630.40
Inventories 694.90 654.50 690.30 587.50 563.60
Raw Materials 385.60 386.90 405.00 320.30 294.10
Work In Progress 110.80 93.50 80.00 81.90 82.80
Finished Goods 198.50 174.10 205.30 185.30 186.70
Notes Receivable
Other Current Assets 195.20 197.00 203.90 182.30 121.80
Total Current Assets 1,829.50 1,758.70 1,818.40 1,630.30 1,504.70
Net Property & Equipment 8,916.10 9,041.60 8,847.40 8,498.90 8,363.90
Prop., Plant & Equip 18,710.60 18,208.90 17,412.50 16,521.20 15,967.90
Accumulated Depr. 9,794.50 9,167.30 8,565.10 8,022.30 7,604.00
Interest & Adv. to Subsidiaries 3,680.30 3,448.20 3,150.20 3,052.00 2,945.50
Other Non-Current Assets
Deferred Charges 956.70
Intangibles 1,367.20 1,232.60 1,191.90 486.60 348.70
Deposits & Other Assets 584.10 1,073.90 1,165.50 1,021.70
Total Assets 16,377.20 16,555.00 16,173.40 14,689.50 14,119.50
LIABILITIES &
SHAREHOLDERS’ EQUITY
(In millions USD)
6
12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
Notes Payable
Accounts Payable 1,426.30 1,249.50 1,194.80 1,093.70 986.60
Curr. Long-Term Debt
Curr. Port. Cap. Lease
Accrued Expense 600.90 531.30 569.50 562.40 287.50
Income Taxes 181.00
Other Curr. Liabilities 218.90 201.80 204.70 201.10 332.60
Total Current Liabilities 2,246.10 1,982.60 1,969.00 1,857.20 1,787.70
Mortgages
Deferred Charges/Inc. 1,194.50 1,682.40 1,727.20 1,462.10 1,345.10
Convertable Debt
Long-Term Debt 7,653.50 7,972.10 8,278.60 7,285.40 6,603.20
Non-Curr. Capital Leases
Other Long-Term Liab. 1,344.40 1,574.60 1,530.50 1,373.10 1,331.20
Total Liabilities 12,438.50 13,211.70 13,505.30 11,977.80 11,067.20
Minority Interest (Liab.)
Preferred Stock
Common Stock Net 1,473.70 1,468.60 1,463.00 1,457.90 1,453.40
Capital Surplus 2,962.50 1,601.80 1,425.30 1,194.00 1,024.50
Retained Earnings 16,741.00 16,445.60 15,407.20 13,935.40 12,544.00
Treasury Stock 16,007.70 15,258.90 14,638.50 12,939.00 11,008.60
Total Shareholder Equity 3,938.70 3,343.30 2,668.10 2,711.70 3,052.30
Total Liabilities & Net Worth 16,377.20 16,555.00 16,173.40 14,689.50 14,119.50
Exhibit 2 – Five-Year Income Statement Reports – 2003 to 2007
International Spirits Inc.
INCOME STATEMENT 12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
(In Millions USD)
Net Sales 15,717.10 15,035.70 14,934.20 14,146.70 13,566.40
Cost of Goods Sold 10,165.00 9,579.50 8,982.50 8,449.10 8,131.30
Gross Profit 5,552.10 5,456.20 5,951.70 5,697.60 5,435.10
R&D Expenditure
SG&A Expense 2,832.50 2,835.20 2,590.70 2,498.30 2,455.40
Income Befor Dep & Amort 2,719.60 2,621.00 3,361.00 3,199.30 2,979.70
Depreciation & Amort.
Non-Operating Income -9.00 5.10 43.40 2.10 -5.10
Interest Expense 433.70 434.60 405.00 377.10 351.00
Income Before Taxes 2,276.90 2,191.50 2,999.40 2,824.30 2,623.60
Prov. For Inc. Taxes 900.50 850.40 1,163.20 1,093.30 1,041.50
Minority Interest (Inc.)
Investment (Gain/Loss)
Other Income 588.80 498.10 404.10 344.90 351.70
Net Income Before Extra
Items
Extra Items & Disc. Ops.
7
1,965.20 1,839.20 2,240.30 2,075.90 1,933.80
Net Income 1,965.20 1,839.20 2,240.30 2,075.90 1,933.80
Outstanding Shares (th) 766,100 777,700 785,000 813,100 846,600
Exhibit 3 – Five-Year Cash Flows Statement Reports – 2003 to 2007
International Spirits Inc.
(In Millions USD)
8
12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
Cash Flow Provided By Operating Activity
Net Income(Loss) 1,965.20 1,839.20 2,240.30 2,075.90 1,933.80
Depreciation/Amortization 988.70 979.00 932.70 877.20 847.30
Net Increase/(Decrease) In Assets/Liab. 188.80 50.30 -181.60 32.60 140.90
Cash Provision (Used) by Disc. Operations
Other Adjustments — Net -433.30 -140.70 -51.10 -14.80 -156.80
Net Cash Provision (Used) By Operations
2,709.40 2,727.80 2,940.30 2,970.90 2,765.20
Cash Flow Provided By Investing Activity
(Incr.) Decr. In Property, Plant & Equip. -812.50 -1,136.70 -787.10 -993.00 -834.70
(Acq.) Disp. of Subs. Business -101.00 48.30 -727.90 -156.90 -19.00
(Inc.) Decr. in Securities Invest.
Other Cash Inflow, (Outflow)
Net Cash Provision (Used) By Investing
-913.50 -1,088.40 -1,515.00 -1,149.90 -853.70
Cash Flow Provide By Financing Activity
Issue (Purchase) Of Equity -602.40 -484.90 -1,578.70 -1,870.30 -1,881.60
Issue (Repayment) Of Debt -328.50 -356.00 933.20 736.90 645.90
Incr.(Decr.) In Borrowing
Dividends, Other Distribution -871.60 -800.80 -742.80 -685.40 -649.50
Other Cash Provisions (Used) By Investing
Net Cash Prov. (Used) by Financing
-1,802.50 -1,641.70 -1,388.30 -1,818.80 -1,885.20
Effect of Exchange Rate on Cash
Net Change in Cash or Equivalents
-6.60 -2.30 37.00 2.20 26.30
Exhibit 4 – Peers Annual Ratios – Fiscal Year End 31 December 2007
COMPANY
International Asia Pacific European South African
Fiscal Year: 12/21/2007
Spirits Beverages Brands Distilleries
Profitability Ratios
Return on Assets 13.65 3.83 11.24 8.08
Cash Flow To Sales 16.04 8.01 14.80 18.02
Gross Profit Margin 35.33 33.63 43.24 46.50
Operating Profit Margin 17.30 6.13 12.49 19.44
Pretax Margin 14.49 5.61 14.46 18.39
Net Margin 12.50 3.10 10.24 11.63
Sales per Employee 520,726.90 794,416.44 271,002.17 224,532.95
Net Income per Employee 0.07 0.02 0.03 0.03
Asset Utilization Ratios
Asset Turnover 0.96 1.14 0.94 0.46
Inventory Turnover 13.60 10.19 6.73 8.00
Leverage Ratios
Total Debt to Common Equity 194.32 71.35 65.86 58.12
LT Debt to Common Equity 194.32 37.96 41.09 43.17
LT Debt to Total Capital 66.02 26.20 27.16 29.29
Dividend Payout 44.35 19.22 24.28 36.11
Cash Dividend Coverage Ratio 2.89 13.46 5.96 4.29
Liquidity Ratios
Quick Ratio 0.42 0.52 0.80 0.37
Current Ratio 0.81 0.76 1.06 0.59
Cash & Equivalent to Current Assets 11.98 4.94 32.71 23.79
Accounts Receivable Days 16.27 64.78 54.12 29.30
Inventories Days Held 26.84 35.80 54.20 45.63
Market Value Ratios
Current P/E Ratio 20.20 20.35 20.68 20.33
Price/Book Ratio 9.81 1.87 3.83 2.24
Price/Cash Flow Ratio 15.55 7.77 10.95 12.21
9
Exhibit 5 – Peers per Share Data & Market Information – 31 December 2007
COMPANY International Asia Pacific European South African
Spirits Beverages Brands Distilleries
Company Beta 0.386 0.441 0.603 1.726
PER SHARE DATA
USD JPY EUR GBP
Currency Conversion 1 USD = JPY EUR 1 = USD GBP 1 = USD
Earnings Per Share 2.53 94.02 2.47 0.59
5 Year Average 2.47 62.89 1.68 0.38
Common Shares used to calc EPS (x 777 476 490 1,372
Dividends Per Share 1.13 19.00 0.60 0.24
5 Year Average 0.93 15.40 0.41 0.18
Dividend Payout % Earnings 44.35 19.22 24.28 36.11
5 Year Average 37.30 23.52 30.13 43.08
Tax Rate 39.5 43.5 21.3 34.2
5 Year Average 39.1 50.3 27.4 40.0
Est. Average Interest Rate on 5.90 1.30 5.61 4.77
5 Year Average 5.57 1.24 6.09 6.33
Treasury Bill Rate (Avrg 6mo – 1Yr) 5.08 0.61 4.05 5.42
S&P 500 TOPIX 100 FTSEurofirst FTSE 100
Market Indices – Avr 1-Year Return 11.76% 8.69% 10.25% 7.43%
10
SECTION B – Reflective Writing
(40 marks)
Is there such thing as an optimal capital structure for a company and does the
payment of a dividend matter in the 21
11
st
century?
Discuss with reference to the leading corporate finance theories in the context of
real life experience.
Assignment Submission
FORMAT
All submissions must now be made as soft (electronic) copies and submitted online. Submissions
must be saved to one of the following file formats:
[MS Word (.doc, .docx), PostScript, HTML, WordPerfect (wpd), RTF (Rich Text format), plain
text or Portable Document Format (.pdf). Please be aware that no other formats will be accepted].
Each page of your assignment should have a header with your assignment title and footer giving
your full name, student ID and page number.
ADDRESS TO SEND YOUR ASSIGNMENTS TO
Assignments must be sent to the correct email address for each module. These are as follows:
Module E-mail address
SOM SOMterm10lon@lsbf.org.uk
SMM SMMterm10lon@lsbf.org.uk
CBR CBRterm10lon@lsbf.org.uk
CFS CFSterm10lon@lsbf.org.uk
QMIM QMIMterm10lon@lsbf.org.uk
CF CFterm10lon@lsbf.org.uk
IDMC IDMCterm10lon@lsbf.org.uk
VMA VMAterm10lon@lsbf.org.uk
SSM SSMterm10lon@lsbf.org.uk
WMAE WMAEterm10lon@lsbf.org.uk
OM OMterm10lon@lsbf.org.uk
OFD OFDterm10lon@lsbf.org.uk
GBM GBMterm10lon@lsbf.org.uk
PLTB PLTBterm10lon@lsbf.org.uk
SP SPterm10lon@lsbf.org.uk
FRA FRAterm10lon@lsbf.org.uk
PRCC PRCCterm10lon@lsbf.org.uk
BCCM BCCMterm10lon@lsbf.org.uk
BOS BOSterm10lon@lsbf.org.uk
IPM IPMterm10lon@lsbf.org.uk
AM AMterm10lon@lsbf.org.uk
MI MIterm10lon@lsbf.org.uk
AFM AFMterm10lon@lsbf.org.uk
PM PMterm10lon@lsbf.org.uk
EFII EFIIterm10lon@lsbf.org.uk
MM MMterm10lon@lsbf.org.uk
RM RMterm10lon@lsbf.org.uk
OB OBterm10lon@lsbf.org.uk
CB CBterm10lon@lsbf.org.uk
ACF ACFterm10lon@lsbf.org.uk
GM GMterm10lon@lsbf.org.uk
IFMGT IFMGTterm10lon@lsbf.org.uk
MBE MBEterm10lon@lsbf.org.uk
PMC PMCterm10lon@lsbf.org.uk
IHRM IHRMterm10lon@lsbf.org.uk
IMC IMCterm10lon@lsbf.org.uk
CMLM CMLMterm10lon@lsbf.org.uk
IFMI IFMITerm10lon@LSBF.org.uk
SML
SMLterm10lon@lsbf.org.uk
DAI
DAIterm10lon@lsbf.org.uk
CONTENT OF YOUR EMAIL
SUBJECT of the email should read: – (Student ID) – (Module Code) – (Student Name)
Example: A40XXXXX, SP, John Matthew
Make sure you clearly state the following on your submission email:
Student ID number:
Full name:
Intake and group number:
Module Name:
Assignment Type: (i.e. – Individual Assignment / Group Assignment / Presentation)
Please also fill out the online cover sheet as directed and attach it to the email separately from the
main body of your assignment.
IMPORTANT
12
No emails should contain more than 10 MB of data (because this will not reach the mail box)
hence if your work is in excess of 10mb you will need to split it into two emails. In this instance it
should be clearly indicated in the first email that there is a second to be expected.
Please also keep all file names under 50 characters.
Assignments must be received no later midnight (24:00) on the day of the submission deadline.
Assignments received in the 24 hours following deadline will be capped at 40%. After 24 hours
the paper will not be graded.
Please note it is also the responsibility of the student to ensure that assignments are correctly
attached when you send your email. If for whatever reason you neglect to do this, no allowance
can be made after the submission deadline and your grade will be adversely affected.
IT IS STUDENTS’ RESPONSIBILITY TO ENSURE THAT ALL SUBMISSIONS
COMPLY WITH THE CRITERIA SPECIFIED ABOVE.
SOLUTION
Problem 1
Question 1: (a). EBITDA (Williams, 2008) / Interest Expense
= 18500 – 873.2
= 17626.8
(b). Total Debt/Equity Ratio (Smith, 1958)
= 14500 / 33460
= 0.433
(c). Current Ratio
The Current Ratio (Wentworth, 1997) formula is:
= 4735/4500
= 1.052
Question 2: According to Exhibit 4 the bond rating criteria and credit yield is justified. The bond rating includes AA, A, BBB an BB
And for these bond ratings following are the EBITDA, Long Term debt, current ration and credit yield premium
Bond Rating Interest Coverage Leverage Current Ratio Credit Yield Premium
AA 5.00-6.00 0.25-0.30 1.15-1.25 30 bps
A 4.00-5.00 0.30-0.40 1.00-1.15 50 bps
BBB 3.00-4.00 0.40-0.50 0.90-1.00 100 bps
BB 2.00-3.00 0.50-0.60 0.75-0.90 125 bps
REFERENCES
Williams, R, 2008, “Financial & Managerial Accounting”, McGraw-Hill Irwin pp 266, ISBN 9780072996500
Wentworth, R., 1997, “The Society for the Diffusion of Useful Knowledge”, Charles Knight and Co., London, pp. 307
Smith, D, 1958, “History of Mathematics”, vol 2 Dover, pp. 477
JH64
But you can order it from our service and receive complete high-quality custom paper. Our service offers Accounting essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”
