Subject Code & Title : 7BSP1245 Finance For International Business
Assignment Type : Coursework 2
Universal Tool Co plc (UTC plc) manufactures and sells a range of machine tool accessories.
The company is considering an investment of £18.5 million in new production plant and machinery for the product. The new facility is to be operational from 1 January 2020. It will have a life of ten years and at the end of its life it will have a residual value of £1.5 million. It is expected that the facility will have significant benefits.
7BSP1245 Finance For International Business Coursework 2 – UK.

Firstly, it will increase UTC’s production output of diamond milling tools by 10%. Total contribution from new sales is expected to be £3,126,000 in 2020 increasing annually by 3% per annum until 2029. All of the increased production will be exported in approximately equal proportions to South Korea, France and the Canada. Thus the firm will have cash flows denominated in Won, €, and $Ca and the contribution figure given above is the sterling equivalent of these cash flows at current exchange rates. Exchange rate data relating to these currencies is given in Appendix 2, Table 1.

Secondly, it will reduce the product’s direct labour and direct material costs which will result in savings of £1,478,000 on existing production in 2020 and this saving will continue each year. Having made this cost saving, the company expect costs to remain constant to 2029 due to continual efficiency improvements. The project also requires additional working capital of £8.0 million.

UTC pays corporation tax at the rate of 19% on its taxable profits which is paid one year in arrears. (Assume that net cash flow is the same as taxable profit).

A recent report by financial consultants suggests that the Universal Tool Co plc’s equity has a beta of 1.6.

In addition, the report noted that the FTSE All-share index increased by an average of 11.6% compound in each of the last three years.

This Case Study has been prepared for discussion, analysis and comment. It is not intended to describe either good or bad practice. This Case Study may not be reproduced without the prior written permission of the author.

Universal Tool Co plc ordinary shares are trading on the stock exchange at £1.35 whilst their loan stock is trading at £102.73. During the last year the firm reported a pre-tax profit of £17 m. The latest Balance Sheet for UTC plc is shown in Appendix 1.

The financial data given above is the ‘best estimate’ for normal trading conditions.However, there is some uncertainty about the level of sales which will depend on the outcome of a proposed takeover. If Universal Tools plc is successful in their bid to take over Amersham Engineering then project pre-tax cash flows will be 20% higher than the best estimate. If the bid is unsuccessful then Amersham Engineering may be taken over by a rival firm resulting in lost sales and project pre-tax cash flows will be 30% lower than the best estimate. Universal Tools estimate the probability of their bid being successful to be 20% and the probability of the rival bid being successful to be 30%. In all other potential outcomes, the cash flows will not change from best estimate. Best estimate data is based on Amersham Engineering not being taken over and continuing to trade as an independent firm.

Required:
Evaluate the investment proposal on behalf of Universal Tool Co plc and advise the firm whether the project is acceptable on a financial basis. Also, comment on how the project might be financed and the potential impact of foreign exchange risk on the project. You should support your arguments with relevant theory and calculations.

Submission requirements :
Your answer should be presented in the form of a report of 2500 words total (excluding the reference list). You must also submit a working Excel spreadsheet containing your calculations.
You should use Arial font size 12 and 1.5 line spacing. Exceeding the word count by 10% or more or deviations from the formatting instructions will attract a penalty of up to 5%. Not submitting a working Excel spreadsheet will attract a penalty of 10% The hand-in deadline for submission is 23.30 on 14 th April 2019.

Submissions up to 24 hours late will attract a 5% penalty whilst those beyond 24 hours but less than 1 week late will be capped at 50%. Reports submitted more than one week late will attract a mark of zero. Referred work submitted late will attract a mark of zero.

Submit one electronic copy via Studynet as a Word file.

This is an individual assignment and the report submitted should be entirely your own work.

This assessment is subject to anonymous marking so do not put your name on any document you submit. However, you must put your SRN on each document you submit.

Appendix 1
Universal Tool Co plc
Balance Sheet as at 31st December 2018

Appendix 2

Guidance for the preparation of your report.
The purpose of this assignment is simply to give you the opportunity to demonstrate that you have acquired the knowledge and skills identified in the Module Handbook and that you can apply them in a typical business situation. Do refer to the assessment criteria given in the Module Guide which gives a outline of how marks will be awarded.

You should approach the task as a business manager dealing with a ‘real’ business and should:

a) Adopt a coherent approach to dealing with the set task with a clearly stated business purpose.
b) Identify an appropriate theoretical dimension and consider the implications for practice.
c) Adopt appropriate analytical methods and a critical perspective.
d) Refer to empirical work where appropriate.

Guidance for the preparation of your report cont’d.
Do refer to the assessment criteria given in the Module Guide which gives a general outline of how marks will be awarded. Further specific advice about how marks will be awarded for the Coursework is given below.

7BSP1245 Finance For International Business Coursework 2 – UK.

Task Specific Assessment Criteria: Coursework

Communication Skills (Written)
Marks will be awarded for a) for the physical presentation and layout of your report, b) adopting logical well supported (ie using appropriate citations) arguments, c) the extent to which the report is accurate, brief, concise and clear, d) the standard of English, and,e) compliance with standard Harvard referencing. Equal account will be taken of each element.

Knowledge & Understanding
You should establish a clear business focussed conceptual basis for your report – ie you need to show what you are seeking to achieve and why it is important for managing the UTC plc business (supported using appropriate citations).

Synthesis
From the case data given you should identify the nature of the decision(s) facing UTC plc and identify appropriate theory to support the approach you adopt and give your reasoning. Ie which analytical tools are consistent with ‘business focussed conceptual basis’ referred to above? (supported using appropriate citations).

Analysis
Using the case data given, you should apply the analytical methods identified in the previous section and evaluate the impact on the business in relation to the ‘business focussed conceptual basis’ referred to above.

7BSP1245 Finance For International Business Coursework 2 – UK.

Evaluation :
Conclusions should be arrived at on the basis of your analysis of UTC plc issues; ie what do the results of your analysis tell you? In your conclusions section you should summarise the results of your analysis. Your recommendations will assessed on the extent to which they are linked to the analysis of UTC plc issues and on the extent to which they are theoretically coherent – ie the extent to which they are consistent with
the theoretical/conceptual base you establish.

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