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.