BAAF III Corporate Finance - Finance Assignment Help

Assignment Task

Learning Outcomes addressed and assessed in this Assignment:
Critically assess and discuss the impact of the economic environment on financial management
Evaluate complex investment appraisal situations

BAAF III Corporate Finance Assignment brief
The following information has been taken from the statement of financial position of Chloe PLC, a listed company:
Statement of Financial Position of Chloe Plc as at 31/12/2020 'M 'M
€ €
Non-current assets 50
Current assets Cash and cash equivalents 4 Other current assets 16 20
Total assets 70
Equity and reserves Ordinary shares 15 Reserves 29 44
Non-current liabilities 6% Preference shares 6 8% loan notes 8 Bank loan 5 19
Current liabilities 7
Total equity and liabilities 70
Further Information on Chloe plc
The ordinary shares of Chloe plc has a nominal value of €1 per share and a current ex-dividend market price of €6·10 per share. A dividend of €0·90 per share has just been paid.
The 6% preference shares of Chloe plc have a nominal value of €0·75 per share and an ex-dividend market price of €0·64 per share.
The 8% loan notes of Chloe plc have a nominal value of €100 per loan note and a market price of €103·50 per loan note.
Annual interest has just been paid and the loan notes are redeemable in five years’ time at a 10% premium to nominal value.
The bank loan has a variable interest rate.
The risk-free rate of return is 3·5% per year and the equity risk premium is 6·8% per year.
Chloe plc has an equity beta of 1·25.
Chloe plc pays corporation tax at a rate of 20%.
Investment in facilities
Chloe plc’s board is looking to finance investments in facilities over the next three years, forecast to cost up to €27m. The board does not wish to obtain further long-term debt finance and is also unwilling to make an equity issue. This means that investments have to be financed from cash which can be made available internally. Board members have made a number of suggestions about how this can be done:
Director A (Andrew) has suggested that the company does not have a problem with funding new investments, as it has cash available in the reserves of €29m. If extra cash is required soon, Chloe plc could reduce its investment in working capital.
Director B (Brian) has suggested selling the building which contains the company’s headquarters in Dublin’s Capital for €22m. This will raise a large one-off sum and also save on ongoing property repair costs as the building is quite old and has need upgrading. Head office support functions would be moved to a number of different locations rented outside of Dublin in Cork, Limerick and Belfast.
Director C (Colin) has commented that although a high dividend has just been paid, dividends could be reduced over the next three years, allowing spare cash for investment.
Requirement:
(a) Calculate the cost of the ordinary shares
(b) Calculate the cost of the Preference shares
(c) Calculate the cost of the loan notes
(d) Critically evaluate the views expressed by the three directors on how the investment should be financed.
Note: Students should include Liquidity, Costs, Logistics, risk, impacts of the overall company and impacts to shareholders. Calculate ratios where you feel appropriate.
(e) Consider the scenario where Chloe plc announce that they are not paying a dividend in 2021. The current share price is €6.10. Analyse what might happen to this share price as a result of this news, citing the theory that backs up your opinion.
Provide researched analysis on a company that you are familiar with to back up your claims.
(f) Evaluate a way to encourage Directors Andrew, Brian and Colin to achieve stakeholder objectives. Choose a different option for each director.
(g) Based on the information above discuss the impact of one external economic factor the directors need to consider before proceeding with the investment.

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