Financial Performance Risk Profile - Finance Assignment Help

Assignment Task :

Part A  
Choosing a firm of your choice proceed with a complete valuation and recommendation report in which you are expected to analyze the scope and performance of the business model of the firm. Based on the analysis, you are expected to conclude with your estimation of the fair value of the firm and the suggestion whether the firm may be a profitable choice for investment or not. A complete report is expected to include at least the issues of:
(a) A brief description of the company (i.e. activities, structure, corporate governance etc.)
(b) Financial performance
(c) Risk profile (i.e. sources of risk and action taken by the company to mitigate risks)
(d) Optimality of capital structure choices (i.e. optimum debt/equity ratio)
(e) Dividend policy
(f) Prospects and fair valuation of the firm using a valuation model (i.e. a dividend or a cash flow discount model)
 

Part B 
Assume that Tires Inc., a fictional subsidiary of the aforementioned firm, is considering proceeding with a new investment. That is to produce and market a new type of tire called SuperTyre. As a financial analyst, you have been asked by your CFO to evaluate the SuperTyre project and provide a recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately (at year 0), assume all cash flows will occur at year-end. Tires Inc. must initially invest € 300 million in production equipment to make the SuperTyre. This equipment would be sold for €50 million at the end of four years. Tires Inc. intends to sell the
SuperTyre to two distinct markets:
1. The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large automobile companies (like General Motors) that buy tires for new cars. In the OEM market, the SuperTyre is expected to sell for €35 per tire. The variable cost to produce each tire is €15.
2. The replacement market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Tires Inc. expects to sell the SuperTyre for €40 per tire there. Variable costs are the same as in the OEM market.
Tires Inc. intends to raise prices at 4% per year; variable costs will also increase at 4% per year. In addition, the SuperTyre project will incur €30 million in marketing and general administration costs the first year. This cost is expected to increase at 3% in the subsequent years. Tires Inc. corporate tax rate is 40%. The company uses a 12% discount rate to evaluate new product decisions.
Automotive industry analysts expect automobile manufacturers to produce 6 million new cars this year and production to grow at 1.5% per year thereafter. Each new car needs four tires (the spare tires are undersized and are in a different category). Tires Inc. expects the SuperTyre to capture 25% of the OEM market. Industry analysts estimate that the replacement tire markets will be 10 million tires this year and that it will grow at 2% annually. Tires Inc. expects the SuperTyre to
capture a 15% market share. The appropriate depreciation schedule for the equipment is straight line and the investment will be fully depreciated during the four years period. You are required to estimate the payback period, NPV and IRR on this project and decide whether to make the investment or not.
A sensitivity/scenario analysis would add value.
 

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