BAF-6-MFI Managerial Finance
Coursework Assignment 2019-20
The deadline for submission of the Group Report part of this coursework
. The Group
Presentations will take place thereafter.
Case Study: Valuation of Loja Limited by Tambaku plc
The Chief Executive Officer (CEO) of Tambaku plc, a large tobacco company, has informed the Board that, given the declining consumption of tobacco products, it is essential for the firm to diversify its operations to reduce the overall risk of the business for its shareholders. The CEO also believes that rapid growth in the overall size of the firm is necessary to be able to compete effectively with bigger rivals. In pursuit of these objectives Tambaku plc has decided to make a bid to acquire Loja Limited, an unquoted company which operates a chain of supermarkets.
Extracts from Loja Limited’s accounts for the year just ended are set out below:
£ millions
Revenue (Turnover)
Operating Profit
Net interest
Profit Before Tax
Profit After Tax
Retained Profit
Tambaku plc is carrying a large amount of surplus cash – the CEO, who had recently rejected a proposal to return excess cash to shareholders through a share buyback, is confident that injection of the surplus funds into Loja Limited would result in Loja’s earnings increasing by 10% in the first year after takeover. He is also confident that the increased level of earnings could be maintained for the foreseeable future. He has instructed the treasury team to estimate the bid price for Loja Limited on this basis.
Tambaku plc’s Non-Executive Director (NED) has expressed caution and suggested that the company’s treasurer ought to look dispassionately at the proposal and produce more detailed financial projections relating to Loja’s value before the Board gives the go-ahead to the CEO’s plan.
The treasurer has therefore asked her team to make an alternative estimate based on free cash flow projections (rather than a roughly estimated earnings figure). For this purpose the treasury team has gathered the following information/estimates:
© Vijay Lee Page 2
 Loja’s turnover has increased to the current level of £12.5 billion from a figure of just £8.1 billion six years ago.
 Over the next three years, Loja’s sales revenue can be expected to increase at an annual rate equal to the compound average growth rate experienced over the previous six years.
 The latest operating profit ratio will remain unchanged for the next three years.
 The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation).
 However, additional working capital would need to be brought in during each year for the next three years – the additional working capital brought in each year would be roughly equal to 15% of the increase in sales revenue during that year.
 After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 3% per year in real terms. The inflation rate is expected to be about 2% per year.
 91-day UK Treasury Bills are currently trading at a market price of £99.75 per £100 nominal; the yield on such bills is generally calculated on an ACT/365 basis.
 The market risk premium is currently estimated at 5.5% per annum.
 The corporation tax rate is 19%.
Loja Limited has recently cleared its borrowings, and currently has no debt.
For both the earnings valuation required by the CEO, and the free cash flow valuation suggested by the NED, the treasury team intends to use relevant information relating to two comparable quoted companies whose line of activity is similar to Loja Limited – i.e. Wm Morrison Supermarkets plc and J Sainsbury plc.
A. Perform a simple earnings valuation of Loja Limited as required by the CEO of Tambaku plc, and also perform a discounted cash flow valuation as suggested by the NED. Compare the results obtained, and discuss the reasons why it is unusual for these different techniques to yield closely similar results.
(circa 30 marks)
B. Discuss the weaknesses of earnings valuations and earnings-based management in general, with particular reference to the CEO’s arguments justifying the takeover of Loja Limited.
(circa 10 marks)
C. Discuss the practical problems of calculating an appropriate cost of capital using the Capital Asset Pricing Model, and the particular problems of estimating a cost of capital for unquoted companies.
(circa 10 marks)
D. Explain what are referred to as “managerial” motives for merger and acquisition activity, identifying any of these that might be relevant in the case of Tambaku plc and Loja Limited.
(circa 15 marks)
© Vijay Lee Page 3
In addition to 65 marks for technical content as roughly indicated above, marks will also be awarded under the following heads:
o Demonstration of financial report writing skills – essentially the preparation and presentation of a report to the top management of a company, using standard business software such as Microsoft Word and Excel.
(circa 15 marks)
o Demonstration of planning and organizational skills – evidence of background reading, teamworking, adherence to the requirements of the assignment.
(circa 5 marks)
In all, a total of 85 marks is allocated as above for the group report – with variations in marks between group members arising only due to differential sharing of the mark for the report agreed between group members and indicated in the form “Estimate of Individual Contribution to Group’s Written Report” (which only needs to be submitted IF the group members have agreed to share the mark for the report unequally – in which case it must be individually signed in confirmation by all the group members).
The remaining 15 marks are allocated for the group presentation – where individual marks will depend not only on the overall quality of the team effort, but also the individual presentation skills demonstrated.
Ideally, your submission should be in the form of a report to the Board of Tambaku plc. The main report must be word-processed and word-counted, and the number of words clearly indicated on the cover sheet. The expected length of the report is 2000 words (there is no limit on what can be put into any appendices to the main report).
The group will also be expected to make a short presentation to the Chairman relating to those parts of their report which they consider to be the most important and relevant. Each presentation will be for no more than 15 minutes and should be punchy and to the point – please avoid long, rambling discourses.
© Vijay Lee Page 4
[Only to be submitted if group members agree to share the mark unequally]
Name of group
contribution to
group report
Signature of
Note: · If there are 3 members in a group an equal contribution would be 33.33% each.
· If there are 4 members in a group an equal contribution would be 25% each.
· If there are 5 members in a group, an equal contribution would be 20% each.
· Variations from these levels of 33.33%, 25% and 20% are permissible for individual group members up to a maximum limit of ± 4% only for a 3-person group, ± 3% only for a 4-person group, ± 2.4% only for a 5-person group or 2.05% for a 6-person group.
· Here is an example of how it might work for a 4-person group:
A four-member group’s report is awarded a mark of 65%. Therefore the aggregate marks for the four members are 65 x 4 = 260. The group agrees that John takes 3% extra share (maximum), by Ringo surrendering a corresponding share of 3%.
Name of group
Percentage contribution to group effort
Mark awarded for report
John Lennon
Paul McCartney
George Harrison
Ringo Starr
As can be seen, the maximum variation in contribution of 3% can result in a fairly substantial variation in the marks granted to the individual. [Note that John may also have the extra 3% by (for example) Paul, George and Ringo each surrendering 1% share. It is for the group members to democratically agree between themselves how they would like the marks to be shared].
BAF-6-MFI Managerial Finance – Coursework 2018-19
Verbal Communication Skills:
 Voice (Audibility, Pace of Delivery)
 Manner (Confidence, Enthusiasm)
 Eye Contact
 Effective Use of Time
Use of visual aids:
 Originality, Creativity
 Slides: Clarity, Visibility, Impact
Structure/content/organisation of material – teamwork
General presentation skills:
 Clarity of exposition
 Response to questions, if any
 Overall impression