CASE STUDY – MADISON PLC

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CASE STUDY – MADISON PLC
Students are required to submit an individual report before the deadline with a maximum of 2500 words based on the following case study. You will also be required to
make a 5 to 6 Minutes presentation as summary of your report in week 10 just before submission. You will be required to send your presentation slides to your Tutor a
day before presentation. The slides should not be more than 6.
CASE STUDY – MADISON PLC
Madison plc is a public limited company, whose shares are quoted on the Alternative investment Market in London and has been operation in the UK for the past 10 years.
Madison plc provides intellectual property to Oil and gas companies, HR consultants, Marketing companies, Tourist companies and investment property funds all over the
UK. For the past 10 years, Madison plc has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the
market. However, the Finance director of Madison has recently engaged your firm to help them source Finance for their expansion plans.
New Software
The current software product that Madison has been selling to companies is now deemed to be outdated and the company is looking to invest in a new product, and there
are two proposals on offer. The details of these two proposals are outlined below.
Madison Super
Madison super is the first of the two proposals. The expected life of this product is 5 years and its working capital requirements and the cost of new software,
expected revenue, components cost and overheads are as below:
Madison Super Draft Figures £‘000
Year
0
1
2
3
4
5
New Software Cost
5,500
Working Capital
400
550
700
850
1,000
Sales Revenue
5,500
6,500
7,700
8,750
9,800
Less:
Component A
(670)
(800)
(950)
(1,100)
(1,350)
Component B
(1,070)
(1,500)
(1,800)
(2,100)
(1,800)
Overheads
(275)
(325)
(385)
(438)
(490)
2
All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In addition
? Revenues, overheads and working capital are expected to rise by 3% per year from year 1.
? The cost of component A and component B are expected to rise in line with inflation of 4% per year from year 1.
? The cost of senior technology officers, who have come from the US have not been taken into consideration in the forecast and are as follows:
– Senior Technology Officer 1: Will be paid £200 per hour and expected number of hours for STO 1 are 1,470. The rate paid is expected to rise in line with inflation at
4% per year from year 2 and the number of hours is expected to reduce by 2% per year, every year from year 2 onwards.
Senior Technology Officer 2: Will be paid £100 per hour and expected number of hours for STO 2 are 1, 700. The rate paid is expected to rise in line with inflation at
4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
Depreciation is straight line over the life of the software, and the software is not expected to have any salvage value at the end of year 5. The company gets an
annual capital allowance of 25%.
Corporation tax is 33% and any tax benefit or tax expense is settled one year in arrears. Ignore depreciation when calculating corporation tax payable/receivable, but
take the capital allowances into account.
If Madison plc invests in Madison Super then the discount rate that would be required to assess the NPV would be 14%.
3
Madison Platform:
Madison Platform is the second of two proposals, the expected life of this software will also be 5 years and its working capital requirements, the cost of the new
software, expected revenue, components cost and overheads are as follows:
Madison Platform Draft Figures £‘000
Year
0
1
2
3
4
5
New Software Cost
8,500
Working Capital
500
653
806
959
1,112
Sales
6,200
7,564
9,001
10,531
12,006
Less:
Component A
(341)
(529)
(810)
(1,053)
(1,441)
Component B
(1,320)
(1,875)
(2,250)
(2,723)
(2,945)
Overheads
(186)
(227)
(270)
(316)
(360)
All of the above estimates have also been prepared in terms of present day costs and prices. Assume that the cash flows arise at the end of each period. In addition,
you will need to take the costs of senior technology officers and capital allowances, inflation and the rise in the revenue, overheads and working capital into
consideration, which are the same for the Madison Super.
Corporation tax rate is 33%, and tax benefit or tax expense is steeled one year in arrears.
If Madison plc invests in Madison platform then the discount rate that would be required to assess the NPV would be 13%.
New Company Acquisition
Madison plc is also considering to grow its operations across continental Europe, and at the moment there are two potential target companies that can help Madison plc
in creating a presence in Europe, Puteaux digital France and Melia Portfolio Research Spain. For the purpose of this analysis, assume that the required investment
funds will be provided by way of a capital loan from the parent entity or other sources of finance; however Madison plc is willing to acquire only one of the
companies. The data for the past three years is given below:
4
2011
2012
2013
2011
2012
2013
Turnover
9,406
10,812
11,516
15,529
17,849
20,516
Administrative Expenses
(7,012)
(7,643)
(8,102)
(16,926)
(19,455)
(22,362)
Operating profit/ (loss)
2,394
3,169
3,414
(1,398)
(1,606)
(1,846)
Interest receivable and similar income
12
14
32
30
34
39
Interest payable and similar charges
(39)
(44)
(26)
(19)
(22)
(26)
Profit/ (Loss) on ordinary activities
2,368
3,138
3,421
(1,387)
(1,595)
(1,833)
Tax
(710)
(942)
(1,026)
Net profit/(Loss)
1,658
2,197
2,395
(1,387)
(1,595)
(1,833)
Fixed Assets
Intangible fixed assets
4,720
5,426
3,577
3,235
3,718
4,274
Tangible fixed assets
1,458
1,676
2,250
5,785
6,649
7,643
6,179
7,102
5,827
9,020
10,368
11,917
Current assets
Debtors: amounts falling due after
more than one year
467
536
409
579
666
765
Debtors: amounts falling due within
one year
2,679
3,080
6,322
3,847
4,422
5,083
Cash at bank and in hand
732
842
1,599
1,298
1,350
1,404
Creditors: amounts falling due
3,879
4,457
8,330
5,724
6,438
7,252
within one year
(2,184)
(1,490)
(1,693)
(9,834)
(13,490)
(17,687)
Net current assets/(liabilities)
1,695
2,967
6,637
(4,110)
(7,052)
(10,435)
Total assets less current liabilities
7,873
10,069
12,464
4,910
3,315
1,482
Net assets/ (liabilities)
7,873
10,069
12,464
4,910
3,315
1,482
Capital and reserves
Called up share capital (£1 nominal
shares)
100
100
100
450
450
450
Share premium account
1,805
1,805
1,805
Capital redemption reserve
2
2
2
Profit and loss account
5,965
8,162
10,557
4,460
2,865
1,032
Shareholder’s funds/(deficit)
7,873
10,069
12,464
4,910
3,315
1,482
Puteaux France £’000
Melia Spain £’000
5
Required:
Draft a report to the Finance Director of Madison plc, in which you:
(1) Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages and make recommendations as to how the
company can manage the same to help in the planned expansion program. [20 marks] (2) Comment and provide recommendations on how efficient working capital management can improve a firm’s cash flows? [5 marks] (3) Analyse the two Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Madison
may use, and the limitations of using those techniques. If Madison plc has capital rationing problems where it has only £5.5 million of funds available for the new
investment, suggest which software the company should opt for. Use IRR to support your decision and assume that the second rate of NPV as 10% for the Madison Super
Software and 11% for the Madison Platform Software. [20 marks] (4) You would also be required to explain how the company can use Break-even analysis as a tool to aid them in making a decision as to which software to produce. You
will be required to come up with an example with your own numbers and draw up a break-even chart in explaining the same [10 marks] (4) What other factors may a firm take into account when making investment decisions? [10 marks] (5) Based on the information provided and to the extent possible, perform ratio analysis and make recommendations as to which company they should be looking to invest
¡n. What other information will help you in making an informed decision on ratio analysis. [10 marks] (6) Presentation of your work (summary – key is the NPV computation and decisions made) (15 marks)
Clearly state any assumptions that you make
Total marks: 90
Individual Coursework
This is individual coursework which contributes 60% to the overall module mark.
Submission
This assignment must be submitted by 9.00 a.m. on the deadline day via Turnitin. Word limit (excluding tables, charts, references and appendices): 2,500 words
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Style and Format
Style : Report
Font size : 12 (preferably Arial)
Line spacing : 1.5 lines
References : Harvard style
Learning outcomes being assessed:
1. Understand the different sources of funding/ finance.
2. Making use of different appraisal techniques and ratio analysis in making Investment decisions.
Assessment criteria
(i) Detailed explanation of sources of finance with academic reference 20%
(ii) Efficient working capital management 5%
(iii) Investment appraisal 20%
(iv) Other factors to consider when making investment decisions 10%
(v) Breakeven analysis 10 %
(v) Ratio analysis 10%
(vi) Presentation 15%
(vii) Professional format 10%
Total 100%
PLAGIARISM WARNING! —Assignments should not be copied in part or in whole from any other source, except for any marked up quotations, that clearly distinguish what has
been quoted from your own work. All references used must be given, and the specific page number used should also be given for any direct quotations, which should be in
inverted commas. Students found copying from the Internet or other sources will get zero marks and may be excluded from the university.
Word Count – Any work submitted with more than 2500 words will be have 15 marks deducted.
The presentation
The allocation of marks will be based on the Assessment Rubrics for the Regular Assignment.
Location: Room TBC
Time slots arrangements: TBC
Please note that you should arrive in good time before your session starts. Students who are absent or late will receive a zero mark.
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