Posted: September 13th, 2017
Paper, Order, or Assignment Requirements
PGBS0132 Principles of Finance 2014-15
Individual Coursework Assignment
Scenario
Breaker Sports is a chain of retail shops which specialise in sports clothing and equipment,
in particular surfwear labels with innovative designs and a strong fashion elem ent. In
addition to selling well known brands, the company also supply ‘custom’ surf boards to
customers’ individual specifications and there is increasing demand for this. Currently all of
the shops are based in the South West of England , although the company also sells its
products via an internet website. The company has achieved strong growth in the past
few years and enjoys good relationships with both customers and suppliers.
Tim Lewis, a business graduate with a strong interest in outdoor sports, founded the
company in 2006 using equity finance raised from the sale of a previous, less successful,
business venture. Additional finance was provided in 2008 by venture capitalists. Internally
generated funds have been another important source of finance for the company: profits
were entirely reinvested in the early years, with dividend payments commencing only in
remainder by the founder and his family and a few of the co mpany’s senior employees.
Tim Lewis believes there is further scope to expand the company, and market research
suggests that the company could achieve sales growth by establishing new retail shops in
other regions of the UK, outside South West England. On the basis of this and other
relevant information, he has drawn up plans for expansion. Since the venture capital fund
now wishes to liquidate its investment, and the company needs to raise additional equity to
finance its expansion plans, Tim Lewis is considering obtaining a listing for the company
on the Alternative Investment Market of the Stock Exchange. He has not yet obtained
detailed advice, but at this stage he plans to sell the venture capital fund’s shares and to
issue a further 4 million fully paid shares of 10p each.
Summarised financial statements for the company for the most recent three years of
trading are as follows:
Summarised income statements for the year ending 30 September:
2014 2013 2012
£000 £000 £000
Turnover 6,893 5,987 4,549
Cost of sales 6,357 5,537 4,210
Gross profit 536 450 339
Interest charges 76 42 24
Profit before taxation 460 408 315
Taxation 92 82 63
Profit for the year 368 326 252
Dividends 68 51 43
Retained profit 300 275 209
Summarised balance sheets (statements of financial position) as at 30 September:
2014 2013 2012
£000 £000 £000
Tangible fixed assets
Freehold land and buildings 595 286 286
Leasehold land and buildings 455 374 201
Store and office equipment 255 246 173
Motor vehicles 21 21 10
1,326 927 670
Current assets
Stock 1,472 1,138 867
Debtors 510 399 296
Cash 183 92 81
2,165 1,629 1,244
Creditors: amounts falling due within one
year:
Bank overdrafts 412 360 140
Creditors 1,217 993 861
Proposed dividends 68 51 43
Current taxation 92 82 63
1789 1486 1107
Net current assets 376 143 137
Total assets less current liabilities 1,702 1,070 807
Creditors: amounts falling due after more
than one year
538 167 179
Total net assets 1,164 903 628
Share capital and reserves
Ordinary shares of 10p each issued and
fully paid
102 102 102
Reserves 1,062 801 526
1,164 903 628
Since the most recent financial statements were prepared, arrangements have been made
for a qualified external valuer to revalue the firm’s assets, but this has not yet been carried
out.
The 2014 dividend has just been paid. The company expects to be able to pay a dividend
of 15p per share for the year ending 30 September 2015 and dividend payments are then
expected to grow at a rate of 9 per cent per annum for the foreseeable future, based on
estimated future earnings.
The following information relates to Sports and sports equipment retailers which are listed
on the London Stock Exchange:
Company Equity Beta Gearing % Price/Earnings
ratio
A 1.39 22.45 9.55
B 1.21 1.68 8.14
C 1.46 12.72 10.25
The gearing measures are based on book values of long term debt divided by long term
debt plus shareholder funds.
Assume that the expected return on the market portfolio is 10 per cent and the return on
risk-free securities is 4 per cent. The corporation tax rate is 20 per cent.
Required
(a) Using the data provided, calculate a price for the shares of Breaker Sports using
the following methods:
(i) Net assets valuation [5 per cent]
(ii) P/E method valuation [5 per cent]
(iii) Dividend growth model (Gordon growth model) valuation
[15 per cent]
(b) Assume now that the corporation tax rate may change in 2015 from 20 per cent to
18 per cent and remain at 18 per cent in subsequent years. By how much would this
change your valuation result using the dividend growth model? Comment on your result
[10 per cent]
(c) ‘Share valuation methods all rely on such unrealistic assumptions that they are of
little practical value.’
To what extent do you consider this statement to be correct? Illustrate your answer with
reference to the Breaker Sports case. [25 per cent]
(d) Suggest and briefly justify a fair price for the shares of Breaker Sports, taking into
consideration the limitations of each valuation method used. What further information
would be helpful in estimating a fair value for the shares? [20 per cent]
(e) Evaluate the advantages and disadvantages for Breaker Sports of their plan to
obtain a listing on the AIM. [20 per cent]
[Total 100 per cent]
For the computational tasks you should clearly state and justify any additional assumptions
you feel necessary. All workings should be clearly shown and explained.
Approximate word guidelines:
Part (c) 500 words
Parts (d) and (e): 400 words each
Place an order in 3 easy steps. Takes less than 5 mins.