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Assessment Information• This assignment is designed to assess the following learning outcomes:1. Demonstrate a critical understanding and evaluation of the forefront of corporate financetheories and empirical evidence.2. Evaluate alternative financing methods and distribution policies.3. Critically evaluate alternative investment appraisals techniques; and decide appropriate actionsaccordingly.4. Make sound financing, investment and asset valuation decisions with reference to theimplications of the efficiency of capital markets.
Word Count• The word limit is 3000 words.• There will be a penalty of a deduction of 10% of the mark (after internal moderation) for workexceeding the word limit by 10% or more.• The word limit includes tables and quotations, but excludes the bibliography and any appendices
Required:The coursework has two sections. You must complete both sections (three questions intotal).Section A: (50 marks)Using the company identified above:1. Estimate the Weighted Average Cost of Capital (WACC) of your firm.(25 marks)2. Discuss the dividend policy of the firm.(25 marks)Section B: (50 marks)Using the information provided below:3. Prepare a report fully appraising the redevelopment project that can be presented tothe Board of Directors of Luverpool Inc.(50 marks)
Section B: Luverpool Inc.Background:Luverpool Inc. is in the construction industry and also owns a number of sporting venues. Its CEO,Jurgen Hop, wants to invest in a new project to redevelop one of their football stadiums that hebelieves could generate income for the firm for many years to come. There is a board meeting of theLuverpool Inc. directors early in the new year and Jurgen wants to submit a report to this meetingoutlining the details of the project.Project DetailsThe following information has been provided by Scout Plc, a firm that Luverpool Inc. hired to providea costing estimate of the stadium redevelopment. The fee for this was £2m which Luverpool Inc.must pay in one year’s time.About the stadium:• The stadium currently holds 54,000 spectators.• There is one game every week for 40 weeks.• The price of a ticket is £20.• Costs of £350,000 are incurred each time a game is played.• The redevelopment project would increase the capacity to 60,000.The direct costs associated with the redevelopment work are:• £8.1 million incurred immediately to secure the necessary machinery and building license.• £900,000 per year on wages.• £1.3 million per year on materials.• £10m at the end of the project to remove all the equipment.Currently the stadium is sold out for every game and given the history, status, not to mention the freeflowing, attacking football being played there, Luverpool Inc. are confident that this will always bethe case, whatever the capacity. However, during the redevelopment work, the current capacitywould be reduced by 6,500 seats.The redevelopment is expected to take three years to complete, however, privately Jurgen is worriedthat it may take a bit longer than that.About the CompanyLuverpool Inc. is a listed company funded partly by debt, partly by equity. Should the project beaccepted it would not materially change the capital structure of the firm. The board, and in particularthe CEO are willing to accept risks, providing they earn a suitable return. Normally they like theirbuilding projects to payback within 25 years, but always keep an open mind on any project.Jurgen has little experience of using Internal Rate of Return, so he is unsure of what hurdle rate touse, however an old colleague of his, Jose M. Losealot, who is CEO of a declining shirt retailer, hassaid he always uses 20% as a hurdle rate when he appraises any new project.
AssumptionsIn analysing the project you can assume that:• There is no taxation or inflation• All annual costs/revenues are paid/received at the end of the year in which they are incurred• The ticket price is fixed forever and cannot be changed• The cost per game will rise by £5,000 each yearYou should also assume that the WACC of Luverpool Inc. is equal to the WACC figure youcalculated for your selected company in Section A.Further GuidanceQuestion 1 – Weighted Average Cost of Capital• An explanation of the process used and source of the numbers, is much more important than the finalanswer itself• Clearly state any assumptions you make• The firm’s latest annual report will be a key source of dataQuestion 2 – Dividend Policy• You should review the firm’s payout policy over a minimum of 5 years• Consider dividends themselves as well alternatives to dividends that the firm may have used• Relate the dividend policy/strategy of the firm, to the theory – it’s not just about the numbersQuestion 3 – Luverpool Inc.• Provide a cash flow table for the proposed project• Calculate the NPV• You may wish to employ other suitable appraisal techniques• Undertake some form of risk analysis• Discuss the findings and make a recommendationFinal CommentsYou should produce a single report style piece of work (with three sections) that is worthy of presentation to aboard of directors. Good presentation, clear explanations and appropriate use of charts and tables will berewarded throughout.
International House, 12 Constance Street, London, United Kingdom, E16 2DQ
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