Finance-QA203 online

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PART 1

Given the following information for the P&L and Balance Sheet for German Company XYZ please calculate the WK and OFN for the period 2014-‐2016.

Why has a profitable company like XYZ needed an incremental Bank Loan during the period?

Please answer the question above using the “Uses and Sources Of Funds Statement” and Ratio Analysis.

What policies could XYZ managers had taken to improve the Operating Fund Need to reduce the Bank Loan?

Had you been the Bank, would you have lent the money to XYZ? Why?

Please find Company XYZ balance Sheet and P&L for the 2014 -‐2016 period. Data in € million.

XYZ P&L Statement (million euros)

	2014		2015		2016
Sales		$6,545		$6,728		$7,001
Initial Inventory	850		865		922
Purchases	3,338		3,431		3,571
Final Inventory	865		922		975
COGS	$3,323			$3,374		$3,518
Gross Margin	$3,222		$3,354		$3,483
Operating Expenses	2,306		2,550		2,801
Interest Paid	13		20		33
PBT	$903			$784		$649
Tax	271		235		195
Net Income	$632			$549		$455
Dividends Paid	379.39		329.16		272.79
Retained Earnings	252.92		219.44		181.86

(M euros)
Cash	2 0 1 4		2015		2016
Cash	584		634		773
Acc. Receivable	3,928	4,453		4,600
Inventory	865	922		975
Current Assets	5,377	6,009		6,348
Fixed Assets	1,870	1,805		1,741
Total Assets	7,247		7,814		8,089
Banks (debt)	2,027	2,436		2,741
Acc. Payable	992	951		749
Deferred Taxes	40	20		9
Current Liabilities	3,059	3,407		3,499
Long Term Debt	2,010	2,010		2,010
Total Liabilities	5,069		5,417		5,509
Shareholders equity	2,178	2,398		2,580
Total Liabilities & Net Worth	7,247		7,814		8,089

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PART 2

On the other hand, managers at company XYZ know that growth is key for the company.

There is a group of managers that is analyzing a new project (Project A) that will drive profits up in the future starting from the first day of January 2018.

The new project will have a capital structure where the value of the debt as a percentage of debt plus equity (D/V) is 60%. We want to calculate the cost of capital for that project.

Target Level D/V = 60%

Expected Tax rate 40%

Please find below data for the expected ERP in different periods, the interest rate level for the German Government Bonds, and the Credit Spreads differential and the beta versus different indices for different historical periods.

German Government Bond Interest rates
& Credit Spreads
	Yield Curve German
	Govern.			Credit Spread
1 month	-0.77%		0.69%
3 months	-0.73%		0.89%
6 months	-0.71%		1.12%
1 year	-0.70%		1.75%
2 years	-0.68%		2.27%
5 years	-0.42%		3.32%
10 years		-0.40%	3.73%

ERP
1 month		1.27%
3 month		1.37%
6 month		1.75%
1 Year		2.90%
2 Years		4.30%
5 Years		4.99%
10 Years		5.78%
Beta Company XYZ versus equity indices.
	1							5
Equity Index	month		3 months	1 Year		2 Years		Years
Dax Index (German Big Cap)	0.80	0.78		0.88	1.08		1.30
S&P500	0.56	0.58		0.5	0.89		0.8
Ibex 35	0.39	0.59		0.68	0.95		1.19
Small Cap Euro index	0.73	0.85		0.93	1.39		1.97
Big Cap Euro Index	0.37	0.9		1.40	1.97		2.48

The new project will produce savings on the purchases of raw materials that will amount to €331m every year for the next ten years.

Additional Expenses are assumed to be €120m (a year) but managers have several doubts related to the calculation of the relevant project cash flows.

On one hand, managers do not know if the use existing capacity that was paid by other projects has to be included in the cash flow stream.

They know that the project that paid for the capacity will not use it.

However there is a competing project (Project B) presented by a competing team in the company in parallel, that’s is also going to use the capacity. Project B is also looking for approval at the board of directors meeting the same day. The NPV of the competing Project is €301m. The two projects are exclusive.

Managers have included in the cash flow stream of the project A the following cash flows

The required investment that will have to be made by the other projects to replace the assets will be ¢240m by Dec 2019 and

Depreciation would be €23m every year.

On the other hand managers guess that there are cannibalization costs as existing projects will lose sales in future years. Managers are guessing the potential costs. Their best guess of these costs is around €9m a year for the next ten years, but there are doubts about the measurement. The industry in which Company XYZ operates is very competitive, and innovation is a must if you want to survive. They have included this cash flow stream in the project, as the CFO argues that sales are going to be lost.

The new project also require an initial investment of €24m in Working Capital (to take place by 31 Dec 2018 24:00h). From that year the incremental WK is expected to be €1.9m every year. Managers expect to recover 70% of the WK by the end of the life of the project.

Key Note: Please do not forget that the company taking the project is XYZ! All the case is related to XYZ company.

Please calculate the NPV and the IRR of the Project in Germany as described above.

Please explain of you will take project A or B. Why?

Have you already worked out the NPV and IRR of the project described above? If the answer is yes, show it to me, and now work out a new scenario….

Now Imagine that the project is takes place in Greece!

The Greek Sovereign Spread is 8,0%, the 10-‐year CDS is trading today at 6,7%. The volatility of the equity market in Athens is 11%, while the volatility of the Ten Year Greek CDS is 8.0%. Inflation expectation in Greece is similar to that in Berlin. The beta of a similar company to the project, traded at the Athens Stock Exchange is 1.1. The only fly is managers expect Greece to leave the Eurozone in 5 years (100% probability), and the new Drachma will depreciate by 50% against the New Deutsche Marc.

Key Note (only) for the Greek NPV calculation: Use the capital structure given in the information above (D/V 65%), and do not work out any adjustment to the beta.

Please work all calculation using Excel, and work a PPT with your answers

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