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Assignment 2

FoodPlanet PLC, which started in 2010, was founded by the chairman Mr Pep.

The corporation operates a wholesale service for independent retailers, caterers, and businesses and is committed to providing a better service to all of its customers. However, due to the increase in consumer demand for everything from online grocery shopping to more personalized advertising, the rise of technology in the grocery industry is reaching a fever pitch. The sales have plummeted due to external competition.

The company does not have an online platform and is struggling to cope with the demand for online shopping. Their sales have dropped as fewer people venture into the shops to buy food. To encourage sales and growth, the company has provided more discounts and offers to customers. Nevertheless, the fall in the company has affected the profitability margins and has had a significant effect on its borrowing capacity and ability to pay back the interest on its debts and decrease in cash flow. In order to enhance competition and start up the online branch, Mr. Pep is considering raising finance to expand the online retail stores and buy products.

Given the firm’s financial position and the risk of entering into a new online market, this has not been without risks for both short-term and long term growth as running an online e-store will affect financial structure and probability. Retail initially, the cash flow coming into the online branch is expected high as customers were intrigued by the range of goods and wholesale prices. Therefore, the company may expect a high volume of sales and profits in the future. The company is also expected to have more liquid assets and cash flow than initially anticipated. Having discussed with the online experts in the type of retail grocery business, managers anticipate that cash flows arising from online sales are expected to increase by £550,000 per year.

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The immediate cost necessary to establish the online processing software will cost £4,000 and it can have a useful life of five years. The internet company charges £6,000 for installing a new online network (one payment) and £1,600 per year for the line rental. Online delivery is nee did a fleet of new delivery vans and the vans cost £250,000. The vans can be financed for 5 years with a 40% down payment. The bank will offer finance for the vans through a loan at 5% compounded monthly with a monthly payment of £2,830.69. The company will l need to hire parttime van drivers to deliver goods and an annual salary is £5,000.

The vans have a useful life of five years and it depreciates straight line for five years. It assumes that the salvage value of the new vans is equal to 25% of the total cost of the vans. The straight-line method of depreciation is used to calculate depreciation expense. In the straight-line method, the annual allowance for depreciation is obtained by taking the total cost of vans subtracted from the salvage value of the v an, and the amount that can be depreciated is then divided by a useful life of five 1years.  The annual depreciation expense in the company’s income statement is calculated at 20% of the annual allowance for depreciation.

It should be noted that the company has a 20% tax rate for its profits. The van maintenance expense and insurance will cost £3,000 a year. The weighted average cost of capital is calculated at 8%. FoodPlanet has assumed a decrease in sales from physical grocery shopping if this plan goes a head due to customers moving from physical groceries to electronic ones. Further, the financial advisor reckons the decrease in sales will amount to £430,000 a year. The financial advisor believes there will be no significant inflation over the next five years and therefore has not included inflation in the above figures. FoodPlanet has some debt and its shares are not listed on the stock market. If the proposal was to go ahead then the company would need to raise additional finance. The financial advisor has not recommended which way to go with regard to the choice of financing.

REQUIRED:

Q1: Prepare a schedule of cash flows for the project. Calculate, using the information available, the net present value of the proposal to sell online shopping and run an online st ore. Include in your answer a justification for whether or not you recommend FoodPlanet to go ahead with this proposal. In this question, you are required to critically discuss the effect of the cost of capital on financial decisions. (25%)

Q2: Calculate the payback period for the proposed project to run an online store; if the company has a policy of only accepting projects with a payback of fewer than three years, would this be accepted? Comment on the suitability of the payback method for the new investment and comment on how to develop an appropriate payback year for the new project.

Q3: Discuss the choice of financing for the project to expand the e (15 %) grocery. In this question, you should clearly discuss and reference the general advantages and disadvantages of the financing choices both in management’s interest and in shareholders’ interests. (2 5%) 23

Q4: Critically evaluate the article below and discuss factors affecting capital structure decisions. (25%) Murray Z. Frank, Vidhan K. Goyal, 2009, Capital Structure Decisions: Which Factors Are Reliably Important? Financial Management, Vol. 38, pp. 1 – 37.   Note: the final 10% of the grade will be allocated for presentation, referencing, and word count. You are required to type word count in the report.

ASSIGNMENT The assignment for this module should not exceed the stated word limit. Word count includes everything in the main body of the text. However, the word count doesn’t include the list of references and appendices. Academic literature should be properly cited using the APA 7th referencing system and shown in the References.  Guidance Notes for the Assignment The coursework should be in essay format and must be structured a table of contents, with separate sections and, preferably, headings in relation to each question under investigation.

Your essay should be 3,500 words (±10%) of your own words. You should submit your assignment in Word not PDF. Your essay should be submitted by the due date to the drop box in Moodle. State the word count at the end – this can be found on the ‘Tools’ tab on the menu bar in word. This word limit will require you to be selective in what you include. More marks are available for your own discussion and observations than for sections taken from books or websites. Any material that you quote or refer to in your work must be referenced fully giving details of its source, author etc. and use the APA 7th referencing system in the assignments. It is not acceptable to include large sections from such sources and journal articles: the vast majority of the essay should be in your own words. Font will be Arial 12pt and all line spacing will be at 1.5 lines (except long quotations, diagram sources and the reference list that are single-line spacing).

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