Strategic Investment Management

The module is Strategic Investment Management it requires strong knowledge of Finance & investment models, theories and skills:
(Do not Bid unless you have the knowledge)

Below are the questions ONLY the details on the case is attached..

Question 1

(a) Calculate the weighted average cost of capital (WACC) for both Sesperian plc
and Agrosolutions plc, and then determine which one should be used in the
valuation calculations. No explanation is required of your choice of WACC. [7
marks]
(b) Using the Discounted Cash Flow method, calculate the stand-alone valuation
of Agrosolutions plc prior to the inclusion of synergies. [20 marks]
(c) Recalculate the stand-alone valuations of Agrosolutions plc after the inclusion
of the synergies. [8 marks]

Question 2

(a) Outline a bidding strategy that the Board of Sesperian plc might have
formulated based on the valuations calculated in parts (b) and (c) above. [15
marks]
(b) In the discussion regarding which WACC to use for the valuation of
Agrosolutions plc Rufus Banda mentioned that different WACCs might be
needed to reflect different financial risk and business risk. Using suitable
examples, including those drawn from the case study, distinguish between
business and financial risk and from your research discuss how such risks
can be alleviated in practice. [15 marks]

Question 3

(a) Explore how behavioural aspects can influence financial decisions in general,
and then more specifically to the case study. In particular draw on the
comments made by Jay Sixsmith regarding the fear of overpayment for the
acquisition of Agrosolutions plc. [17 marks]
(b) Provide a critical appraisal of the comment made by Rebecca Donato that it
was debateable that efficient markets exist at all levels. You are expected to
appraise the general concept of efficient financial markets, as well as
exploring the implica

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Master of Business Administration
Strategic Investment Management
Assignment
Date for Submission: 21st July 2014 (13:59 BST)
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Assignment Brief
As part of the formal assessment for the Master of Business Administration you are
required to submit a Strategic Investment Management assignment. Please refer to
your Student Handbook for full details of the programme assessment scheme and
general information on preparing and submitting assignments.
Learning Outcomes:
After completing the module the student should be able to:
1. Identify key models and use them to calculate the stand-alone valuations of a
target company in a potential acquisition bid.
2. Assess the likely strategic components in formulating a bidding strategy for
the acquisition.
3. Undertake strategic investment decisions using a range of methodologies;
4. Critically appraise the strengths and weaknesses of a number of investment
decision techniques;
5. Communicate the potential impact of behavioural aspects on financial
management decisions
Assignment Task
Sir Walton Hamilton, the incumbent Chief Executive of Sesperian plc, had recently
resigned after successfully directing the company for the past twenty years. During that
time the company had become a relatively successful business in its sector achieving
moderate market share through organic growth.
Rebecca Donato had recently been appointed as Chief Executive to replace Sir Walton
Hamilton. Rebecca was quite young for a chief executive, but had been chosen for her
drive and enthusiasm, and was seen as someone who would grow the company.
Rebecca Donato was particularly keen on expanding the company quickly through
merging or acquiring companies which would provide a strategic fit with the long-term
goals of the company. This had been discussed at previous Board meetings of the
executives and it had been broadly agreed that such a strategy would provide faster
results rather than just relying on organic growth. Not everyone had been in complete
agreement and some of the members thought that such a strategy would change the
culture of the business and had inherent risks if the acquisition was not successful.
However, at these meetings, the new Chief Executive had been able to persuade the
members that it was the best way forward if the company was to achieve growth in the
short term. At these Board meetings, some potential targets for acquisition had been
discussed and one in particular had been highlighted. Therefore, Rufus Banda, the
Finance Director had been given the task of working with Henshaw Investment Bank, to
arrive at a valuation of the target company in order that a bidding strategy for the acquired
company could be determined. Details of these valuations were to be brought to the next
Board Meeting for discussion.
At the subsequent Board Meeting called by Rebecca Donato at the beginning of July the
valuation of the potential target company, Agrosolutions plc, was tabled and discussed. It
had been agreed that Sesperian would bid for all the assets of Agrosolutions plc (the
whole firm). Working with Henshaw Investment Bank, Rufus Banda presented the
following details regarding the target company and its valuation.
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Present revenues (year 0) amount to £10 million. These revenues are expected to grow
at a rate of 7 per cent per annum. The cost of goods sold (COGS) is 60 per cent of sales
and selling, general and administrative (SG&A) expenses are expected to be 15 per cent
of sales. Net working capital is 21 per cent of sales and depreciation is estimated at £1.2
million per year.
Henshaw Investment Bank had also valued Agrosolutions’ Net Property, Plant and
Equipment (NPPE) to be £12 million, and the capital expenditure (CAPEX) required per
annum is given as £1.3 million. The tax rate had been estimated at 39 per cent.
Henshaw had also estimated the steady state growth of Agrosolutions’ to be 6.5 per cent
per annum.
Rufus Banda explained that after evaluating the various valuation methods available
Henshaw Investment had advised using the Discounted Cash Flow Technique. He went
on to explain that the first step involved calculating the Free Cash Flows of Agrosolutions
plc over a period of five years to ascertain its stand-alone value. Rebecca Donato
commented that surely synergies could by achieved which may well increase the value of
the targeted company. The Finance Director explained that any synergies could be added
in at a later stage. He further explained that it was prudent to establish a stand-alone price
as it allowed the target’s shareholders to justify a floor for their negotiations, as well as
comparing it with the target’s current market value. In addition a terminal value which
reflects the free cash flows after the end of the forecast period needs to be calculated and
added to the last year of the forecast period. The Investment Bank had also advised using
the constant-growth valuation formula to calculate the terminal value. These free cash
flow figures would then need to be discounted to obtain their present values.
The discussion then moved on to the appropriate discount rate to apply to the free cash
flow computation. Doug Freebold, the Production Director, thought the present weighted
average cost of capital (WACC) of Sesperian would be the most appropriate to use.
However, Rosemary Hilton, the Marketing Director thought that as Agrosolutions plc was
not in the same sector as Sesperian, as well as the capital structure being different, it may
well be the case that they should use the WACC of Agrosolutions as the discount factor.
Rufus Banda agreed with Rosemary Hilton stating that it is better to, ‘‘focus on where the
money is going, rather than where the money comes from” in determining the target’s risk
and financing in order to ascertain the appropriate discount rate. He added that this may
reflect the different business risk and financial risk involved in the acquisition. Rufus
Banda, in consultation with the Investment Bank provided the following information
regarding the data required for the calculation of the WACC of both companies.
Bidder Target
Sesperian plc Agrosolutions plc
Bond rating A BBB
Yield to maturity of bonds 7.05% 7.45%
Tax rate 39.00% 39.00%
Beta 1.01 1.2
Debt as % of capital 20.00% 25.00%
Equity as % of capital 80.00% 75.00%
10-year treasury bond yield 5.88% 5.88%
Market risk premium 6.00% 6.00%
Possible synergies from the merger became the next topic of conversation. The Marketing
Director, Rosemary Hilton, felt certain that after discussion with the Investment Bank that
she would be able to improve Agrosolutions’ marketing and distribution capabilities. Doug
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Freebold also indicated that operational efficiencies could also be improved. Rufus Banda
then explained that Henshaw Investment Bank, in conjunction with the various managers
and directors of Sesperian, had estimated an addition of three percentage points of
revenue growth for the target company, and subtracted one percentage point from
SG&A/Sales ratio relative to the stand-alone model. It is further assumed that all the
merger synergies would be realised immediately and would fall within the five-year
forecast period.
Doug Freebold felt that although the acquisition might be useful to diversify their portfolio,
and there may be some synergies to be made, he was still unsure of the risk involved, and
was particularly concerned that they should not overpay for Agrosolutions plc. In
contrast, the Marketing Director, Rosemary Hilton, thought that as marketing opportunities
were available from the acquisition, she was particularly eager that it should go ahead.
Jay Sixsmith, the Human Resources Director, however, also cautioned against excessive
enthusiasm to acquire this new business at any costs. He mentioned that a considerable
amount of research had recently been undertaken in the field of behavioural finance, part
of which focused on the psychological effects of financial decision making in situations
such as mergers and acquisitions. Doug Freebold also mentioned that he read recently
that it was difficult for the acquiring firm to benefit from acquisitions in an efficient market,
as shareholders have access to the same information as managers. However, Rebecca
Donato disagrees stating that it is debateable that markets are efficient at all levels and
there are many instances where executives have information about future gains from an
acquisitions that is not known by shareholders.
The Chief Executive, Rebecca Donato, concluded by saying that as she had been
employed to grow the company she was keen that this type of acquisition activity went
ahead. However, she had also taken notice of the cautionary remarks of her colleagues
Doug Freebold and Jay Sixsmith. She therefore asked Rufus Banda, with the aid of
Henshaw, to make the necessary calculations regarding the valuations of Agrosolutions,
so that a definitive bidding strategy could be formulated at the next Board Meeting, which
she proposed to call for the next week.
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Question 1
(a) Calculate the weighted average cost of capital (WACC) for both Sesperian plc
and Agrosolutions plc, and then determine which one should be used in the
valuation calculations. No explanation is required of your choice of WACC. [7
marks]
(b) Using the Discounted Cash Flow method, calculate the stand-alone valuation
of Agrosolutions plc prior to the inclusion of synergies. [20 marks]
(c) Recalculate the stand-alone valuations of Agrosolutions plc after the inclusion
of the synergies. [8 marks]
Question 2
(a) Outline a bidding strategy that the Board of Sesperian plc might have
formulated based on the valuations calculated in parts (b) and (c) above. [15
marks]
(b) In the discussion regarding which WACC to use for the valuation of
Agrosolutions plc Rufus Banda mentioned that different WACCs might be
needed to reflect different financial risk and business risk. Using suitable
examples, including those drawn from the case study, distinguish between
business and financial risk and from your research discuss how such risks
can be alleviated in practice. [15 marks]
Question 3
(a) Explore how behavioural aspects can influence financial decisions in general,
and then more specifically to the case study. In particular draw on the
comments made by Jay Sixsmith regarding the fear of overpayment for the
acquisition of Agrosolutions plc. [17 marks]
(b) Provide a critical appraisal of the comment made by Rebecca Donato that it
was debateable that efficient markets exist at all levels. You are expected to
appraise the general concept of efficient financial markets, as well as
exploring the implications of efficient markets to this case study in particular.
[18 marks]
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Guidelines:
You MUST underpin your analysis and evaluation of the key issues with appropriate
and wide ranging academic research and ensure this is referenced using the Harvard
system. The My Study Skills Area contains the following useful resources; Study
Skills Guide (containing a Harvard Referencing section) and a Harvard Referencing
Interactive Tutorial. You must use the Harvard Referencing method in your
assignment.
Additional notes:
Word count: 4000 words (maximum)
The word count excludes the title page, executive summary, reference list and
appendices. Where assessment questions have been reprinted from the
assessment brief these will also be excluded from the word count. ALL other
printed words ARE included in the word count. Printed words include those
contained within charts and tables. See ‘Word Count Policy’ on the homepage of
this module for more information.
Assignments submitted late will be marked as a 0% fail, unless you have withdrawn your
intent to submit for this module in advance of the deadline.
Your assessment should be submitted as a single word or pdf file. For more information
please see the “Guide to Submitting an Assignment” document available on the module
page on iLearn.
You must ensure that the submitted assignment is all your own work and that all sources
used are correctly attributed. Penalties apply to assignments which show evidence of
academic unfair practice. (See the Student Handbook which is on the homepage of your
module and also in the Induction Area).
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Assessment Criteria
Level 7 is characterised by an expectation of students’ expertise in their specialism. Students are semi-autonomous, demonstrating
independence in the negotiation of assessment tasks (including the major project) and the ability to evaluate, challenge, modify and
develop theory and practice. Students are expected to demonstrate an ability to isolate and focus on the significant features of
problems and to offer synthetic and coherent solutions, with some students producing original or innovative work in their specialism that
is worthy of publication or public performance or display.
Mark Bands Outcome
Generic Learning Outcomes (GLOs) (Academic Regulations, Section 2)
Knowledge & Understanding
Intellectual (thinking), Practical,
Affective and Transferable Skills
Characteristics of Student Achievement by Marking Band
90-100%
Achieves module
outcome(s) related to
GLO at this level
Exceptional analysis of key issues/concepts/ethics with
very clear originality and autonomy. Exceptional
development of conceptual structures and argument
making an exceptional use of scholarly conventions.
Demonstrates independence of thought and a very high
level of intellectual rigour and consistency. Work pushes
the boundaries of the discipline and may be considered for
external publication
Exceptional analysis of key issues/concepts/ethics.
Exceptional development of conceptual structures and
argument, making consistent use of scholarly
conventions. Exceptional research skills, independence
of thought, an extremely high level of intellectual rigour
and consistency, exceptional expressive/professional
skills, and substantial creativity and originality.
Exceptional academic/intellectual skills. Work pushes the
boundaries of the discipline and may be considered for
external publication
80-89%
Outstanding analysis of key issues/concepts/ethics with
clear originality and autonomy. Outstanding development
of conceptual structures and argument making an
exemplary use of scholarly conventions. Demonstrates
independence of thought and a very high level of
intellectual rigour and consistency
Outstanding analysis of key issues/concepts/ethics. Very
high level development of conceptual structures and
argument, making consistent use of scholarly
conventions. Outstanding research skills, independence
of thought, a high level of intellectual rigour and
consistency, outstanding expressive/professional skills,
and considerable creativity and originality. Exemplary
academic/intellectual skills
70-79%
Excellent analysis of key issues/concepts/ethics. Excellent
development of conceptual structures and argument
making excellent use of scholarly conventions.
Demonstrates independence of thought and a high level of
intellectual rigour and consistency
Excellent analysis of key issues/concepts/ethics. High
level development of conceptual structures and
argument, making consistent use of scholarly
conventions. Excellent research skills, independence of
thought, a high level of intellectual rigour and
consistency, excellent expressive/ professional skills, and
considerable creativity and originality. Excellent
academic/intellectual skills, and considerable creativity
and originality
60-69%
Good analysis of key issues/concepts/ethics.
Development of conceptual structures and argument
making consistent use of scholarly conventions
Good analysis of key issues/concepts/ethics.
Development of conceptual structures and argument,
making consistent use of scholarly conventions
50-59%
Satisfactory knowledge of key issues/ concepts/ethics in
discipline. Descriptive in parts but some ability to
synthesise scholarship and argument. Minor lapses in use
of scholarly conventions
Satisfactory knowledge of key issues/ concepts/ethics in
discipline. Descriptive in parts but some ability to
synthesise scholarship and argument. Minor lapses in
use of scholarly conventions
40-49%
A marginal pass in
module outcome(s)
related to GLO at this
level
Basic knowledge of key issues/concepts/ethics in
discipline. Generally descriptive, with restricted synthesis
of existing scholarship and little argument. Use of
scholarly conventions inconsistent
Basic knowledge of key issues/concepts/ethics in
discipline. Generally descriptive, with restricted synthesis
of existing scholarship and little argument. Use of
scholarly conventions inconsistent.
30-39%
A marginal fail in
module outcome(s)
related to GLO at this
level. Possible
compensation. Satisfies
qualifying mark
Limited knowledge of key issues/concepts/ethics in
discipline. Largely descriptive, with restricted synthesis of
existing scholarship and limited argument. Limited use of
scholarly conventions.
Limited research skills impede use of learning resources
and problem solving. Significant problems with
structure/accuracy in expression. Team/Practical/
Professional skills not yet secure. Weak academic/
intellectual skills. Limited use of scholarly conventions
20-29% Fails to achieve
module outcome(s)
related to this GLO.
Qualifying mark not
satisfied. No
compensation
available
Little evidence of knowledge of key issues/concepts/ethics
in discipline. Largely descriptive, with little synthesis of
existing scholarship and little evidence of argument. Little
evidence of use of scholarly conventions.
Little evidence of research skills, use of learning
resources and problem solving. Major problems with
structure/ accuracy in expression.
Team/Practical/Professional skills virtually absent. Very
weak academic/intellectual skills. Little evidence of use of
scholarly conventions
10-19%
Inadequate knowledge of key issues/concepts/ethics in
discipline. Wholly descriptive, with inadequate synthesis
of existing scholarship and inadequate argument.
Inadequate use of scholarly conventions.
Inadequate use of research skills, learning resources and
problem solving. Major problems with structure/accuracy
in expression. Team/Practical/Professional skills absent.
Extremely weak academic/intellectual skills. Inadequate
use of scholarly conventions
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1-9%
No evidence of knowledge of key issues/concepts/ethics in
discipline. Incoherent and completely but poorly
descriptive, with no evidence of synthesis of existing
scholarship and no argument whatsoever. No evidence of
use of scholarly conventions.
No evidence of use of research skills, learning resources
and problem solving. Incoherent structure/accuracy in
expression. Team/Practical/Professional skills nonexistent.
No evidence of academic/intellectual skills. No
evidence of use of scholarly conventions
0% Awarded for: (i) non-submission; (ii) dangerous practice and; (iii) in situations where the student fails to address the assignment
brief (eg: answers the wrong question) and/or related learning outcomes

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