Academic Year 2021/22 Module Code: BFK407 Module Name: International Business Finance Module
Leader: Monina Hurl
Coursework Title: Individual Portfolio.
Task Details/Description: You are required to provide a portfolio which brings together four separate elements as follows: Task Number Task Description Coursework % Mark Module Marks Word Limit 1 Foreign Exchange Risk and Mitigation 25 22.5 500 2 The Cost of Capital 25 22.5 500 3 Investment Appraisal 35 31.5 500 4 Reflective Piece 15 13.5 1,000 100 90 2,500 The remaining 10% of the module marks are from the multiple-choice questions at the end of each unit.
Module Learning Outcomes Assessed:
1. Identify and analyse the financial problems faced by firms in their financial and economic environments
2. Use financial tools to provide effective solutions to organisational challenges
3. Critically evaluate financial theory in the identification of effective solutions to organisational challenges
COURSEWORK ASSIGNMENT
Presentation Requirements: Word Count: See first page for detail on individual tasks. For ALL tasks combined: 2500 words, maximum up to +10%. Font Size: 11 (Arial) Line Spacing: 1.5
Submission Date & Time: Monday 20th December 2021 at 12:00 noon (UK time)
Assessment Weighting for the Module: This assessment accounts for 90% of the total module mark at the first sitting and 100% of the total module marking on resit or deferral.
Assessment Criteria Task Criteria 1 Foreign Exchange Risk. Provide accurate answers marks will not be awarded unless supporting calculations are shown. For discussion: marks awarded for relevance to the topic, ability to interpret the topic in accurate and insightful ways and clarity of communication. 2 Cost of Capital. Please see also marking scheme: marks awarded for relevance to the topic, ability to interpret the topic in accurate and insightful ways and clarity of communication. 3 Provide accurate answers, marks will not be awarded unless supporting calculations are shown. For discussion: marks awarded for relevance to the topic, ability to interpret the topic in accurate and insightful ways and clarity of communication. 4 This requires you to draw on materials and discussions covered in the Sources of Finance area of the module and academic studies relevant to the subject area. Academic referencing should be used where applicable. The word limit for this task is a maximum of 1,000 words.
Ethical Requirements Primary data is not required to be collected so there is no ethical clearance required.
Essential Reading for Coursework Task (please also refer to the other material on Blackboard): Please note that this is not intended as an exhaustive or definitive list of readings for this piece of coursework. Instead, the articles/chapters listed below should be viewed as core or essential readings that may act as a start point as you prepare to tackle this assignment: 1. Recommended text: Watson, D. and Head, A. (2019) 8th Edition. Corporate Finance Principles and Practice. 2. Arnold, G and Lewis D.S.(2019) 5th Edition, Corporate Financial Management. Pearson. 3. Economist Intelligence Unit Report (2014). Navigating the Waters of Foreign Exchange and International Payments. 4. Financial Press articles e.g. UK Broadsheets such as The Financial Times, The times, The Guardian and The Independent and magazines such as The Economist
Task 1: XYZ Plc is a company that is expanding into the overseas market, after having dealt solely with UK suppliers and customers for many years. The Financial Director of XYZ Plc has not dealt with currencies other than UK Sterling within her role, but knows that you, as a Financial Assistant, have been studying foreign exchange risk. She has asked you to bring her up to speed on foreign exchange derivatives.
Required: a) Produce a set of business notes, explaining how both Forwards and Futures work, and their similarities and differences. You should include a critique of the parity theories in their relation to Forward rates. (There is a word limit of 500 words for this part a of the question.) (10 marks)
The company’s first major overseas customer is based in France. XYZ Plc is due to receive 1 million euros in 5 months’ time from them. Today is 1st January.
Required: b) Explain to the Finance Director how the individual steps of a Money Market Hedge would eliminate the risk of foreign exchange movement over the next 5 months. (There is a word limit of 300 words for this part a of the question.)
(5 marks)
The following information is available to XYZ Plc: Spot rate €1.07 – €1.12 Forward 5 months €1.09 – €1.13 Annual Interest rates: Borrow Invest UK Sterling 8% 3% Euro 9% 4%
Required: c) Calculate the sterling receipt under a Money Market Hedge and Forward for the 1 million Euros. Would the Finance Director choose this method of hedging or a Forward Contract? (5 marks)
You have also raised the possibility of a Futures contract instead, and have provided the following information to the Finance Director: Spot rate €1.07 – €1.12 Futures contract size £125,000 Futures rates June €1.1136 September €1.1245
Required: d) Discuss how the steps involved in setting up a Futures contract eliminate the risk of Foreign Exchange rates (Ignore the payment of a margin. The marks are for discussion and it is not necessary to calculate the Futures outcome). (5 marks)
Total 25 marks
Task 2:
Consign Plc is considering expanding and therefore wants to invest in a new piece of machinery costing £1 million. In order to do this, it will take out a long term bank loan at an interest rate of 8%. Ignore issue or admin costs.
Currently it has 2 million shares in issue at a share price of £3.20. It has a beta value of 1.126. The risk free rate of return is 4% and the market premium is 7%.
It also has 500,000 6% preference shares, with a nominal value of £1 and a share price of £0.86.
Its 7% irredeemable bond has a book value of £2 million, which is at par.
The current tax rate is 20%.
Requirements:
a) Calculate the weighted average cost of capital (WACC) of Consign Plc in the following circumstances: i) Before the new bank loan is issued; (7 marks) ii) After the new bank loan is issued. (3 marks) (10 marks)
Below is an excerpt from the Financial Times 15th July 2021:
b) Critically discuss what the value of the beta means for the cost of equity, the overall cost of capital and therefore the value of equity for Tesco Plc. (There is a word limit of 500 words for this part a of the question.) (15 marks)
Total 25 marks
Task 3:
Beval Ltd is interested in expanding its products and is interested in buying a new piece of machinery for £500,000. It has estimated that in the first year it should be able to manufacture 50,000 units at a selling price of £10 per unit; in the second year it should increase to 55,000 units at a selling price of £10.50 per unit; the third year 52,000 units at a selling price of £9 per unit; and in the final year it would be 40,000 units at a selling price of £8 per unit. In the first year the variable costs are estimated to be £5 per unit, inflating at 3% per annum after that. Fixed costs are £50,000 in year 1, increasing at 2% per annum. Corporation tax is at 19% payable in the year. The residual value of the machinery should be £100,000 at year 4 prices. Cost of capital is 9%.
a) Calculate the Net Present Value (NPV) of the investment to the nearest £1,000; its Internal Rate of Return (IRR); its Payback; and its Accounting Rate of Return (ARR) based on average investment. Should the company proceed with the investment on financial grounds? (22 marks)
b) Compile a report on the superiority of Net Present Value (NPV) over other investment appraisal techniques. (13 marks) Total 35 marks
Task 4:
The Finance Director of Abex Plc is looking at raising £1 million for a new investment. She is unsure whether to raise the £1 million needed via debt or equity. Create a set of business notes discussing the differences between the two sources of finance, from the perspective of the company. 15 marks
