Posted: May 1st, 2015

STRATEGIC FINANCIAL DECISION AND ANALYSIS

STRATEGIC FINANCIAL DECISION AND ANALYSIS

:
The Finance; Investment; Dividend and Risk Management Strategy

You are a member of the Board of UK OIL Plc whose role is to make strategic and operational decisions.

Throughout the last few months, your Finance Department have been considering a number of issues, detailed on the attached.

Next week (week commencing 12th January) they will present their findings.

Following their presentation, your task is to submit a report justifying your decisions and highlighting the risks and considerations you have in making these decisions.

Which machine (if any) should you buy ?
British Oil Machinery who have quoted £3,000,000 OR
Munchen Machinery Germany who have quoted of €3,400,000 supported by appropriate international guarantees.

How should you finance the purchase ?
Equity (Shares) or Debt finance or a Combination
If Debt, what type of debt ?
Loan or Bond
Fixed or Floating Rate
Sterling or Foreign Currency

The company’s Risk Management (Hedging) Strategy

The company’s Dividend Policy ?

( barry in mind the latest exchange rate and take the decision based on the excel sheet )

(( PART 2 ))
PART 2: Mergers & Acquisitions

Stage 1 (30%)

UK Oil Plc have been performing well and are now considering their growth strategy.

One possibility, is the acquisition of Arabic Oil Supplies Abu Dhabi, though you may wish to recommend alternative growth strategies

To support you:
The Finance Department have been evaluating the financial implications, costs, benefit etc and will present their findings during the Week Commencing 16th February 2015 with regard to:
method of finance
transfer price
location and operation of Group Treasury Department which may be possible/advantageous post-acquisition

Following their presentation, your task is to submit a report justifying your decisions and highlighting the risks and considerations you have in making these decisions.

Your growth strategy, include and evaluation of the proposed acquisition and alternative strategies
( apply Ansof matrix )

The Method of Financing the Acquisition
( how are you going to finance the business )
How should you finance the purchase ?
Equity (Shares) or Debt finance or a Combination
If Debt, what type of debt ?
Loan or Bond
Fixed or Floating Rate
Sterling or Foreign Currency

Location and Operation of the Treasury Department
( if it’s in UAE there will be only 30% return to UK . if it’s in Uk based calculate the tax )
Tax Management, including consideration of Transfer Pricing, Remittance Restrictions and Corporate Social Responsibility.

(( PART 2 STAGE 1 – LIQUIDATION ))
Unfortunately the acquisition which (you can now assume) was financed by issuing sterling debt equivalent to $20,000,000, proved disastrous and the company are now facing the possibility of administration or even liquidation.

Present an outline of how funds would be distributed in the event of liquidation and evaluate the position of each class of creditor including the various shareholders assuming:
Non Current Assets realize £140,000,000
Current Assets include:
Bad Stock £5,000,000
Bad Debts £10,000,000
Liquidation Fees of £500,000

Consolidated Balance Sheet of UK Oil Group as at 31.12.20×5

£000 £ 000
Non Current Assets £ 162,000
Goodwill £ 8,000
Current Assets £ 55,000
Less Current Liabilities £ 50,000 £ 5,000
£ 175,000
Less Non Current Liabilities
Loans (secured) £ 70,000 £ 105,000

Share Capital – 50p Ordinary Shares £ 50,000
Share Capital – 5% £1 preference shares £ 30,000
Share Premium £ 20,000
Retained Profits £ 5,000
£ 105,000

RATIOS NOW Rights Issue Debt Share Exchange

Number of Shares 100,000,000 110,000,000 100,000,000 110,000,000
All UK UK & Arabic

Annual Return 19,000,000 20,513,158 20,513,158 20,513,158
Ordinary Sharesholders Assuming NO increase in returns

Book Value £110,600,000 120,534,210.53 105,534,210.53 118,692,105.26

Debt £50,000,000 £50,000,000 £63,157,895 £50,000,000
Increase

EPS 0.19 0.1865 0.2051 0.1865
But future debt interest

Market Price 2.20 2.16 2.38 2.16
Assuming sames PE & No Growth in Earnings

Market Value 220000000 237520775.6 237520775.6 237520775.6
NO difference BUT in practice ????

PE Ratio 11.58 11.58 11.58 11.58
Assuming same multiple

Gearing Ratio 2.212 2.411 1.671 2.374
Increase

Debt % 31.13% 29.32% 37.44% 29.64%
Increase

Rights Issue Debt Share Exchange

Existing Shares 100,000,000
New Issue 1 for 10 10,000,000
Price per Share £1.50
£ Raised £15,000,000
Exchange Rate 1.52
$ Raised $22,800,000

$ £
Cost of AO 20,000,000 £13,157,895
AO Value Acquired 12,300,000 £8,092,105
Goodwill 7,700,000 £5,065,789

Book Value of the Business
£ £ £
Pre Acq Value of UK £110,600,000 £110,600,000 £110,600,000
Cash Received £15,000,000 £13,157,895 0
Cash to AO £13,157,895 £13,157,895 0 Earnings Pre Acquisition
AO Assets Acquired £8,092,105 £8,092,105 £8,092,105 UK £19,000,000.00
Post Acq Book Value £120,534,211 £13,157,895 Loan Arabic Oil ,300,000.00 £1,513,157.89
£105,534,211 £118,692,105 Total £20,513,157.89

Number of Shares % Pre Post Earnings
Exisiting 100,000,000 100,000,000 UK Shareholders 100,000,000 90.91 £100,545,454.55 £107,901,913.88 £18,648,325.36
New 1 for 10 10,000,000 0 Arabic Shareholders 10,000,000 9.09 £10,054,545.45 £10,790,191.39 £1,864,832.54
110,000,000 100,000,000 110,000,000 £110,600,000.00 £118,692,105.26 £20,513,157.89

Book Value of 1 Share
Pre £1.1060 £1.1060 £1.1060
Post £1.0958 £1.0553 £1.0790

Consider AFRAN, Quicksilver