Myer’s investment proposal 1 Company profile Myer is a newly listed Australian retail chain. An extract of its balance sheet as of 01/07/2015 is provided below: Issue: Raising new funds for new investment project Myer spotted a lucrative investment opportunity in the homeware segment of the industry. The details of the investment project are provided below. Its CEO is deciding whether to spend AUD 100 million to expand this division of the business. The firm has a large amount of retained earnings. However, it is also contemplating issuing either a 20-year bond or additional shares to finance its new project. A third option is to approach a bank and request for a term loan facility. The maturity of a term loan is typically 5 years. 3 The investment project The project’s life is expected to be 15 years. Myer will need to acquire a new factory for this purpose. The acquisition is expected to cost $100 million. The factory has an expected life of 20 years. The finance division estimates the sale value of the factory to be $23 million after 15 years. In addition, Myer also needs to redeploy an existing production line for the new product. The machine is current worth $1.5 million, and is expected to live for 20 years. The sale value of this machine is expected to be $450,000. Moreover, the current production using this machine yields 85,000 after-tax profits per year. Both the factory and the machine are to be liquidated at the end of the project’s life. The project is estimated to produce 346,000 units per year, at the estimated price of $650 per unit. The production cost is $245 per unit. Besides the production costs, the company needs to spend $96 million per year on marking and administration, as well as $1.4 million on logistics. In the process of making the decision, Myer hired expert consultants from the Boston Consulting Group, costing 540,000. Furthermore, inventory expected to cost 12% of yearly sales. Account receivables are expected to account for 15% of total sales, and account payables account for 21% of COGS. Besides the aforementioned estimates, the consultants provide worst- and best-case estimates for several key variables. The information is given below: Probabilities Table 1: Estimate of project’s sale price 4 Questions 4.1 Company profile Provide a background on Myer’s business, operations, industry etc etc. 4.2 Investment project Advise the CEO of Myer whether the company should go ahead with the investment proposal. In your answer, provide the following: a. Free cash flow analysis spreadsheet. Also include (1) the model’s inputs, (2) net working capital analysis, (3) depreciation analysis. Assume that the straight-line method is use for depreciation. b. Show the project’s NPV and IRR c. Break-even and sensitivity analyses. Comment on the riskiness of the project. d. Your recommendation. Also discuss any further considerations beyond the information provided so far. Provide an overview of the current conditions of the Australian financial markets. Give your suggestion of which form of finance would best suit Myer in this particular environment. Discuss another alternative type of finance that you think might be better than the aforementioned choices. In your answer, discuss the pros and cons of each alternative. Use GSBS6130 T3 2016 assignment relevant corporate finance theories and your assessment of the Australian financial markets to form your answers.
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