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SIFM 1. Crestlee Plc. Crestlee Plc’s summarised balance sheet is shown below. £m Financed by: Ordinary share price 380p The company currently has a Beta of 1.3. The stock market has an expected return of 12%, and government securities currently offer a return of 5%. Crestlee’s Debenture holders requires and interest rate of 3% over the risk free rate. Corporation tax is currently at 30%. Calculate Crestlee’s cost of capital. It is anticipated that for an investment of D$2M, sales for the next 4 years will be D$10M, growing at 10% p.a. Gross margin is expected to be 40%, and local overheads will be approximately D$1M p.a. These operating costs will increase by the local rate of inflation, currently 5%. The local economy is stable, and Corporation tax is 30%, and withholding tax, on all remittances outside the country is 10%. Dotty Land has a double tax treaty with the UK. Capital allowances are available on capital investment at 25% p.a on a reducing balance basis. It is anticipated that after 4 years the assets in Nice Shirt Dotty co will be sold for D$0.5M. Head office is debating how to finance the project, and is interested to know if it will make any difference to the viability of the project. They can finance it out of reserves from the UK, where the current cost of Capital 8%, and they would not require a further risk premium for this investment. All excess funds would be transferred to the UK at the end of each year. Alternatively, they could take out a loan in Dotty Land for D$1.5M (the remaining funds coming from Head office)at an interest rate of 5%, with the capital repayable in equal instalments in years 2,3, and 4. The interest on the loan would be allowable for tax, but local financing laws would mean that no profits could be repatriated until http://www.ukassignment.org/ end of the project, when all cash would be sent back to the UK and subject to withholding tax). You are required to advise on the viability of the project, and which financing method they should choose.#p#分页标题#e# Currently Inflation in the UK is 3% and inflation in Argentina is 6%. and this is not expected to change. The current exchange rate of £ v Argentinean peso(APs) is 6.1APs/ £. Corporation tax is payable in Argentina at 35%, and withholding tax is payable at 10% on all remittances This is the same for a subsidiary or a branch. UK corporation tax is 28%.. The UK has a double tax treaty with Argentina. Next can borrow in the UK at 5% and Argentina at 6%, with flexible repayments. The Beta is 0.9. and market value is £3,700M. It currently has debt of £550m. The risk free rate in the UK is 3% and the market risk premium is 6% It is estimated that each shop will cost approximately 5M APs to set up, and that they would open 100 shops over the course of two years (spread evenly over that time). Each shop opening cost includes fixtures and fittings of 1M APs, which is allowable for tax on a straight-line basis of 20% per annum. The other 4M APs will be spent on a 5-year lease. Market research costing £300,000 has indicated that in the first year, each shop will expect sales of 6M APs. Each shop sales will grow at 20% in the second year and 15% per annum there after (including the effect of inflation). Gross profit margins are expected to be 50% based on current prices and exchange rates. 50% of goods will be sourced in the Argentina, and the remaining 50% will be supplied from the UK via Next head office. Local operating costs of 1M APs per annum will be incurred. These costs are expected to move in line with local inflation. In addition, monitoring and management costs of £3m per annum to cover all shops will also be incurred in the UK in relation to this venture. Any excess funds from the Argentinean stores will be returned to the UK at the end of the year. Advise Next PLC on financial ground whether this is a worthwhile project and whether they should finance it from the UK or via Debt in Argentina which would be repaid as soon as possible
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