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 31.12.20x5 £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    $2,300,000.00    £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