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Laurentian Bakeries Case Study
Laurentian Bakeries Case Study
Assignment Instructions: Assignment Reference BAF/StudentNumber/Jan21/A3 Due Date Within seven days after the face to face workshop Length 15 min Weighting 25% of the course File Format PowerPoint or PDF Submission Details Blackboard – instructions provided on Blackboard Assignment Question:
Read the case study ‘Laurentian Bakeries’ and answer the following questions:
(i) What are the key items to keep in mind when determining the free cash flows for investment analysis?
(ii) Calculate the weighted average cost of capital (WACC) for Laurentian Bakeries. How does the capital structure of a firm/project affect the WACC? (iii) Produce a projected capital budgeting free cash flow statement for the expansion of the company’s frozen pizza plant in Winnipeg.
You can make the following assumptions: the project will have a life of 10 years, the corporate tax rate will stay at 38.5% per annum throughout the life of the project, inflation rate will be 4% per annum and there will be no salvage value at the end of the life of the project. Using your free cash flow statement, calculate the NPV, Payback, and IRR of the project.
(iv) Without making any calculations, identify and discuss the benefits and risks of making the investment (i.e. expansion of the frozen pizza plant).
(v) As Danielle Knowles, what recommendation would you make concerning the Winnipeg plant expansion, and why?
Barta PLC is evaluating an investment in Sweden
Barta PLC is evaluating an investment in Sweden
Barta PLC is evaluating an investment in Sweden. This will involve building manufacturing capacity at a cost of 30 mln Swedish Krona. This will have a 3-year project life. Cash flows are expected to be 15 mil Swedish Krona annually.
The current spot exchange rate is 11.90 SK per £1. Inflation in UK is 2% and it is 5% in Sweden.
Barta PLC requires 10% rate of return on similar investment in UK £.
Required:
1) Calculate NPV of the investment opportunity using UK£ (15 marks)
2) Advise if Barta PLC should undertake this investment. Comment on other matters that should be considered.
Following the international expansion Barta PLC has grown into a successful multinational company
Following the international expansion Barta PLC has grown into a successful multinational company
Following the international expansion Barta PLC has grown into a successful multinational company with subsidiaries in various countries and territories including Barbados, Grenada, the US, Italy, etc. The company operates a centralised treasury management system from London.
On 1st March 2021, US subsidiary of Barta PLC signs a contract to sell two batches of 5G towers to French company Nice ltd for €10,000,000, payable €5,000,000 on 1st June and €5,000,000 on 1st September 2025. The US subsidiary’s finance director is considering hedging options to manage exposure to exchange rate risk. Current spot rate is $1.10/€.
Three hedging alternatives were possible for the US subsidiary:
a) Hedge in forward market. The 3-month forward exchange quote was $1.1060/€, the 6-month quote was $1.1130/€, the 9-month quote was $1.1134/€, and the 12-month quote was $1.1138/€.
b) Hedge in the money market. The company could borrow euros from the Munich branch of HSBC at 8%
c) Hedge with foreign currency options. June put options were available at strike price of $1.1500/€ for a premium of 2% and September put options were available for the same strike price of $1.1500/€ at a premium of 1.2%. June call options were available at strike price of $1.1500/€ for a premium of 3% per contract, September call options were available at strike price of $1.1500/€ for a premium of 2.6%.
The US subsidiary estimates its cost of capital to be 12%.
Required:
1) Calculate the expected US$ value of the contract based on:
a) Forward contract
b) Money market hedge
c) Foreign currency options
2) Advise US subsidiary of Barta PLC on the hedging strategy that should be adopted for the contract with Nice Ltd based on your analysis.