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FINA 8004: Sam and Annabelle Burns Own and Manage the Firm Hair Care Ltd: Corporate Finance Assignment, UCC

University University College Cork (UCC)
Subject FINA 8004: Corporate Finance

CASE STUDY – HAIR CARE LIMITED

Sam and Annabelle Burns own and manage the firm Hair Care Ltd, based in Cork, Ireland. The firm was formed in 2002 when Sam and his wife re-mortgaged their house and borrowed heavily from the bank to buy out the company from a conglomerate organization who were disposing of non-core businesses.  Sam had been a senior salesman with the hair-care subsidiary of the conglomerate.  This subsidiary bought hair care products, mainly small value items and consumables – scissors, brushes, combs, hair nets, curlers and hair driers, from manufacturers and resold them to wholesalers and large retail chemist chains within Ireland, mainly for use in hairdressing salons.  The business has continued in this direction.

Haircare Limited’s suppliers/manufacturers are almost entirely non-Irish suppliers, many based in Hong Kong but with manufacturing facilities in mainland China, Taiwan, and Malaysia.  However, about 30% of the products are sourced in Europe – Italy, and Germany predominantly. Sam and Annabelle are concerned about the long term reliability of their supply chain given the difficulties they have experienced during the COVID 19 outbreak.

PREDICTED 3 YEAR FX RATES   
EURO TO HONG KONG DOLLAR ONE EURO EQUALS
CURRENT and 30/6/2020 10 HK $
31/03/2021 12 HK $
31/03/2022 15 HK $
31/03/2023 20 HK $

The interest-only mortgage taken out to finance the purchase of the freehold will have to be repaid in the next year. Haircare Limited’s year-end is 31st March and a summary of the company’s most recent Statement of Financial Position reads as follows:

HAIRCARE LTD – SUMMARY SOFP AS AT 31 MARCH 2020
STATEMENT OF FINANCIAL POSITION 2019
€MS
NON CURRENT ASSETS – FREEHOLD LAND & BUILDINGS 22560
PLANT & EQUIPMENT 2320
FIXTURES AND FITTINGS 320
INVENTORIES 1258
RECEIVABLES 986
CASH 3000
PAYABLES (2896)
OTHER LIABILITIES 0
7% INTEREST ONLY MORTGAGE (TO BE REPAID 30/6/20) (10000)
NET ASSETS 17548
€4 ORDINARY SHARES 10000
€2 4% PREFERENCE SHARES 5000
RETAINED PROFITS 2548
TOTAL FUNDING 17548

The sourcing of the funding for the next five years is of concern to Sam and Annabelle and they wish to take advice from a corporate finance expert in this area.

Required:

Acting as an advisor to Hair Care Limited, prepare a report that;

  • Presents a projected funding requirement and source of a funding proposal for Haircare Limited for 2020 to 2025.
  • Explains and illustrates (using projections) the foreign currency risk facing Haircare Limited by the proposed acquisition of HK INC. and suggest an appropriate hedging strategy therefor
  • Compares the proposed competing for equity investments in terms of risk and return and market efficiency and advise on your preferred investment for Q3 2020
  • Advises on the optimum entry pricing point for the hairdryer if the following decision rules are used (please show all detailed workings and pay-off matrix for the 9 potential financial outcomes): Minimax, Maximin, and Expected value.
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