|University||University College Dublin (UCD)|
|Subject||Finance for Non-Financial Managers|
Photoequip Ltd. manufactures camera tripods and other photographic equipment for sale to wholesale and retail traders. It is organized into several divisions, Professional Photography, Amateur Photography, and Consumer Photography. Professional Photography caters to the high-end professional user with discerning tastes, while the Amateur Photography division caters to the middle market of keen photographic enthusiasts. The Consumer division deals with all other areas, mainly the casual and tourist photography market.
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All these areas have been affected by the rise of mobile photography. Manufacturers of mobile phones have steadily increased the capabilities and sophistication of the cameras in their products to the extent that the camera is the biggest selling point for the product. In developing their strategy over the next 5 years, the directors and senior managers of Photoequip now see these products as a threat to their business. They believe that these products are no longer mobile phones with a camera, but cameras with a mobile phone. The improvement in the mobile product is evident in not just the hardware element, but also in the software that controls the camera that allows for ‘post-shot editing of the picture. The advances in mobile photography are such that even professional photographers in some circumstances will use these products.
Photoequip Ltd. has been monitoring the developments in its market and has noticed a steady decline in sales across all their divisions, but it is most evident in their amateur and consumer divisions. More recently this decline is also becoming evident in the professional division. It is believed that the release of the latest mobile phones with more sophisticated cameras is a key factor in driving this change. The company believes its existing products can be easily repurposed to address the needs of mobile
While this approach was being considered, an opportunity to acquire a company already in the business of manufacturing mobile photography accessories has been identified by a sub-committee of the board tasked with developing a strategy to deal with the decline in the business. This company, Apple-Ready Products Ltd., is already established in the mobile photographic accessories market, and following initial contact and discussions with this company, the board sub-committee has agreed with Apple-Ready Products Ltd. to a review of its business prior to any decision to proceed to more serious discussions on an acquisition.
Following the exchange of suitable non-disclosure agreements (NDAs), you have been instructed to carry out a financial analysis of the company and prepare a report on the feasibility of the acquisition for consideration by the board with a recommendation on the potential acquisition.
Apple-Ready Products’ financial year-end is 31st December each year and you have been given the financial statements for the years 2018, 2019. You have also been given the management accounts for 2020 which have not yet been audited or published and you have also been given the management’s budget for 2021. This budget has been prepared on the basis that manufacturing capacity is the limiting factor and all overhead expenditure lines are based on an incremental budgeting technique.
If the project were to proceed, the investment in Apple-Ready Products would be expected to be five times EBITDA which, based on the forecast for 2021, would amount to €380m. Photoequip also anticipates that it can borrow the funds to acquire Apple-Ready Products at an interest rate of 10% pa and it anticipates that inflation in the Eurozone will achieve 1% in the corning years. On a project such as this Photoequip would also expect a payback period of fewer than 4 years. Net cash inflows from the project that are anticipated over the first five years after the acquisition are forecast to be:
• Year 1. C90m
• Year 2, €105m
• Year 3, €120m
• Year 4,€125m
• Year 5, €105m
Prepare a report to the board of directors of Photoequip Ltd. that
1. Analyses and comments on the past performance of Apple-Ready Products between 2018 and 2020 and on the forecast for 2021. The commentary on the performance should be informed by appropriate ratio analysis.
2. Based on the forecast cash inflows provided, prepare an investment appraisal using discounted cash flow models and the non-discounted cashflow payback model of investment appraisal.
3. Recommends an appropriate budgeting technique to apply to the combined entity assuming the acquisition is to proceed in 2022. This recommendation should justify why the recommended technique is appropriate, and briefly discuss any alternative techniques stating why they have been discarded.
4. Explains why the forecast for FY 2020 based on management accounts might differ from the financial statements when they are published.
5. Based on your analysis, the report should make a clear recommendation to the board subcommittee as to whether Photoequip should proceed with the investment with a clear justification for your recommendation.
6. You may include any other elements in your Report that you feel may be relevant to the decision
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