Business Report in Corporare Finance
Business Report in Corporare Finance
You have to complete research on GPE (Great Portland Estates). It is a public listed company, so you can find all the relevant financial data like the financial statement, annual reports etc. on their official website or other relevant finance websites like Yahoo Finance, FT, etc.
A client of your consultancy company, Great Portland Estates (ie. GPE), has been offered a major property investment opportunity and would like you to identify the price they may be willing to pay for the freehold interest. The investment opportunity is a development scheme to build an Office Block of 1,600 square metres usable space at the University of Reading, where the remaining staff of Henley Management College should move from their current site in Henley on Thames. The purchase price (including legal expenses) would be at around £16 million.
Particularly your team has been asked to advise ONLY on issues surrounding the choice of discount rate, types of funding and financial structure (ie. you do not have to provide a valuation, but only to advise on the discount rate to be provided in the valuation). GPE are also trying to secure a bank loan corresponding to an LTV ratio (of both purchase price and additional expenses) either similar to the target capital structure or 20% greater than the target structure (ie. you have to add 20% to the target LTV).
Initially you should present an in-depth discussion of
– Sources of funding currently used by GPE and relative cost
– Alternative sources accessible by GPE and their likely impact on capital structure and cost of funding
[This section of the report will account for 30% of your assignment mark].
Subsequently you should critically present how the discount rate is determined, deriving intermediate (cost of debt and equity and target leverage) and final figures with appropriate financial models. Even if you use standard models, you may want to include some small variations from basic models presented in class, properly referencing the adjustments you intend to make and the reasons why you think they are appropriate.
In this part of your assignment, you should clearly state and support all your assumptions for the computation of cost of debt and equity and the capital structure, analysing both the current and historical structure of GPE in order to forecast the target debt-to-equity split they might want to achieve in the long-run.
More specifically, the assignment will include the calculation of 2 discount rates to be used for the project:
– The first one with an LTV equal to the target capital structure
– The second one with an LTV being 20% higher than the target structure
Please remember that as you change capital structure, the financial risk changes and hence the risk perceived by both equity and debt providers may change
[This section of the report will account for 60% of your assignment mark].
Finally, you should include an appropriate sensitivity analysis demonstrating the uncertainty attached to your assumptions, especially in the light of the current market condition. A particular attention will have to be given to the impact Brexit may have on their short- and long-term capital structure and cost of funding. You could also consider the opportunity of discussing how your conclusion might be affected under different market scenarios.
[This section of the report will account for 10% of your assignment mark].
Across the project as a whole, all your assumptions and critical reasoning should be clearly explained and you should clearly show how they affect the different numbers used in your models. Avoid descriptive annotation in your calculations – move the technical discussion to Appendices but make sure that references to the technical discussion appear in the main text).
Output
You should produce a professional report that will be presented to the board of directors of your company. Knowledge of pricing models and academic literature (through appropriate referencing system) should be shown along with an ability to apply it to an empirical analysis. Particularly the corporate finance issues should be presented through quantitative modelling, as well as critical thinking. Your report must include:
– Introduction
– Data sources and models
– Critical comments on both assumptions and results
– Discussion of the investment advice
– Conclusion
The substantive report must be of maximum 3,000 words (excluding appendices and references). Any detailed description of the technical / quantitative analysis and supplementary material should be included as an appendix, but it should also be possible to read the main report without needing to refer continuously to the appendix (ie. most important issues, basic concepts, assumptions and technical aspects should be explained in the main text). While the 3,000 words is a limit (and not only a guidance), you may decide to write a shorter report if you think it is appropriate. You should also include the relevant material (e.g. graphs, tables, etc.). Extra marks will not be granted simply for the amount of material included.
Assessment
The best answers will demonstrate:
– Evidence of understanding of underlying finance theory;
– Evidence of research, reading and effort;
– Identification of financial issues and their relevance in the current market condition;
– Ability to analyse the pricing in a rigorous, critical and quantitative manner;
– Identification of the main information sets needed for the empirical analysis;
– Ability to critically discuss the information to identify the most appropriate cost of capital;
– Production of a coherent professional report;
Focus on the following;
– Recognizing how to use appropriate discount rate for investment/valuation decisions
– Analysing capital structure and weighted average cost of capital of the company
– Applying discounted cash flows
During the lectures the client covered risk and returns (betas, capital asset pricing models), cost of equity, cost of debt, WACC, leverage and capital structures.
Structure:
It is not a compulsory structure and sequence of the report, but the assignment itself MUST include these parts (you can add more parts if you want):
1) Introduction
2) Data sources and models
3) Critical comments on both assumptions and results
4) Discussion of the investment advice
5) Conclusion
