Your Task Question 1

You work as assistant to the Chief Financial Officer ("CFO") of Delicious Candies (the "Company"), which produces a range of sweets in the United Kingdom ("UK") and exports them to continental Europe (please disregard any impact of the foreseen exit of the UK from the European Union ("EU")).

The CFO asked you to evaluate the investment in a new production equipment (the "Project") recently discussed by Company's top management and prepare a report. The purpose of such investment would be to increase production capabilities in light of strong indications from the market of growing demand in multiple countries that the Company serves.

The investment cost of such equipment, including set-up, is GBP 2,800,000 (all payable up-front); the Company expects to use it for five years and then to re-sell it to a smaller producer at 25% of the original value. Maintenance costs are estimated at 4% of the investment cost in year 1 (i.e. 12 months after the purchase of the equipment) and then to grow annually by further 2% from year 2 to year 5. The increase in net cash profit is estimated at GBP 600,000 in year 1, then growing annually by 20% from year 2 to year 5 (that reflects the need to enhance year after year Company's distribution capabilities in certain countries of continental Europe).

Required:

You are asked to include the following in your report to the CFO:

i) Cash flow, with timeline, reflecting all cash inflows and outflows of the Project;

ii) Assuming that Company's required rate of return is 8%, calculation of the project's NPV and assessment of whether the Project should be undertaken or not;

iii) Analysis of the assumptions made for the Project (provided above), highlighting what risk each of them entails (in other words: what could go wrong), ideally with a sensitivity analysis.

iv) Recommendation to the CFO in case another investment opportunity is considered by the Company and has an NPV similar to the Project (value of NPV: undisclosed), under the assumption that Company's financial resources for any investment are limited;

v) Change (if any) in the answers to i), ii) and iii) above, should Company's required rate of return become 12% in light of higher returns demanded by Company's top management.

Note:
Calculations are required for i), ii), iii) and v). Calculations are not required for iv), however an example may be included to help support the answer.

Question 2

You are an investment banker advising Blue Sky (the "Company"), which manufactures and sells solar panels. The Company has common stock outstanding i) with market price currently at EUR 20 per share and ii) for which the last dividend paid was EUR 0.5 per share with analysts foreseeing an increase by 35% per year going forward. The expected risk-free interest rate is 2%, whereas the expected market premium is 5%. The beta of Company's common stock is 1.2.

Required:

The Company asked you to assess the following:

i) Cost of equity using the dividend valuation model vs the capital asset pricing model;
The Company is evaluating its cost of capital under alternative financing solutions. It expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock at EUR 22 a share, with an EUR 1.5 dividend per share. Company's marginal tax rate is 35%. The Company needs your advice to address the following:

ii) On the basis of the data above: cost of debt; cost of common stock; cost of preferred stock;
iii) If Company raises new capital using 55% debt, 30% common stock, 15% preferred stock: what is its WACC?
iv) And what if it raises new capital using 35% debt, 50% preferred stock, and 15% preferred stock? Comment the difference in WACC under iii) and iv).

Question 3

Tesla (the "Company") is a U.S.A.-based global automotive and energy company. It specialises in manufacturing electric cars.

His iconic founder, Elon Musk, has relentlessly pushed for the Company to achieve sustainable net profits by ramping up production of its car models, albeit with a number of setbacks. The evolution of its market capitalisation since inception testifies the belief of investors in its chances to succeed (rapid growth in 2013 - 2015 and again in 2017), together with considerable uncertainty over the sustainability of its business model (lateral movement in 2016 as well as in 2018).

Given Musk's at times erratic behaviour and questions about Company's financial health as well as ability to build cars at larger scale, Tesla may be at an inflection point.

Required:

Critically evaluate the competitive position of Tesla against the traditional car manufacturers (please pick: one between General Motors and Ford; ii) one between Volkswagen and Renault). Is Tesla going to stay independent or will it ultimately have to merge with / be acquired by a larger group? Justify your view.

If you believe that it will stay independent, what is your assessment of its current capital structure and how sustainable is it in the long term (for example: need for capital injection to fund investments)?

Instead, if you believe that Tesla will have to merge with / be acquired by a larger group, how such a transaction could be financed (assume that Tesla is effectively acquired by a larger company which will get control over it) and what benefits could derive to Tesla under that scenario (for example: lower WACC?).