International Financial Management
Coursework Assignment
General Instructions
You are the Finance Director of Next PLC, a UK based company with limited international operations. The company are primarily a fashion retailer operating a chain of stores across the UK which is supported by a mail order business called Next Directory. More information about the company can be found at www.next.co.uk and choosing “the company” from the bottom menu. Over recent years the company has undergone a successful revival, demonstrating strong sales growth and profitability, making good returns for shareholders. You are keen to build on this growth and are contemplating setting up some overseas retail operations. You will all be provided with a different scenario to consider, but the general guidelines will be the same
Required
You are required to write a report of no more than 3,000 words outlining the following
a) Whether or not the project should be undertaken
b) A strategy for the ongoing management of Forex risk which may arise as a result of such expansion should it go ahead
c) Advice on the organisational structure and financing arrangements which the company should adopt if it were to undertake such a project
Your report should be fully referenced, and your decisions should be backed up by appropriate calculations, and use real world data where appropriate
Table of Contents
1. Introduction
1.1. Background and scope of the report
1.2. Data collection and analysis method
1.3. Background and conditions of undertaking the project
1.4. Background of the country of investment – Australia
1.4.1. View on the economic situation
1.4.2. View on the relevant taxation
2. Financial appraisal
2.1. Net Present Value (NPV)
2.2. Payback Period (PP) & Discounted Payback Period (DPP) & Break Even Analysis
2.3. Accounting Rate of Return (ARR) & Internal Rate of Return (IRR)
3. Feasibility study
3.1. Financing
3.1.1. How to finance: equity vs. debt
3.1.2. Where to finance: UK vs. Australia vs. other countries
3.2. Risk Management
3.2.1. Risk identification
3.2.2. Management of Forex risk
3.3. Conclusive advice on the organisational and financial arrangements
3.3.1. Organisational arrangements
3.3.2. Financial arrangements
Project Goals and Scope
This report evaluates the financial viability and strategic feasibility of Next Plc expanding its operations by opening 150 new retail stores in Australia. The study examines investment indicators, assesses financing alternatives (equity vs. debt), and identifies necessary risk management strategies for the international expansion.
- Financial assessment using quantitative indicators like NPV, IRR, and Payback Period.
- Comparative analysis of equity financing from the UK versus local Australian debt financing.
- Evaluation of currency and inflation risks associated with the Australian market.
- Strategic recommendations regarding organizational structure (subsidiary vs. branch).
- Optimization of tax liabilities and gearing ratios to enhance project profitability.
Excerpt from the Book
3.1.1. How to finance: equity vs. debt
After the financial appraisal it became clear, that the choice between equity and Debt Financing has a crucial effect on the costs structure and on the discount rate, which at the end impact the NPV of the project (see Tables 1, 2 and 3).
Equity Financing means that the cash for the payment of the 375 A$ m setup cost comes from the UK assets of the Next Plc. The discount rate in this case is based on the Weighted Average Cost of Capital (WACC) and according to our calculations 7.6 % (see Appendix IV).
Debt Financing through the 5 years loan means that the upfront payable 5 years lease of the setup costs is completely leveraged. In this case there is no cash outflow from the Next Plc. Instead we have to repay the loan interest rate of ca. 4.8 % (see Appendix III) and the loan itself. The Total Loan Costs for the 150 shops are 429.5115375 A$ m, whereas the NPV of the Net Total Loan Costs is 289.3999563 A$ m (see Appendix III). Hence becomes clear that the time value of the debt financed initial investment at the beginning of the project is ca. 85.6 A$ m (22 %) lower than of the equity financed initial investment.
Tax minimisation becomes possible through the repayment of the loan, which decreases the remittable cash flows and thus the withholding tax. In the case of Equity Financing dividends are not tax deductible and the withholding tax payables are almost 73 A$ m, whereas the repayment of the loan almost halves the payables to 36.7 A$ m (Lumby & Jones, 2003; see Appendix III).
Summary of Chapters
1. Introduction: Outlines the scope of the assignment, research objectives, and background information on the Australian economic landscape relevant to the expansion.
2. Financial appraisal: Presents quantitative calculations including Net Present Value, Payback Periods, and rates of return to assess the project's profitability.
3. Feasibility study: Analyzes optimal financing strategies, addresses risk management, and provides recommendations for organizational and financial structures.
Keywords
Next Plc, Australia, Investment Project, Financial Appraisal, NPV, Debt Financing, Equity Financing, Forex Risk, Risk Management, Subsidiary, Taxation, WACC, Cash Flows, Capital Expenditure, International Expansion
Frequently Asked Questions
What is the primary purpose of this financial report?
The report serves to provide the management of Next Plc with a detailed financial analysis and strategic advice regarding the potential opening of 150 retail stores in Australia.
What are the central themes discussed in this study?
Key themes include investment feasibility, methods of financing, international taxation, foreign exchange risk management, and organizational structure selection.
What is the core research question?
The report seeks to determine whether the Australian investment project should be undertaken and which financial and organizational frameworks would yield the highest profitability and lowest risk.
Which scientific methods are utilized for the financial analysis?
The study employs standard financial appraisal tools such as Net Present Value (NPV), Payback Period (PP), Discounted Payback Period (DPP), Accounting Rate of Return (ARR), and Internal Rate of Return (IRR).
What is covered in the main body of the report?
The main body covers the economic background of Australia, a comparative financial appraisal of equity versus debt, and a feasibility study focusing on risk management and structure.
Which keywords best characterize this document?
The report is characterized by terms such as Next Plc, Financial Appraisal, Debt Financing, Forex Risk, and International Expansion.
Why is a subsidiary structure recommended over a branch?
A subsidiary is recommended because it limits liability risks for the parent company and offers specific tax advantages under the double tax treaty.
How does debt financing compare to equity financing for this project?
Debt financing is shown to deliver a higher NPV and offers significant tax advantages through interest deductibility, despite higher initial interest rates.
- Arbeit zitieren
- BA (Hons) Artur Gleyberman (Autor:in), 2009, Financial Report - Next Plc, München, GRIN Verlag, https://www.grin.com/document/143373
