Paper instructions:

Cook PLC is planning to make a take-over bid for Clarke PLC. The Company has approached you as a management consultant and have asked that you calculate the current share price of Clarke PLC based on the following parameters using shareholder value analysis.

Cook PLC is planning to make a take-over bid for Clarke PLC. The Company has approached you as a management consultant and have asked that you calculate the current share price of Clarke PLC based on the following parameters using shareholder value analysis.

Key value drivers for Clarke PLC.

Sales 2013(yr 0) £400,000,000

Forecast period 5 years. Any longer is considered too uncertain

Sales growth rate per annum 4%. This is based on a revised pricing strategy

Operating profit margin 7%. Increasing by 2% per annum for the next 5 years

Incremental fixed investment 6% Decreasing by 1% per year

Incremental working capital 8% Decreasing by 1% per year

Corporation tax rate 30%. This is expected to remain constant for the next 5 years.

Sales 2013(yr 0) £400,000,000

Forecast period 5 years. Any longer is considered too uncertain

Sales growth rate per annum 4%. This is based on a revised pricing strategy

Operating profit margin 7%. Increasing by 2% per annum for the next 5 years

Incremental fixed investment 6% Decreasing by 1% per year

Incremental working capital 8% Decreasing by 1% per year

Corporation tax rate 30%. This is expected to remain constant for the next 5 years.

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Target Capital Structure 70% Equity

30% Debt

Gross cost of debt 4%

Treasury bills rate 1%

FTSE index 6% (Current total market returns)

Estimated Beta factor 1.1

Total existing debt £500,000,000

Total number of shares 1,000,000,000

Target Capital Structure 70% Equity

30% Debt

Gross cost of debt 4%

Treasury bills rate 1%

FTSE index 6% (Current total market returns)

Estimated Beta factor 1.1

Total existing debt £500,000,000

Total number of shares 1,000,000,000

a) Using SVA, calculate the estimated current share price of Clarke PLC on a spreadsheet. (25 marks)

b) From the following mutually exclusive scenarios using a spreadsheet, measure and comment upon each one’s sensitivity to the share price.

• Sales growth rate

• Corporation tax rate changes

• Profit margin remains the same (15 marks)

• Corporation tax rate changes

• Profit margin remains the same (15 marks)

c) It has been argued that SVA is flawed in that there are too many steps in the model and too many variables attached to them. Analyse this statement and in doing so evaluate the need for each step in the model. (35 marks)

d) Analyse how genetic algorithms may improve managerial decision-making, highlighting both the benefits and weaknesses they possess. (25 marks)

This project will consist of a word-processed report (with a spreadsheet on a virus-free CD attached) and is to be uploaded to blackboard as per the University instructions by Thursday March 20th 2014.

This project will consist of a word-processed report (with a spreadsheet on a virus-free CD attached) and is to be uploaded to blackboard as per the University instructions by Thursday March 20th 2014.