Provide recommendations with respect to the buy-out request from the Director who wants to withdraw from the business
The table below reports the gross operating income (in million euros) for all the business lines of a bank, over the last three years. Compute the bank’s capital charge against operational risk under both the basic indicator and the standardized approach of Basel II. Briefly explain the causes underlying the difference between the two results.
|Payments and settlements||10||15||40|
Please rephrase to easer or add calculation the following answer:
Question: Provide recommendations with respect to the buy-out request from the Director who wants to withdraw from the business (is his request fair, or what alternative would be more appropriate)
Answer: Recommendations with respect to the buy-out request from the Director
The Director interested in selling his equity is asking for a 40% premium on the current book value of 25% of his share of equity. Effectively, he is asking for a premium of 40% * 25% i.e. 10% premium.
Given the profitability that is visible from the BS and P&L, this is a reasonable request. The buyer of these shares would stand to gain from this acquisition given the long-term prospects of growth that is being concerned.
This is a case study. CASE: As an up and coming financial analysis in the specialist corporate advisory firm High-End Strategy Ltd, the Managing Partner has asked you to prepare briefing notes for a forthcoming meeting with a new client. This client is Higher Health Precision Tools Pty Ltd is (HHTP) and is currently a small engineering company that has an emerging reputation as a specialist tooling provider for health equipment manufacturers. HHTP was started 7 years ago by its managing director Hiro Suzuki and is set up as private limited liability corporation. HTTP’s latest audited income statement and balance sheet are attached, along with forecasts for the current year. HHTP has 4 directors.
The directors include Hiro who also acts as Chairman, and who provided the original patents and ideas that established the business, and three non-executive directors who provided the initial equity capital (33% each)). The four directors hold equal shares in the company (Hiro received his shares based on providing the patents). The company employs around 28 people – 25 in the production processes and 3 managers (including Hiro as Managing Director, a Production Manager, and a Finance Manager). They lease a small but high-quality facility in western Tokyo (a building of 1,450 square meters). With the expected expansion of health demand in the coming decades, HHTP had a recent strategic planning retreat in which the senior management team has discussed becoming more aggressive to take advantage of new activities they see developing in the coming years. Hiro has had discussions with a number of different health technology firms about providing the tooling product for their operations and they have been very positive. Hiro-san has proposed that the company has significant opportunities becoming available which can lead to a significant expansion of operations (but will also require a significant increase in operations capability). While individual projects will be assessed as they come about, he believes that some fundamental preparatory steps need to be undertaken now. These steps would set the framework to be able to respond to the opportunities as they evolve. Specifically, Hiro-san believes that:
• The company will have the opportunity to pick up an additional 3 or 4 projects a year, averaging between ¥70 and 100 million in turnover per project.
• Should HHTP proceed with the projects, it will need a substantial increase in investment capital to fund new equipment, and an increase in building space (the current 1,450 square meters will be insufficient). In terms of plant and equipment, they need to double or even triple the current machinery levels
• Given the growth in the health industry, and in the “value” inherent in the companies patented processes and products, there will be even more opportunities into the future Hiro-san has done some preliminary work on alternative properties and has identified 2 preliminary options: