First we have to find an international company and export it to a new country, we chose Ikea and exporting it to Brazil since Brazil doesn’t have Ikea. Although they are going to open a store there but the date is still TBA. You first have to get the financial report and Cash flow of Ikea.
• Your task: setting up a new subsidiary in a new country, to be sold after 5 years of operation (management buy-out).
• Following steps:
I Analysis of financials (annual report) to get insight into profit and turnover
II Estimate share of market in order to get projected revenu
III Based on NPV calculate present value = required investment
IV Finance decision: how much equity, how much debt
V Raising equity capital: IPO
Net Present Value
• NPV is a capital budgeting decision criterion for an investment proposal, defined as the present value of its annual (after-tax) cash flows less the initial investment:
NPV = ∑ FVn [1 ∕ (1+i)ⁿ]
FVn = Future Value of cash flow in year n
i = discount rate (=cost of capital) 20%
n = number of years
calculating the NPV based on a series of projected future cash flows including a “terminal value”.
For your company chosen, I want you to deliver this NPV-number, based on:
· The projected cash flows for the next 5 years;
· A well-founded WACC as the discount rate used.
As explained, these projected cash flows are just “best guesses”, but still they have to be combined with sound reasoning:
1. What, approximately, is the total size of the market in your target country?
2. What is a realistic market share of your company at the start, and how could this develop during the next years?
3. What is, based on an industry-average or competitor’s number, the gross margin?
4. Remember: cash flow = net profit + depreciation.
• Hand in calculation of NPV (see mail)
• Find prices (%) for:
– Local debt financing for a bank loan (5 years)
– Local debt financing through issuing a corporate bond (5 years)
– Local debt financing through issuning a convertible bond (5 years)
How to raise equity
– IPO = issuance of ordinary shares
– Bank loan
– Issuance corporate bonds
– Convertible bonds
How to raise equity capital
– P/E ratio
– EPS = Earnings per share
Suppose company’s earnings €1,000.000
Required equity base €10,000,000
# shares issued 1,000,000
How to raise debt capital?
• Bank loan
– pledge (mortgage)
• Issuing corporate bond
– credit rating
• Issuing convertible bond
• A convertible bond is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features.
• Convertible bonds are most often issued by companies with a low credit rating and high growth potential.
• To compensate for having additional value through the option to convert the bond to stock, a convertible bond typically has a coupon rate lower than that of similar, non-convertible debt. The investor receives the potential upside of conversion into equity while protecting downside with cash flow from the coupon payments and the return of principal upon maturity.
• From the issuer’s perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. The advantage for companies of issuing convertible bonds is that, if the bonds are converted to stocks, companies’ debt vanishes. However, in exchange for the benefit of reduced interest payments, the value of shareholder’s equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.
How to go on? Well, based on your NPV-calculation up till now, the next step is to think about: how to raise the equity part in order to finance the new business?
As I explained last time, this is first of all a matter of: how (high) to decide on the IPO-price of your newly listed stock?
This comes down to relate net profit-numbers (1 year ahead) to EPS (Earnings Per Share) and P/E (Price/Earnings).
Example: suppose next year €1,000,000 profit is expected, and the number of shares to be issued (in order to secure the equity-side of finance) is 100,000 then EPS = 10
When P/E (derived from industry average) would be 14 then P for IPO = €140