Learning outcomes:
- A critical understanding of statistical methods used by managers to reduce data and estimate the risk of specific industry projects
- Interpret and communicate statistical information and financial results to support strategic decisions
- Independently identify, collect, record, manage and analyse financial and statistical data using appropriate methods
Case study A:
Land Securities Group plc (see www.landsecurities.com) are the largest commercial property company in the UK and a member of the FTSE 100. Founded in 1944, they now own and manage more than 26 million square feet of property, from shopping centres to London offices.
You are provided with the following information:
1. The company website: www.landsecurities.com
2. Yahoo finance: https://uk.finance.yahoo.com/q?s=LAND.L
3. Historical prices for the company https://uk.finance.yahoo.com/q/hp?s=LAND.L
Case study B:
PKB Ltd is embarking on an expansionary phase, and is planning to invest in upgrading its manufacturing capacity.
The company manufactures a range of household tools for wholesale and retail distributors. Its latest summary balance sheet is shown below:
Balance Sheet at financial year-end 2015/£000s
Non-current assets (net book value) 8,234
Net current assets 783
Net assets 9,017
Share capital 1,000
Other reserves 8,017
Other information regarding the financial position of PKB Ltd:
• There is no long-term debt. PKB Ltd has an overdraft facility which fluctuates throughout the year but averages at £1m overdrawn and is expected to be around this amount for the foreseeable future. The overdraft is included in net current assets in the balance sheet.
Finance costs in the last year were £80,000.
• The cost of the investment is £5m in today’s money. This investment will be funded by debt finance, a long-term bank loan.
• The new manufacturing plant and equipment will have a predicted useful life of four years and an estimated scrap (terminal) value of 15% of their original cost in real terms.
• Inflation is estimated at 3% per year.
• PKB Ltd can borrow funds at 1.5% above the risk-free rate of interest.
• For a project with this level of risk the Finance Director of PKB Ltd considers that a discount rate of 9% should be appropriate.
• The new plant will be paid for and commissioned at the start of the upgrading project.
• The fixed costs of operating the new plant and equipment will be £1.2m per year in today’s money.
• The variable operating costs will be 60% of the sales value.
• The project is expected to generate new sales of £8.5m per year, in today’s money, if no additional marketing is undertaken (see next point).
• If PKB Ltd were to launch an intensive marketing campaign to promote the additional products, new sales could be increased by 12%. Estimated annual costs of the marketing campaign for each of the next three years are £250,000 in today’s money.
• All cash inflows and outflows are taxable at 28%.
• Tax is paid in the same year that the relevant taxable cash flows are generated (including the scrap value of the plant and equipment). PKB Ltd can use tax allowances of 25% on capital expenditure of this nature.
Task: You are required to complete a detailed analysis concerning the following issues:
Land Securities Group plc:
a. Download the historical prices (https://uk.finance.yahoo.com/q/hp?s=LAND.L) for one year only, from 1 January 2015 to 31 December 2015, and then calculate the daily returns based on ‘close’ prices (column E). The daily return is calculated as the close price at the end of the day minus the close price for the preceding day and this is then divided by the close price from the preceding day and expressed as a percentage. This can be expressed in an equation, or formula, as (P1 – P0) / P0, where P1 is the close price today and P0 the close price for the preceding day.
Plot the daily returns for the year 2015 (around 250 observations) and calculate the descriptive statistics (mean, mode, median, variance, covariance and frequency distribution). Also comment on the overall result.
PKB Limited
b. The case study relates to a company, PKB Ltd, that is currently considering an expansion of its product range and a possible marketing campaign. Prepare a report on the planned investment that uses payback, NPV and IRR and also shows how the marketing campaign would affect the viability of this project.
c. Discuss how the risk in this project could be incorporated into your calculations and identify which of the assumptions made in the case study is the most critical for the viability of the project.