Jim's Tech Supplies Ltd
Background
Jim's Tech Supplies Ltd (JTS) is a company that imports and manufactures laboratory equipment. The company, which is listed on the New Zealand Stock Exchange, has been growing rapidly and is currently evaluating the benefits of engaging in a share buyback.
The Finance Manager at JTS lacks expertise in cost of capital and long-term financing issues so you have been employed as a consultant to advise the JTS Board. You will present your recommendations to the Board of JTS in the form of a PowerPoint presentation.
JTS have provided you with the following current balance sheet:
|
Jim's Tech Supplies Limited Balance Sheet
|
|
Assets
|
$000
|
Liabilities & Net Worth
|
$000
|
|
Cash
|
1,500
|
Accounts Payable
|
3,200
|
|
Other Short Term Assets
|
4,100
|
Bank Loan
|
4,000
|
|
Plant & equipment
|
3,200
|
Bond
|
8,000
|
|
Land & buildings
|
20,000
|
Total Liabilities
|
15,200
|
|
Other assets
|
2,800
|
Equity including retained earnings
|
16,400
|
|
Total
|
$31,600
|
Total
|
$31,600
|
You have also been provided with the following information:
- There are currently 4,000,000 shares on issue. The shares are listed on the NZX and the last trade was at a price of $2.95.
- Retained earnings total $3,500,000.
- JTS's bank debt of $4,000,000 costs it 6% p.a.
- JTS's perpetual bond of $8,000,000 is issued at 7.5% and currently has a yield to maturity of 6%.
- The payment terms of both bank debt and the perpetual bond are interest only.
- Land and buildings are not depreciated but the building fit-out, which is currently valued at $1,800,000, is depreciated.
JTS's budgeted income and expenses for the next financial year are as follows:
|
Jim's Tech Supplies Limited Budgeted Income and Expenses for the next financial year
|
|
$000
|
|
Revenue
|
9,200
|
|
COGs
|
3,200
|
|
Wages
|
2,200
|
|
Repairs and Maintenance
|
450
|
|
Power
|
360
|
|
Sales and Marketing
|
1,100
|
|
Other
|
50
|
JTS also provides you with the following information:
- Revenue is expected to grow at 3% p.a. from years 2-5 and 2% p.a. in years 6-10.
- COGs are expected to grow at 3% p.a. from years 2-5 and 2% p.a. in years 6-10.
- Wages are expected to increase at 3% p.a.
- Repairs and maintenance are forecast to grow by 3% p.a.
- Power expenses are forecast to grow by 4% p.a.
- Sales and marketing expenses are forecast grow by 2% p.a.
- Other expenses are forecast to grow by 5% p.a.
- Depreciation on the building fit-out is calculated at a rate of 10% DV.
- Depreciation on plant and equipment is calculated at a rate of 16% DV.
- Assume there is no capital expenditure over the period.
- The tax rate is 28%.
- Given the above revenue and expense forecasts are simply estimates, you should consider the possibility of all revenue and expenses (including depreciation but excluding interest) being 15% lower and 15% higher than the base case represented in the above forecasts.
- If there is negative NPBT, assume the tax credit is received in the same year.
- The PWC 2002 New Zealand Equity Risk Premium document estimates a Market Risk Premium (MRP) of 5.1% for NZ. You should use this number in your calculations. HINT: To calculate the required return on equity you would need to search for the betas of similar NZ companies and make some assumption about the beta of JTS (and the risk-free rate).
Requirements
JTS is looking to buy back $2,500,000 or $4,500,000 worth of shares. It would fund the buyback through the issue of a new perpetual bond which it forecasts will have an interest rate of 6%. It would not use its cash on hand or any cash generated for the buyback.
- You are expected to determine the impact of these actions on EBIT / EPS over the next 10 years and recommend no buyback or the buyback of $2,500,000 or $4,500,000 worth of shares from an EBIT / EPS perspective.
- You are requested to give your view on the likely impact of the $2,500,000 or $4,500,000 buyback on JTS's cost of capital.
You are expected to deliver the following items to the Board of JTS prior to your presentation -
- A print out (in pdf format) of your PowerPoint presentation. This should contain no more than 15 slides. The print out should be of "Notes Pages" which contain each slide at the top of the page with brief notes below which elaborate on the information from your slides. The presentation should contain all the important information from your Excel model. You should assume you will have just 30 minutes to present to the board so please think carefully about what information to include and how best to present it.
- And Your Excel model.
Need power point + Excel Analysis.