Accounting and Managerial Finance
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The module is designed to address the role of marketing and brand management in the fashion and luxury goods industry. Candidates are required to research and critically evaluate theories, concepts and tools relating to the module and apply them within a contemporary global context.
Philip Morris International is currently undergoing a shift from traditional tobacco-based products to electronic cigarettes. The company is becoming increasingly environmentally conscious, as the statistics for non-recyclable plastics in the environment do not show a rosy picture, and they have decided to evaluate a proposal to acquire Terracycle – a recycler of difficult to recycle plastics – with a view to using only recycled plastics in their production of electronic cigarettes.
The board believes that this proactive move would enable them to benefit from substantial savings in material costs in the future, as well as making an impact environmentally. With additional investment in recycling facilities, Philip Morris International aims to, if all goes to plan, become a supplier to its competitors as well.
This is initially viewed by the board as an excellent opportunity to create additional value by aggressively promoting this practice and further expand their market share.
Together with the company CFO, the investment team has come up with the most-likely scenario of figures and would like a recommendation for acceptance of the project, including the choice of funding. Table 1 in the Excel file shows the relevant cash flows for the project. The initial outlay is expected to be $440m, which covers the cost of acquiring the Terracycle facilities and for expanding the production to all locations. Working capital of $15m would be required at the beginning of the project that would be fully recovered in the last year of the project. Further data needed to perform the evaluations are in table 2, of which some items need to be sourced, or calculated.
You are required to value the project using the following methods and present a proposal to the investment committee in order for them to approve it:
- Philip Morris International is considering financing the project as All Equity and it should be valued as such in the first instance. This is due to the fact the company has sufficient Cash and Reserves to cover the cost of the initial investment. (Assume ‘Beta’ value obtained from financial website is “all equity” for this part of the exercise.)
- The CFO has also asked to value the project funding 50% of the initial investment with debt to determine the overall impact of the interest tax shield on the project and take this into consideration when making the final recommendation. (Assume the same level of debt is held to the end of the project. Do not consider the repayment of the debt principal in the valuation.
Hint: Use Adjusted Present Value (APV here)
- A Weighted Average Cost of Capital (WACC) valuation using the company’s current Debt to Equity ratio.
Hint: Use Market Value of Equity to calculate the Debt to Equity ratio.