2017 S1 FINA2222 FMC - student assignment 代写

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2017 S1 FINA2222 FMC - student assignment 代写

2017 S1 FINA2222 CFP JOEY YANG Page 1

FINA2222 Case Study (20%)

2017 Semester 1

Fraser & McKenzie Cookware Inc.

Jamie Smith, CEO of Fraser & McKenzie Cookware, Inc. (FMC), sat in his office reflecting on a

meeting he had with an investment banker earlier in the week. The banker, whom Jamie had known

for years, asked for the meeting after a group of private equity investors made discreet inquiries

about a possible acquisition of FMC. Although FMC was a public company, a majority of its shares

were controlled by family members descended from the firm’s founders together with various family

trusts. Jamie knew the family had no current interest in selling – on the contrary, FMC was

interested in acquiring other companies in the kitchen appliances space – so this overture, like a few

others before it, would be politely rebuffed.

Nevertheless, Jamie was struck by the banker’s assertion that a private equity buyer could “unlock”

value inherent in FMC’s strong operations and balance sheet. Using cash on FMC’s balance sheet and

new borrowings, a private equity firm could purchase all of FMC ’s outstanding shares at a price

higher than $16.25 per share, its current stock price. It would then repay the debt over time using

the company’s future earnings. When the banker pointed out that FMC itself could do the same

thing – borrow money to buy back its own shares – Jamie had asked, “But why would we do that?”

The bank’s response was blunt: “Because you are over-liquid and under-levered. Your shareholders

are paying a price for that.” In the days since the meeting, Jamie’s thoughts kept returning to a share

repurchase. How many shares could be bought? At what price? Would it sap FMC’s financial

strength? Or prevent it from making future acquisitions?

Fraser & McKenzie Cookware’s Business

Fraser & McKenzie Cookware was a mid-sized producer of branded small appliances primarily used

in residential kitchens. For the period 2012-2016 the industry posted modest annual unit sales

growth of 2% despite positive market conditions including a strong housing market and product

2017 S1 FINA2222 CFP JOEY YANG Page 2

innovations. Competition from inexpensive imports and aggressive pricing by mass merchandisers

limited industry dollar volume growth to just 3.5% annually over that same period.

Under Jamie Smith’s leadership, FMC operated much as it always had, with three notable exceptions.

First, the company completed an IPO in 2014. This provided a measure of liquidity for founders’

descendants who, collectively, owned 62% of the outstanding shares following the IPO. Second,

beginning in the 2010s, FMC gradually moved its production abroad. Finally, FMC had undertaken a

strategy focused on rounding out and complementing its product offerings by acquiring small

independent manufacturers or the kitchen appliance product lines of large diversified manufacturers.

Thus far, all acquisitions had been for cash or FMC stock.

Fraser & McKenzie Cookware’s Performance

During the year ended December 31, 2016, FMC earned net income of $54.9 million on revenue of

$350.6 million. Exhibits 1 and 2 present the company’s recent financial statements. The company’s

2016 EBITDA margin of nearly 22.2% was among the strongest within the peer group. During 2013-

2016, compounded annual returns for FMC shareholders, including dividends and stock price

appreciation, were approximately 11% per year. This was higher than the ASX S&P200, which

returned approximately 6% per year. However, it was well below the 16% annual compounded

return earned by shareholders of FMC’s peer group during the same period.

Fraser & McKenzie Cookware’s Financial Policies

FMC’s financial posture was conservative and very much in keeping with FMC’s long-standing

practice and, indeed, with its management style generally. At the end of 2016, FMC’s balance sheet

was the strongest in the industry. Not only was it debt-free, but the company also held a large

amount in cash and securities. Given such substantial liquidity, the management had terminated in

2014 a revolving credit agreement designed to provide standby credit for essential needs; the CFO

argued that the fees were a waste of money and Jamie agreed.

In recent years the company’s largest uses of cash had been common dividends and cash

consideration paid in various acquisitions. Dividends per share had risen only modestly during 2012-

2016. However, as the company issued new shares in connection with some of its acquisitions, the

number of shares outstanding climbed, and the payout ratio rose significantly, to 100% in 2016.

2015 2016

Net income (000s) 52,435 54,929

Average number of shares outstanding (000s) 57,321 59,052

Earnings per share (EPS) 0.92 $0.93

Effective tax rate (corporate) 30% 30%

2017 S1 FINA2222 CFP JOEY YANG Page 3

QUESTIONS

1. What is the ultimate goal of financial management? Using the corporate finance theories you

have learned so far, do you think FMC’s current capital structure is optimal? Why? (10 mark)

2. Given the cash position of FMC at the end of 2016, do you think its payout policy is optimal?

Explain. (10 mark)

Consider the following share repurchase proposal from FMC’s CFO: the company will use $209

million of cash from its balance sheet and $50 million in new debt-bearing interest (on permanent

basis) at the rate of 6.75% to repurchase 14 million shares at a price of $18.50 per share. Consider

the impact of this repurchase by answering questions 4 to 7.

3. How does the proposed share repurchase plan affect FMC’s leverage? (10 mark)

4. How does the proposed share repurchase plan affect FMC’s profitability and debt coverage?

Compare its earnings per share (EPS), return on equity (ROE) and interest coverage. (22

mark)

5. How does the proposed share repurchase plan affect the total value of FMC? (Hint: cash is

treated as negative debt, and this will affect the value of interest tax shield.) (8 mark)

6. You are FMC’s shareholder supporting the repurchase proposal and you have a personal tax

rate of 36%. What is your after-tax dividend income under 1) the traditional tax system; and

2) the imputation tax system? Which tax system do you favour? Why? (25 mark)

7. Is there a downside to the above repurchase proposal? Explain. (10 mark)

2017 S1 FINA2222 CFP JOEY YANG Page 4

APPENDIX (Spread Sheet)

Case Exhibit 1: Fraser & McKenzie’s Balance Sheet (in 000s )

Assets:

2016

Cash & Cash Equivalents

67,851

Marketable

Securities

141,149

Accounts Receivable

48,780

Inventory

56,874

Other Current Assets

6,157

Total Current Assets

320,811

Property, Plant & Equipment

174,321

Goodwill

38,281

Other Assets

58,839

Total Assets

592,253

Liabilities & Shareholders'

Equity:

Accounts Payable

31,936

Accrued Liabilities

27,761

Taxes Payable

16,884

Total Current Liabilities

76,581

Other liabilities

4,814

Deferred Taxes

22,495

Total Liabilities

103,890

Shareholders' Equity

488,363

Total Liabilities & Shareholders' Equity 592,253

Case Exhibit 2: Fraser & McKenzie’s Income Statement (in 000s )

Operating Results:

2016

Revenue

350,560

Less: Cost of Goods Sold 253,684

Gross Profit

96,876

Less: Selling, General & Administrative 29,698

Operating Income

67,178

Plus: Depreciation & Amortization 10,681

EBITDA

77,859

EBIT

67,178

Plus: Other Income (expense) 11,292

Earnings Before Tax

78,470

Less: Taxes

23,541

Net Income

54,929

Dividends

54,929

Margins:

Gross Margin

27.6%

EBIT Margin

19.2%

EBITDA Margin

22.2%

Effective Tax Rate (1)

30.0%

Net Income Margin

15.7%

Dividend payout ratio 100.0%

2017 S1 FINA2222 CFP JOEY YANG Page 5

INSTRUCTIONS

 Complete your assignment in MS Word format using size 12 pt Times New Roman font and

1.5 line spacing.

 The attached MS Excel spread sheet tables must be completed and pasted into your

assignment as appendix.

 CLEARLY SHOW THE BASIS OF YOUR CALCULATIONS in the main text, so that partial credit

can be earned where possible.

 Submit your case study in PDF or MS Word on LMS. Include your tutorial time, tutor’s name,

group member names and their student numbers on the front page of your submission.

 SUBMIT THE MS WORD DOCUMENT ONLY. Excel files are not acceptable.

 PAGE LIMIT: 5 PAGES (excluding tables).

Q Assessment Criteria

Mark

Allocation

1 Answer the question; provide a brief discussion. 10

2 Answer the question; provide a brief discussion. 10

Complete the spread sheet table, and show your workings clearly in the

Word document.

Complete the spread sheet table, and show your workings clearly in the

Word document. Briefly discuss your findings.

5

2017 S1 FINA2222 FMC - student assignment 代写

Complete the spread sheet table, and show your workings clearly in the

Word document. Briefly discuss your findings.

Complete the spread sheet table, and show your workings in clearly the

Word document. Briefly discuss your findings.

7 Answer the question; provide a brief discussion if you can. 10

Total 100

REFERENCES

Ensure you identify ALL references you use and use the Harvard style which you can find on the

Library website at http://libguides.library.uwa.edu.au/content.php?pid=43218&hs=a

2017 S1 FINA2222 CFP JOEY YANG Page 6

SPARK - PEER ASSESSMENT

SPARK will be open in Week 6 and Week 8.

Look out for the reminders on LMS.

You will need to complete at least one SPARK assessment. Failure to complete at least one SPARK

assessment will result in the group score being multiplied by 0.8 to provide your individual mark

(unless your SPARK assessment was lower).

2017 S1 FINA2222 FMC - student assignment 代写