Pear PLC is Considering the Development of a Smart Fridge, Called Ifridge: Corporate Finance Assignment, DCU

Task 1

LO1 and LO2

Scenario:

Pear PLC is considering the development of a smart fridge, called ifridge. Based on extensive marketing surveys, the sales forecast for ifridge is 13,000 units per year. Given the pace of technological change, Pear PLC expects the product will have a four−year life and an expected wholesale price of £1,390 (the price Pear will receive from stores). Actual production will be outsourced at a cost (including packaging) of £995 per unit.

To ensure the quality of the product, Pear must also establish a quality lab for testing purposes. It will rent the lab space but will need to purchase £8 million of new equipment. The equipment will be depreciated using the straight−line method over a five−year life. Pear’s marginal tax rate is 20%. The lab will be operational at the end of one year. At that time, ifridge will be ready to ship.

Pear expects to spend £1.2 million per year on rental costs for the lab space, as well as marketing and support for this product. However, receivables related to ifridge are expected to account for 12% of annual sales, and payables are expected to be 15% of the annual cost of goods sold (COGS). Required

• Forecast the incremental earnings from the ifridge project.
• Prepare the incremental free cash flows based on the incremental earnings forecast.
• Please appraise the project with NPV, IRR, and Payback period methods. The company’s cost of capital is 9%.
• Explain the advantages and disadvantages of these investment appraisal methods.
• Discuss the time value of money concept.

Task 2

As a financial analyst, you have been asked to analyze a firm. Answer the following points;

LO1 & LO5

• Evaluate the risk profile of the firm, and examine the sources of risk.
• Recommend strategies to reduce the key risks of the organization.

LO3

• Calculate the cost of equity of the company.
• How risky is this company’s debt? What is its cost of debt?
• What is the company’s current cost of capital?

LO1 & LO2

• How has this company returned cash to its owners? Has it paid dividends or bought back stock?
• How does this firm’s dividend policy compare to those of its peer group and the rest of the market?
• Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?

LO1, LO3 & LO4

• Analyze the selected company’s share performance over the last five years.
• If you were hired to enhance value at this firm, what would be the path you would choose?

The Firm

• Select a firm that has plenty of publicly available information (a listed company).
• Avoid selecting the following:
  • Financial service firms (banks, insurance companies & investment banks)
  • Money losing companies
  • Companies with large capital arms (GE and the auto companies)
  • Real estate investment trusts