Investment Banking Individual Assignment

Instructions

▪ The grade in this assignment has a weight of 100% on the final course grade. ▪ The maximum grade for this assignment is 10.

▪ The pass grade for this assignment is 5.5.

▪ Each part is worth 20% of the assignment grade.

▪ Each part in the assignment covers one course learning outcome, as per the below table.

▪ Students are expected to upload on Moodle an Excel file with calculations and a pdf file with the written report, by the given deadline.

▪ Deadlines for all assignments are strict and no extension will be granted, except for proven major unfortunate cases.

▪ The answers must match what is asked in each part (nothing more, nothing less).

▪ Keep it to-the-point, but make sure nothing is missing in the answer, max 5 pages plus 5 pages appendix ▪ Incomplete answers get partial points, as per grading rubrics (see below).

▪ Please note that all assignments are checked for plagiarism, and cases will be reported and punished according to the MSM Academic Misconduct Policy and Procedure.

Mapping of the course learning outcomes to the parts in the assignment

The mapping of the parts in this assignment to the course learning outcomes, is:

	Part 1	Part 2	Part 3	Part 4	Part 5
DD 1
DD 2
DD 3
DD 4
DD 5

 

Grading rubrics

Please note that each part is graded according to the following rubric:

Grade	Meaning Grade
10.0	Outstanding
9.0 – 9.9	Very Good
8.0 – 8.9	Good
7.0 – 7.9	More than Satisfactory
6.0 – 6.9	Satisfactory
5.5 – 5.9	Almost Satisfactory (Pass)
< 5.5	Unsatisfactory

 

The assignment covers some of the issues faced (and decisions to be made) by (financial) managers in an international context for their companies. Based on the course topics you should be able – as (financial) manager – to answer the questions in order to cover the problems, calculate the relevant figures, and come up with alternative solutions. Please answer each question by calculating your answers in an excel sheet and showing them in the report together with the required comments, in a short paragraph for each question.

Part 1: Amsterdam Sports Company (ASC), a Dutch company, considers to invest in a Mexican sports company to have its supply under control. It can do so by a so-called greenfield investment in Mexico or by an international acquisition.

1. a) What is the difference between the two? For both give two advantages and two disadvantages

ASC decides to investigate a take-over of the local club Mexico Sports (MS), let a Dutch staff member join the board of MS, improve its performance, and sell the company after 3 years.

• The expected free cash flow for next year is 10.000.000 MPS (Mexican Pesos), 11.000.000 MPS in the second year and 12.000.000 in the third year.
• The expected value of MS at the end of the third year (on top of that year’s free cash flow) at which MS is expected to be sold will be 6 times MS’s free cash flow.
• All free cash flows are after tax (so disregard Mexican and Dutch taxes).
• The current exchange rate is MPS 10,00 per EUR. The rate is expected to change according to its PPP. The annual inflation rate for the coming three years in the Eurozone is expected to remain low. In South America however the inflation for the next years depends on the government’s planned fiscal and monetary policy and that is not clear yet. Estimated is

o 60% probability that inflation will be suppressed and the exchange rate will remain 10,00 MPS/EUR (scenario I)

o 40% probability that the policy will fail, inflation will increase and the the euro will rise to MPS 12,00 next year, 14,00 the 2nd year and 16,00 the 3rd year (scenario II).

• At the end of the first investment year it will be clear what the policy and so the inflation rate will be for that year and the years to follow – and consequently the development of the MPS/EUR-rate.
• ASC’s minimum required rate of return on investments is 20%, not a basispoint less. • The current owners want not a peso less than MPS 60.000.000 for their company.

As financial expert you start doing the necessary calculations for ASC:

1. b) Make an overview of the pros and cons of the take-over bid not only based on the provided data above but also take into account the issues with regard to an M&A transaction in cla
2. c) Mention the impact the two scenarios will have on the outcome of the take-over transacti Explain the difference between a scenario analysis like this and a sensitivity analysis.
3. d) Show how the calculation of the expected value of MS for ASC from the expected cash flows and required rate of return on investment will look like based on NPV and payback m So will ASC buy MS?
4. e) Describe the multiples method for valuating this acquisiti
5. f) In case the NPV is positive indicate what the IRR of this same project would be? Also explain
6. g) Describe the risks of the implementation of an acquisition like thi Include the risks of an investment decision in an international context.

Part 2: Because of the Corona crisis a company needs to raise additional funding for its operations. The management decides to enter international capital markets (equity and debt) to find investors and asks an investment bank to manage the whole process. The company has a good rating (A), so the issue(s) are expected to be a success.

The questions are: how will the process of issuing in international capital markerts be organized by the investment bank? Describe the different elements of the issuing process. And which factors determine whether the issue will be a success? Elaborate on the international dimensions as well as on the impact of the crisis.

Part 3: Select a listed (public) international company of your choice. Describe the investment worthiness of the company using as much relevant data like ratios and the valuation (eg DCF and multiples method) as needed. In order to get the full picture whether this is a company to invest in, go online again and search for the industry numbers or a peer company, to compare with the company and comment these in this paragraph. Be critical in your analysis (so marketing language of the company is not so relevant, find outside sources).

Part 4: Look now at the same company data and take for your judgement of the investment worthiness of the company also into account the (financial) risks, the riskmanagement and how these risks are or can be mitigated (in which way? Do use scenario and/or sensitivity analysis). Elaborate on the trade off between risk and (potential) return (is this a value investment or a growth stock? Might this company a potentail take over candidate or will the company grow by taking over other companies? Judge how the dividend policy is and the potential to buy back stocks).

Part 5: Please write a brief APA-compliant report putting together the results of all previous parts. Make sure the text flows clearly and be straight to the point, by highlighting the results that you think are most interesting for a finance reader, assuming financial terminology is known, focusing on applying theory, critical comments, interpretation of results, relevant Excel screenshots. The report should not be too long but should contain all the answers and the information required. Overall a good report should not exceed 5 pages. Please remember that the points for this part are assigned to the structure, layout, grammar, and APA compliance of the report, as well as to the complete referencing of all values, rates, decision making criteria (and other information sourced from anywhere) to the source. Referencing is to be included in both the body text and the final bibliography (list of references). The content is supposed to include the answers to all parts, including the calculations made (formulas used), the variables included in the calculations (the name and value of each variable has to be clearly stated), brief but complete paragraphs for all the theory parts (including comments, comparisons, and all you are asked for in each part). Please do not copy paste in the report the parts as they are presented in the assignment, as this may generate a high percent of plagiarism report in Turnitin. Just give the report a structure based on short titles for the assignment parts, without pasting the text of these parts.

 

ANSWER

 

Part 1 (a)

Greenfield investment is an investment technique where an organization implements foreign direct investment (Ashraf, Doytch,& Uctum, 2020). The company starts operations in a foreign country and meets all the responsibilities of starting a subsidiary from the bottom, for example, the construction of offices, purchasing equipment, marketing, and hiring. Additionally, under this form of investment, the company has total control over its activities.

Advantages

This form of investment eliminates intermediaries from the process, thus providing the company with total control over its budgets, operation, and also presents the company with independence in decision-making processes. Furthermore, the company can enjoy easy access into the industry as a potential client, and customers may view the efforts of the company to expand as an effort to offer quality products and services.

Disadvantages

The financial risk involved in this kind of investment is high. The company will be required to outsource for loans as it makes entry into a foreign market that the company has limited knowledge about. Also, entry barriers, for example, high initial cost and government policies may make Greenfield investment a rather expensive venture to undertake.

International acquisition, on the other hand, is an investment process where a company buys another company in a foreign country (Galaso, & Sanchez-Diez, 2020). The company that acquires another takes control of all activities in the acquired company.

Advantages

International acquisitions eliminate entry barriers that would have otherwise made the entry process into a foreign market daunting. High initial cost and government policies are some of the barriers that are eliminated under this method. Similarly, the acquired company can access more resources and expertise from the larger company. The company that acquires another most likely has better resources and can share them with the company it has purchased.

Disadvantages

Culture clash is a major disadvantage of international acquisitions. An international company may have its culture that it has developed in the company. When it acquires a company with a different culture, the conflict in culture may affect the general performance of the company. Additionally, duplication of duties and responsibilities, especially where the two organizations have almost similar working plans can negatively impact the financial position of an organization.

Part 1 (b)

Pros

The first advantage of the takeover is that the company will enjoy increased market share. Additionally, the company will acquire intangible assets, for example, a brand in the foreign market. Also, the company will secure better distribution channels that will impact its performance.

Cons

The company will face challenges in change integration, especially employee resistance. Similarly, there are high costs involved in taking over.

Part 1 (c)

The two decisions are likely to positively affect the decisions of managers of the company to go ahead with the takeover processes. Scenario analysis is a process implemented to analyze possible occurrences in the future and their possible outcomes. Sensitivity analysis, on the other hand, is a process of predicting the outcome of a decision or activity provided by various variables.

Part 1 (d)

Yes ASC will buy MS

Part 1 (e)

The first valuation method is the discounted cash flow method. This method values a company based on its ability to generate and grow its cash flow for the investors. Book value is another method that will be used in evaluating the acquisition. This method is effective in a situation where the company lacks any intellectual property like in the case of Mexico Sports.

Part 1 (f)

The NPV is negative.

Part 1 (g)

The main risk that may affect this type of acquisition is that instead of building the reputation of a company, it may end up being affected negatively if the acquired company has a low brand image.

Part 2

The investment bank will arrange the issuing process into primary and secondary markets, and also through the sale of stock. Under the primary market, the bank will sell the new securities to people in the international capital market that have extra cash and are interested in purchasing the securities. Under the secondary market, the bank will offer the equity securities of the company to the investor who will own part of the company or issue debt securities, which are loans towards the company (Meier, 2019). Additionally, the Investment bank will also sell stock belonging to the company to potential investors. All these three activities undertaken by the investment bank on behalf of the company will help it raise additional funding for its operations.

Several different elements make up the international capital market, and the first one is the international equity markets, which consists of companies whose stock is traded outside their countries of origin. An increase in the need to privatize, rapid technological advancements, and over-dependency on investment banks are factors that affect this element. The international bond market is another element, and it consists of a bond that businesses sell outside their country. Some of the bonds that are sold under this element include foreign bond, Global bond, and Euro bond. The euro currency market is another element of issuing, and it is a short-term Euro currency loan. Finally, offshore centers are tax havens that have minimal financial regulations.

The first factor is that the companies that need issuance must indicate excellent macroeconomic performance for several years. The second factor is that there must members in the international market who are willing to invest in the company or offer it’s a loan (Meier, 2019). Additionally, the credit standings of the company have to be perfect; the company should have paid off its debts or its record of debt management and payment need to be exceptional. The characteristic of a bond includes the risks involved, and the benefits play a consideration in whether the issuance will be a success. Furthermore, the condition in the international capital market also played a role in the success of the issuance. The common dimension of international capital includes foreign exchange and political stability.

Part 3

In order to analyze the performance of Marriott International and judge its investment worthiness, I have calculated several ratios as they relate to the performance of the company. To ensure that I have better understanding of the company’s performance in the industry and whether it is worth investing in, I have calculated several ratios relating to its performance. The company’s ratios that I have calculated include return on investment, return on assets and return on equity. We are going to determine the investment worthiness of Marriott International by comparing its current Return on Investment (ROA) and its previous ROA. In the 3^rd quarter of 2020, Marriott had an ROA of 3.8%. This ROA is higher than what the company posted at the same time in 2019. Another ratio that I calculated is Return on Investment (ROI). ROI measures how the company is able to generate cash flow as per the amount that is invested. The company had an ROI of 5% which was higher than the previous year. 5% is relatively high for the company and since it is also more than in the previous year it is effective to claim that the company is worth investing in. The last ratio that I calculated relating to this company is Return on Equity (ROE). The return on equity for the company was 4.4% still higher than the previous year.

Part 4

Considering the investment worthiness of Marriott International and its performance in the industry, especially during the COVID-19 pandemic, I believe the major financial risk the company faces is a decline in international customer. Additionally, as the pandemic continues to force governments to lock down their boarder, the company is likely to face some financial challenges. The best way that the company can mitigate this situation is by marketing its services to the local people and lowering their prices to attract more customers. Although the company has shown excellent performance by the end of the first half of 2020, there are still high uncertainties on its performance if the pandemic continues. Investment into Marriott International is a stock growth investment. Considering the size of the company and its performance streak, it will grow by acquiring other companies. In 2020, Marriott International declared a dividend policy where each share attracted 48 cents. Similarly, the company has order the repurchase of its shares making the process easy and possible.

References

Ashraf, A., Doytch, N., & Uctum, M. (2020). Foreign direct investment and the environment: disentangling the impact of greenfield investment and merger and acquisition sales. Sustainability Accounting, Management and Policy Journal.

Galaso, P., & Sanchez-Diez, A. (2020). Core-periphery relations in the international mergers and acquisitions network. Applied Econometrics and International Development, 20(1), 23-34.

HSBC wealth profit nosedives 65% in H1 2020 as Covid-19 hits group. Private Banker International. (2020). Retrieved 5 December 2020, from https://www.privatebankerinternational.com/news/hsbc-h1-2020-profit/.

Meier, J. M. A. (2019). Regulatory integration of international capital markets. Available at SSRN 2931569.

World’s Best Bank 2020: JPMorgan proves to be a fortress in a storm. Euromoney. (2020). Retrieved 5 December 2020, from https://www.euromoney.com/article/27g0tbzca93zph51zgjy8/awards/awards-for excellence/worlds-best-bank-2020-jpmorgan-proves-to-be-a-fortress-in-a-storm

 

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