| Country : | Australia |
|---|
Assignment Task
1. Universal Store Holdings Limited (hereafter known as “Universal”) ordinary shares are listed on the Australian Securities Exchange (ASX) following an Initial Public Offering (IPO) late in 2020. Universal is a youth fashion retailer with over 60 stores across Australia. According to the following ASX announcement made by Universal: “25/02/2021 8:19 am Universal Store Holdings Limited 1H FY21 Results Presentatio[n]” (hereafter, “Announcement”) they plan to open three new stores in the second half of the 2021 financial year.
2. Universal has already performed a substantial amount of data collection and preliminary analysis related to one particular planned new store in the western Sydney suburb of Rouse Hill. In contrast to Universal’s typical strategy of leasing space in a shopping centre for a new store, they instead propose a build-own-operate model for its Rouse Hill store. However, the capital expenditure associated with the construction of a new store and the operating expenses are substantial. Therefore, before Universal commits to building the new store a financial analysis is needed to determine if it will contribute to the goal of creating wealth for its shareholders.
3. You are employed in Universal’s corporate finance department and have impressed senior management with your aptitude for financial analysis. This talent was developed through the practice-oriented assignments that you completed at University. You recall how exciting it was learning about listed companies by searching and reading announcements made to the ASX. The Chief Financial Officer (CFO) has asked you to perform a financial analysis of the planned Rouse Hill store using a purpose-built preformatted EXCEL spreadsheet. The CFO has suggested you liaise with company employees from a variety of different departments to collect the information that is necessary to perform the analysis. You will also search through public documents to identify some of the assumptions that will be required in your financial analysis, and certain additional information. Your analysis will be provided to the Board of Directors who must approve substantial capital expenditures.
4. The two major cash outflows associated with a new store are the cost of the building and the fixtures and fittings such as counters and furniture. The directors are accountable to the shareholders and so a financial analysis is necessary to be confident that the investment in the new Rouse Hill store is justified. The following paragraphs contain a substantial amount of information that has been gathered from across the business and it is your job to determine which information is relevant to the analysis.
Capital Budgeting Information
Present an itemised breakdown (and the total) for each of the following:
1. The cash flows at the start.
2. The cash flows over the life.
3. The cash flows at the end.
4. What is the NPV of the proposed Rouse Hill store, and your recommendation?
Additional Information
5. The Announcement refers to a “strong financial capacity to fund and accelerate all growth initiatives”.
a) How might Universal measure its ‘financial capacity’?
b) What is an advantage of a ‘strong financial capacity’?
6. Assume that Universal’s dividend in the second half of 2021 will be the same amount as the dividend paid in May 2021. Further assume that dividends in 2022, 2023 and 2024 will be the same amount as the total dividend paid in 2021. After 2024 dividends will increase by 2% p.a. and the required return is 8%. What is a fair price for a
Universal share in 2021? (Assume the full 2021 dividend has already been paid). Show your return calculation in the spreadsheet.
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