ASSIGNMENT BRIEF AND SUBMISSION GUIDELINES:
 This is an individual exercise
 Submission of this assignment should be as follows:
– An electronic version must be submitted through TURNITIN (via
Blackboard) by the above deadline.
 The overall assignment should be of no more than 3,000 words in total,
exclude all calculations.
– Note that the list of references is not included in the word count.
 All of the usual University regulations will apply with regard to the late
submission of work and plagiarism – see the module handbook for an
outline of certain areas.
 Adhere to Harvard system of referencing.
 Assessment criteria are provided below:
Please see the detailed assignment for mark allocation. The assignment will be
marked taking into account the grade descriptors provided at of the module
guide. There is no right to ask for a re-mark. Anonymous marking will be
implemented for the coursework assignments.
ASSIGNMENT BRIEF
 This individual assessment is 100% weighted
 Attempt all questions
 The focus of this assignment has changed to focus on current situations,
and the use of up to date information. You should make full use of
university information systems, such as Blackboard, DMU Replay, to
assist with this. However, you should ensure that you link academic
theories relating to business finance to your argument in order to
achieve high marks in this assignment.

QUESTION 1 40 marks

XP Plc is a multinational company based in Leeds, United Kingdom and was
founded in 1984. The company specialises in financial services to private equity
companies operating in the industrial and commercial property construction
and development industry. The company is currently faced with THREE
strategic issues:
Strategic option 1: Whether to purchase a new machine
Project Information
XP plc plans to buy a new machine to meet expected demand for a new
product, product T. This machine will cost £250,000 and last for four years, at
the end of which time it will be sold for £5,000. XP plc expects demand for
product T to be as follows:
Year Demand (units)
1 38,000
2 45,000
3 50,000
4 30,000
The selling price for Product T is expected to be £10.00 per unit and variable
cost of production is expected to be £5.80 per unit. Incremental annual fixed
production overheads of £25,000 per year will be incurred. Selling price and
costs are all in current price terms.
Due to the current high rate of inflation caused by the global financial crisis,
selling price and costs are expected to increase as follows:
Increase
Selling price of product T: 4% per year
Variable cost of production: 5% per year
Fixed production overheads: 6% per year

Other information
XP plc has a cost of capital of 10% and pays tax at an annual rate of 30% one
year in arrears. It can claim capital allowances on a 25% reducing balance basis.
Required:
a) Calculate the net present value of buying the new machine and advise
XP plc accordingly. (10 marks)
Strategic option 2: Mergers and Acquisitions opportunities
Project Information
Fiona plc is a multinational established in 1998 and has significant cash
balances. XP plc and Angela plc both approach Fiona plc with takeover offers.
Consider the company details as below:
Fiona plc XP plc Angela plc
Earnings per share (EPS) 14p 31p 38p
Dividends per share (DPS) 3p 18p 14p
Number of shares 1m 2.7m 1.8m
Share price £5.42 £4.44
Growth rate 7% 3% 5%
XP plc feels that if Fiona plc (Target company) were to be acquired the strength
of its distribution networks would increase the growth rate of Fiona plc to 9%.
Angela plc is more interested in a particular resource Fiona plc has proprietary
access to. If Fiona plc was acquired, Angela plc would have access to the
resource leading to the EPS of Angela plc increasing to 58p (assume a constant
dividend payout ratio).
The following offers have been made:

Predator 1: XP plc 1 share for every six Fiona plc shares
Predator 2: Angela plc 1 share for every four Fiona plc shares
The cost of equity capital for both firms is 11%
Required:
a) What is the value of a Fiona plc share in its current form?(3 marks)
b) What value would be added if XP plc were successful? Alternatively,
what value would be added if Angela plc was successful? (5 marks)

c) If XP plc was successful what would be the change in wealth for the two
sets of shareholders? (5 marks)
d) If Angela plc was successful what would be the change in wealth for the
two sets of shareholders? (5 marks)

Strategic option 3
XP plc has been tasked with making recommendations to a key client with
regards to investment opportunities the clients are considering.
They have provided the following information:
Name E(Return) BETA
Next Plc 8% 1.05
ITV 15% 1.20
Smith Group 10% 1.55
Tate & Lyle 11% 0.95
The return on a Government Bond at 3% and the FTSE 100 index rose from
7,023 to 7,687 in the last 12 months.
Required:
a) Calculate and graphically display the Security Market Line (SML).
(6 marks)

b) For each of the four investment opportunities listed above calculate and
display graphically whether they are under- or over-priced. (6 marks)

 

QUESTION 2 (10 MARKS)
Discuss the reasons why the NPV method of investment appraisal might be
considered superior over other investment appraisal techniques.
(maximum word counts 300 words)

 

QUESTION 3 (30 MARKS)
Based on the academic literature, critically explain the motives behind Mergers
and Acquisitions and why Mergers & Acquisitions do not always have a
successful outcome.
(maximum word counts 900 words)

 

QUESTION 4 (20 MARKS)
Based on the academic literature, critically explain the difference between the
Capital Asset Pricing Model, Arbitrage Theory (Ross, 1976) and Fama & French’s
Three-Factor.
(maximum word counts 600 words)