M004LON Coursework 2 - April 2016.

Individual coursework - Contributes 60% of total marks.

CASE STUDY - MADISON PLC

Students are required to submit an individual report before the deadline with a maximum of 2500 words based on the following case study. You will also be required to make a 5 to 6 Minutes presentation as summary of your report in week 10 just before submission. You will be required to send your presentation slides to your Tutor a day before presentation. The slides should not be
more than 6.

CASE STUDY - MADISON PLC

Madison plc is a public limited company, whose shares are quoted on the Alternative investment Market in London and has been operation in the UK for the past 10 years. Madison plc provides intellectual property to Oil and gas companies, HR consultants, Marketing companies, Tourist companies and investment property funds all over the UK. For the past 10 years, Madison plc has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the Finance director of Madison has recently engaged your firm to help them source Finance for their expansion plans.

New Software

The current software product that Madison has been selling to companies is now deemed to be outdated and the company is looking to invest in a new product, and there are two proposals on offer. The details of these two proposals are outlined below.
Madison Super Madison super is the first of the two proposals. The expected life of this product is 5 years and its working capital requirements and the cost of new software, expected revenue, components cost and overheads are as below:
Madison Super Draft Figures £‘000

Year 0 1 2 3 4 5
New Software Cost 5,500
Working Capital 400 550 700 850 1,000
Sales Revenue 5,500 6,500 7,700 8,750 9,800
Less:
Component A (670) (800) (950) (1,100) (1,350)
Component B (1,070) (1,500) (1,800) (2,100) (1,800)
Overheads (275) (325) (385) (438) (490)
2

All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In addition

•  Revenues, overheads and working capital are expected to rise by 3% per year from year 1.
• The cost of component A and component B are expected to rise in line with inflation of 4% per year from year 1.
• The cost of senior technology officers, who have come from the US have not been taken into consideration in the forecast and are as follows:

- Senior Technology Officer 1: Will be paid £200 per hour and expected number of hours for STO 1 are 1,470. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 2% per year, every year
from year 2 onwards.

Senior Technology Officer 2: Will be paid £100 per hour and expected number of hours for STO 2 are 1, 700. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year
2 onwards.

Depreciation is straight line over the life of the software, and the software is not expected to have any salvage value at the end of year 5. The company gets an annual capital allowance of 25%. Corporation tax is 33% and any tax benefit or tax expense is settled one year in arrears. Ignore depreciation when calculating corporation tax payable/receivable, but take the capital allowances into account.

If Madison plc invests in Madison Super then the discount rate that would be required to assess the NPV would be 14%. 3

Madison Platform:
Madison Platform is the second of two proposals, the expected life of this software will also be 5 years and its working capital requirements, the cost of the new software, expected revenue, components cost and overheads are as follows:

Madison Platform Draft Figures £‘000
Year 0 1 2 3 4 5
New Software Cost 8,500
Working Capital 500 653 806 959 1,112
Sales 6,200 7,564 9,001 10,531 12,006
Less:
Component A (341) (529) (810) (1,053) (1,441)
Component B (1,320) (1,875) (2,250) (2,723) (2,945)
Overheads (186) (227) (270) (316) (360)

All of the above estimates have also been prepared in terms of present day costs and prices. Assume that the cash flows arise at the end of each period. In addition, you will need to take the costs of senior technology officers and capital allowances, inflation and the rise in the revenue, overheads and working capital into consideration, which are the same for the Madison Super. Corporation tax rate is 33%, and tax benefit or tax expense is steeled one year in arrears. If Madison plc invests in Madison platform then the discount rate that would be required to assess the NPV would be 13%.

New Company Acquisition
Madison plc is also considering to grow its operations across continental Europe, and at the moment there are two potential target companies that can help Madison plc in creating a presence in Europe, Puteaux digital France and Melia Portfolio Research Spain. For the purpose of this analysis, assume that the required investment funds will be provided by way of a capital loan from the parent entity or other sources of finance; however Madison plc is willing to acquire only one of the companies.