You are analyzing KKP Private Limited and you have collected the following information. KKP operates 7 nurseries and provides landscaping services to the condominiums in Korea. It started in the year 2000 and its revenues have grown at a compounded rate of about 12% a year. Its financial details for the past 3 years are shown below:
Income Statement
|
|
FY 2014
|
FY 2013
|
FY 2012
|
|
|
$'000
|
$'000
|
$'000
|
|
|
|
|
|
|
Revenue
|
9,600
|
9,200
|
8,700
|
|
Cost of goods sold
|
-5,376
|
-5,152
|
-4,872
|
|
Gross profit
|
4,224
|
4,048
|
3,828
|
|
Operating expenses
|
-845
|
-729
|
-612
|
|
Net operating profit
|
3,379
|
3,319
|
3,216
|
|
Interest expense
|
-82
|
-65
|
-42
|
|
Income befor tax
|
3,297
|
3,254
|
3,174
|
|
Income tax
|
-659.44
|
-650.87
|
-634.704
|
|
Net income
|
2,638
|
2,603
|
2,539
|
Balance Sheet
|
|
FY2014
|
FY 2013
|
FY2012
|
|
|
$000
|
$000
|
$000
|
|
Current assets:.
|
|
|
|
|
Cash and bank
|
650
|
765
|
640
|
|
Inventory
|
1200
|
920
|
725
|
|
Trade receivables
|
480
|
368
|
300
|
|
Total Current assets
|
2,330
|
2,053
|
1,665
|
|
Non-current assets.
|
|
|
|
|
Property, plant and equipment Other non-current assets
|
2,400
250
|
2,100
140
|
1,900
175
|
|
Total Non-current assets
|
2,650
|
2,240
|
2,075
|
|
|
|
|
|
|
Total assets
|
4,980
|
4,293
|
3,740
|
|
Current liabilities
|
|
|
|
|
Trade payables
|
268.8
|
234.182
|
203
|
|
Accruals
|
290
|
275
|
240
|
|
Other current liabilities
|
75
|
26
|
38
|
|
Total Current Liabilities
|
634
|
535
|
481
|
|
Non•current liabilities
|
|
|
|
|
Borrowings
|
620
|
510
|
400
|
|
Other non-current liabilities
|
18
|
15
|
16
|
|
Total Non-current Liabilities
|
638
|
525
|
416
|
|
Equity
|
|
|
|
|
Share capital
|
2,700
|
2,300
|
2,000
|
|
Reserves
|
1008
|
933
|
843
|
|
Total Equity
|
3,708
|
3,233
|
2,843
|
|
Number of shares outstanding
|
2,700,000
|
2,300,000
|
3,000,000
|
|
Total liabilities and equity
|
4,980
|
4,293
|
3,740
|
5-years EPS and DPS
|
|
2014
|
2013
|
2012
|
2011
|
2010
|
|
EPS
|
0.98
|
1.13
|
1.76
|
1.34
|
1.28
|
|
DPS
|
0.83
|
0.94
|
1.35
|
1.22
|
1.08
|
KKP plans to open another 3 nurseries. The initial capital expenditure required for this expansion is estimated to be $3 million, which is to be depreciated equally over three years to zero net book value. No salvage value is expected. Based on a market feasibility study which cost $100,000 to undertake, it anticipates that sales will be $300,000, $500,000 and $650,000 for the first three years.
Thereafter, it will grow at 2% per year indefinitely. Gross profit will be 50% of sales. Fixed overheads in the first three years is estimated to be $75,000 per year and this will increase to $125,000 from year four onwards. Net working capital is estimated to be 12% of sales, which is required at the start of the year. As the firm expects to fully implement a just-in-time inventory system, the net working capital will be fully recovered at the end of year three.
For the purpose of investment appraisal, the company uses a market risk premium of 5% and risk-free rate of 3%. Its historical beta is 0.8 and marginal tax rate is 20%. Good Landscaping has a target debt ratio of 16%. It issued bonds on July 1, 2013 for $200,000 with a par value of $100 and coupon rate of 8%. The maturity of the bonds in on June 30, 2020. The market value of bonds is $108.53. Its shares are selling at $1.20.
Question 1:
Compute the accounting ratios for FY 2012 to 2014 and evaluate KKP's liquidity, profitability, asset utilisation and financial leverage.
Question 2:
Calculate KKP's cost of equity, cost of debt and weighted average cost of capital (WACC).
Question 3:
Calculate the net present value (NPV) and examine whether Good Landscaping should proceed with this growth strategy.
Question 4:
Analyse and comment on the dividend policy over the last 5 years.
Question 5:
In order to finance the expansion plan, the Board is considering several options such as issue shares for $ 9 million, borrow funds for $9 million and reduce dividend payout to 40%. Compare the implications of various options and recommend an appropriate financing alternative.