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Assignment Brief

The assignment aims to increase your understanding of the different techniques used in the evaluation of business sustainability and corporate bankruptcy. You are required to apply theoretical knowledge to actual company data.

The purpose of the assignment is to analyse the bankruptcy risk for two companies in the same sector. Some company data(note: all data taken from Bloomberg trading software) is provided for you on the following pages and in a separate excel document, but you should also research any additional information as you feel necessary.

Your report should include the following

a) An evaluation of changes to capital structure for these firms, using data to support your response.Your evaluation should include a discussion as to the risk faced by these companies as a result of the capital structure.(note: weeks 3-5 may help with this, in addition to knowledge gained in ACFI2303)

b) An assessment of bankruptcy risk for the two companies, referring to known bankuptcy models to support your assessment.(note: you can use any method/(s) of your choice to determine this but they should be taken from the taught syllabus in weeks 8-10).

c) A critical discussion, based on a) andb), as to which company is most at risk from bankruptcy
Both of the companies to be discussed are in the real estate industry within the United Kingdom and are publicly listed with the London Stock Exchange (LSE). Land Securities Group PLC is listed on the FTSE100, meaning it is one of the 100 largest market capital (market value of equity) companies in the UK. Grainger PLC is listed on the FTSE350, being one of the 350 largest market capital companies (but not in the top 100)

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Related Services

Company One –Land Securities Group Plc

Land Securities Group Plc (FTSE100 – Ticker ‘LAND LN’) is a property investment and management company. The group invests in real estate, including offices, shops and shopping centres, out of town retail locations, supermarkets and industrial and warehouse facilities throughout the UK. Land Securities’ portfolio also consists of a small percentage of hotel, leisure and residential properties.

Company Two – Grainger Plc

Grainger Plc (FTSE350 – Ticker ‘GRI LN’) is a residential property company. The company owns and operates residential rental properties in the UK and Germany, develops residential-led mixed use projects and retirement housing, and offers residential fund and asset management services.

Some key financial data for both companies is included in the excel document attached (see Blackboard). You should be able to calculate the key financial ratios required for parts a and b using this information. You may need to generate some values from the data given.

Assignment

Dividend and tax data is not available, how can I calculate cost of equity and cost of debt?
The data for both is available. If you are finding varying rates e.g tax, remember this is not an audit or tax assignment; you don’t need to dig into the reasons for this. However, it is perfectly reasonable to make assumptions, for example you may choose to use one tax rate for both companies, or for all years on the basis that the rate is probably the same but the actual tax paid may be as a result of deferred taxes etc…
Are we expected to calculate the WACC? We don’t have enough information.

Think about the MM theory and what information is included. Consider how you can calculate this information from the data provided (you do not need to find new data)

What calculations should we do for part a? Do we compare them against industry average?

The guidance states “G ood marks are available for students applying theoretical capital structure models to the data provided, with a full evaluation of the changes and the risks to the company.

So, think about what calculations are needed to apply capital structure models. You have all the data you need to do this. Consider whether the M&M theories covered during the module used industry average within them when deciding this for yourself.
I don’t know where to find the value of equity?

Market capitalisation = value of equity
Do I need to calculate CAPM to find the cost of equity?

No; you don’t have the data for that (although you could try to find it if you choose to!). Try a simple approximation…consider what the return is to shareholders on their share in a given year. Cost of equity = return to shareholders

I’m struggling on the capital structure part of the assignment. I don’t know which figures to use and how to implement it in the formula. Do i have to talk about all 3 theories and use all the formulas: trade off theory, M&M 1, M&M2. Please advise

Think about the context of the assignment…would M&M1 be appropriate for example? Perhaps try looking at the data and seeing whether any of the theories appear to hold true?.

Do we need to explain the models that we use in parts a b?

Not necessarily, unless you feel it adds value, but you may need to discuss them elsewhere to some extent. Look at the marking guide for part c

The information on Fame/in the annual accounts does not match that provided. Can I use alternative information instead?

No, use the data provided. The data is adjusted (by Bloomberg) such that it is directly comparable. If you include further (not replacement) data, consider this when you discuss the limitations.

How do we calculate the cash flow?
Consider what you plan to use as cash and work it out from there. Alternatively, are there any ‘cash flow’ data items provided?

I don’t understand how the figures are displayed; can you explain?
As a quirk of Bloomberg, expenses are usually shown as positives in the reports. This is the case for the data shown, and all should actually be treated as expenses. There is one exception:

‘Operating expenses’ are shown as negative if an expense, or positive if the adjusted value shows an income. Please treat accordingly. So, for example, for Grainger Plc, the adjusted accounts show operating income in 2013/14 and expenses in 2015-2017. This may seem unusual (one of the issues with using adjusted data) but please just use the data provided rather than seek alternative data. This is not a financial accounting assignment.

In addition, the 4 rows titled as follows are ‘cash flows’, and so the sign just represents whether it was a positive or negative cash flow in that year
Cash from Operations
Cash from Investing Activities
Cash from Financing Activities
Net changes in cash

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