OBC Ltd Case Study Analysis Help With Solutions
Ocean Blue Charters Ltd (OBC Ltd) is a Raglan based company.
Its financial position at 31 December 2014 is as follows:
|Current assets -160,000||Current liabilities -100,000|
|Non-current assets- 400,000||Non-current liabilities- 200,000|
|Investments –shares- 40,000||Equity:|
|in other companies||Preference capital -50,000|
|Ordinary capital -250,000|
The issued capital comprises 25,000 non-voting 10% Preference shares which are preferential as to both dividends and return of capital in the event of winding up and 250,000 Ordinary shares. There are no retained earnings at 31 December 2014.
OBC Ltd needs to raise funds for a proposed expansion. The company wishes to maintain the current proportions of long-term debt:equity. Funds can be raised as follows:
• It can sell seven-year, $1,000 face-value bonds with a 9% annual coupon interest rate for $1,000. The cost of issuing these is $50 per bon.
• It can sell unlimited 10% preference shares at their par value of $2 per share, but this will cost 15c per share in issuing costs. The preference shares will be preference as to both dividends and return of capital in the even of winding up.
• OBC’s ordinary shares currently sell for $2.40 per share. New ordinary shares can be sold for the same price, but issue costs of 10% of the price will be incurred.
OBC expects to pay a dividend of 25c per ordinary share next year (2015). Dividend growth of 10% per annum is expected in the future.
OBC Ltd owns an existing boat which was purchased on 1 January 2013 for $600,000 and is being depreciated at 20% per annum using the prime cost method with an estimated residual value of zero.
It could be sold on 1 January 2015 for $450,000 before taxes. If it is not sold on that date, it can be used for another four years (depreciated using the prime cost method, with a zero residual value) then sold to net $150,000 before taxes at the end of 2018.
Since its purchase, the company has leased this existing boat on an annual basis to John Dory, an experienced boatman, for $212,500 per annum. John has been responsible for all the maintenance and running costs of the boat.
The only expenses OBC currently incurs annually are depreciation of the boat and interest of $12,000. No changes in interest are expected in the next four years.
John is unable to meet the increasing public demand for such trips with the existing boat and has suggested that OB purchase a larger boat, which he is prepared to captain as an employee for the company, but he does not wish to lease it. If OBC does not purchase a new boat, John will continue with the existing arrangement he has with the company for another four years, with a 5% annual increase in his lease cost commencing 1 January 2016.
A new fully equipped, all-weather boat can be purchased for $1,250,000. It would be depreciated over four years using the prime-cost method with an estimated residual value of zero. If it is purchased, the first trip will take place on 1 January 2015.
Assume the new boat could be sold for $250,000, at 31 December 2018.
If this boat is acquired, it is anticipated that the following current account changes would result:
Accounts receivable +7,300
Accounts payable -8,000
The following changes are expected over the four-year period:
• Passenger numbers will increase by 5% in 2016 and 6% in 2017 to the maximum the boat can accommodate.
• The fare will increase by 3% per annum.
• Labour costs will increase by 4% each year.
• Variable costs will increase by 6% in 2016 and by 2.5% per annum thereafter.
• Fixed overhead costs (excluding depreciation) will increase by 2% per annum.
The company undertakes projects with a payback period of less than 2.25 years, provided the NPV is positive.
How it Works
How It works ?
Step 1:- Click on Submit your Assignment here or shown in left side corner of every page and fill the quotation form with all the details. In the comment section, please mention product code mentioned in end of every Q&A Page. You can also send us your details through our email id firstname.lastname@example.org with product code in the email body. Product code is essential to locate your questions so please mentioned that in your email or submit your quotes form comment section.
Step 2:- While filling submit your quotes form please fill all details like deadline date, expected budget, topic , your comments in addition to product code . The date is asked to provide deadline.
Step 3:- Once we received your assignments through submit your quotes form or email, we will review the Questions and notify our price through our email id. Kindly ensure that our email id email@example.com and firstname.lastname@example.org must not go into your spam folders. We request you to provide your expected budget as it will help us in negotiating with our experts.
Step 4:- Once you agreed with our price, kindly pay by clicking on Pay Now and please ensure that while entering your credit card details for making payment, it must be done correctly and address should be your credit card billing address. You can also request for invoice to our live chat representatives.
Step 5:- Once we received the payment we will notify through our email and will deliver the Q&A solution through mail as per agreed upon deadline.
Step 6:-You can also call us in our phone no. as given in the top of the home page or chat with our customer service representatives by clicking on chat now given in the bottom right corner.
Features for Assignment Help
We believe in providing no plagiarism work to the students. All are our works are unique and we provide Free Plagiarism report too on requests.
We believe in providing perfect, relevant and 100% accurate solutions to the student as per questions asked. All our experts are perfect in providing that so as to give unique experience to the students.
We are the only service providers boasting of providing original, relevant and accurate solutions. Our three stage quality process help students to get perfect solutions.
All our works are kept as confidential as we respect the integrity and privacy of our clients.
- Physics Assignment Help
- Chemistry Assignment Help
- Engineering Assignment Help
- Psychology Assignment Help
- Online exam Help
- Marketing Assignment Help
- Arts Assignment Help
- Sociology Assignment Help
- Project Management Assignment
- Case Study Help
- Nursing Assignment Help
- Research Assignment Help
- Operations Management Assignment help
- Accounting Assignment Help
- Biology Assignment Help
- Mathematics Assignment Help
- English Assignment Help
- Business Plan Help
- Essay Writing Help
- Human Resource Assignment Help
- Accounting Homework Help
- Computer Science Assignment Help
- Finance Assignment Help
- Economics Assignment Help
- Statistics Homework Help
- Management Assignment Help
- Strategy Management Assignment Help
- Auditing Assignment Help
- Information Management Assignment Help
- Online Assignment Writing help
- Best Assignment Help
- Humanities Assignment help
PART A VIABILITY OF THE INVESTMENT
Q1.Calculate the weighted average cost of capital. (Use tax rate of 30%)
a.the initial investment, and
b.the terminal cash flow.
Q3.Assuming the expansion starts in 2015, show
a.the operating net cash flows for the existing boat for the four years, and
b.in ONE statement, the incremental operating cash flows associated with the new boat and the discounted value of those cash flows for the four years.
v.discounted payback period
(Use your WACC calculated in (1) above where appropriate.
Q5.Because OBC Ltd would now be undertaking an active investment/venture (rather than a passive investment), one director, Albert, doesn’t think sufficient attention has been paid to risk. He is a director of another company that establishes “risk classes” and believes the risk of OBC’s new boat venture is in the “above-average risk class” and therefore the discount rate used to assess the viability should be increased by 15%.
Henry, another director, wants to use the CAPM to determine the required rate of return/discount rate, but the other directors and the company accountant do not, as they say it is not really valid for OBC and the current proposed project.
a.If the discount rate was increased by 15% and Albert has the final “say”, would OBC proceed with purchasing the new boat? Show workings.
b.Briefly explain why the CAPM is not really valid for assessing the risk of this project for OBC.(You must provide at least 3 reasons for lack of validity).
c.Identify and briefly explain in your own words the various issues that could increase the risk of not achieving the results you calculated in (3) above, and affect the viability of the investment.
Q6.Write a brief report, stating with reasons and with reference to your answers above whether OBC Ltd should buy the new boat.
PART B IMPLICATIONS FOR WORKING CAPITAL MANAGEMENT
Q7.Explain why the working capital would change as a result of buying the boat.
PART C FINANCING OF THE INVESTMENT
Q8.Given that OBC wishes to maintain the current proportions of long-term debt:equity to finance the expansion, calculate:
a.The maximum debt that can be borrowed,
b.The number of preference shares to be issued and the proceeds receivable,
c.The number of ordinary shares to be issued and the proceeds receivable.
Q9.OBC has not decided how it will finance the purchase of the new boat. Compare and contrast the following sources of finance from the company’s point of view. (You need to consider advantages and disadvantages of each source).
Q10.If OBC did not wish to maintain its current debt:equity ratio, it could borrow the full cost ($1.25million) of the new boat or it could lease it.
Product Code :Case11
To get answer for this question, kindly click here (Note: Don’t forget to write the product code in comment section)
You can also email us at email@example.com but please mentioned product code in the mail body while sending emails.You can browse more questions to get answer in our Q&A sections here.