Reference no: EM13853366

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.