Reference no: EM133078104

FIN 3003 Corporate Finance - Higher Colleges of Technology

Project brief
Your team was hired by an investment fund, Future Star Investment (FSI) to advise its Board of Directors on two investment alternatives which they are considering.

FSI is a diversified fund. It invests in various sectors with holdings in both listed and unlisted companies e.g. manufacturing, energy, construction, retail, food, tourism.

This year, FSI is considering to invest AED 500m of its funds and has identified two businesses in two different sectors where the fund would like to acquire holdings. FSI is looking to invest in opportunities that would maximise the value of its shareholders. These are:
Investment alternative 1: FSI is interested in the telecoms sector and has identified Emirates Integrated Telecommunications Company (Du) as a potential investment.

Investment alternative 2: FSI is also interested in the transport sector and has identified Emirates Transport Operator (ETO) which is a UAE based publicly traded company that operates a range of urban transport services (bus, tram, train) across the GCC region.

Your team's mission is to prepare a report, and a presentation to the Board, in which you present your evaluation of both investment alternatives. FSI have prepared a brief for each alternative (see Appendix) with a set of questions they would like you to answer. These are outlines below.

Required:

Question 1: Your group is required to:
(a) Calculate the following market multiple ratios for Du at its 2020 financial year-end:
i. EV/EBITDA
ii. Price-to-earnings ratio (PE ratio)
iii. Price-to-book ratio
(b) Contrast and explain the results of the different market multiple ratios that you calculated.
(c) Compare the PE ratio you calculated for Du with relevant benchmarks (e.g. with another telecom firm in the UAE, or the PE ratio of other telecom companies in other comparable markets)
(d) Evaluate the usefulness of market multiple ratios in company valuation.

Question 2: Your group is required to:
(a) Calculate the NPV of the project based on the Government's estimate of the franchise cost. Show NPV including and excluding the terminal value.

(b) Calculate the IRR of the project. Show NPV including and excluding the terminal value.
(c) Indicate ETO should invest in the project if it paid Government's expected franchise cost. Consider the impact of the terminal value in your evaluation.
(d) Calculate the payback period of the project by excluding the terminal value.
(e) Based on the payback period calculated in (d), should ETO bid for the project on the basis of the Government's estimate of the franchise cost?
(f) Estimate the maximum price which ETO could bid for this new franchise given that competition is expected to be strong for this project. Include terminal value in your estimate.
(g) Estimate what would be the maximum price ETO could bid and still achieve a three years payback on this new franchise?

Question 3: Your group is required to:
(a) Explain whether it is better for ETO to base its bid price on the NPV method or Payback method - you need to explain the advantages and disadvantages of the two methods, which one would you recommend and why?

(b) If ETO proposed to pay AED 500m for the franchise, which investment alternative would you recommend to FSI (i.e. alternative 1 or 2)? You may recalculate NPV and IRR for the franchise.

Justify your answer by taking into consideration the most important risk factors faced by each investment proposition which are likely to affect the value of each business.

Attachment:- Corporate Finance.rar