How options are used in business to effectively hedge

Assignment Help Financial Management

Reference no: EM133668238

Report -

Part A
Students will be required to research the topic relating to the concept of the definition and application of financial options.

Required
The paper should include information about how options are used in business to effectively hedge against unforeseen changes in the prices of the underlying asset.
Word length 1,500 words.

Part B
Instructions
The assessment involves undertaking and completing a case study where you are required to apply concepts relating to investing in long-term assets.

Specifically, you will apply capital budgeting techniques in the case to undertake an Analysis of the data provided, interrogate the information provided by your analysis, develop a Board of Directors Report to show your recommendations and Influence the readers.
Global Testing Geneva Ltd.

Background.
The Global Testing Geneva (GTG) was established in Switzerland in 1893, by two brothers who married into a wealthy family organization.

The company had developed as a global organization for inspection and testing with 40,000 employees worldwide. The core service that was provided was Inspection of International trade to ensure that governments collected the appropriate amount of customs duty and minimized and illegal profiteering by customs officers.

The company had also acquired a professional certified certification organization. That reviewed ISO 9000 standards requirement and implemented ISO 9000 standard. Systems. As the result of his inspection services the organization had increased as a global organization across a number of countries. In the 1990s the granddaughter of the founders who now was the CEO of the company introduced a strategy of corporate entrepreneurship across all international subsidiary organisations.

In New Zealand, the company was founded on the back of traditional inspection and testing with most of the organization focused on the testing of primary products such as wool agricultural products, coal, steel and minerals. The revenue for the group was low at $25m NZD On one occasion the CEO of GTG New Zealand while held up in a traffic delay, noticed the signage on the back of a vehicle as. Medlab, Auckland with a tag line of. "testing for life". Immediately recognizing an opportunity, he followed the vehicle, recognising that the word testing was core activity of the organization, only in New Zealand, but worldwide. As the result of this Inquisitive and entrepreneurial approach. GTG NZ was granted permission by head office in Geneva to actively pursue the acquisition pathology laboratories across New Zealand.

Your role.

You have just accepted the role. Is an expatriate from Australia to New Zealand as the Finance manager for GTG New Zealand Ltd. Your first task is to assist with the analysis of two potential pathology laboratory acquisitions.

There are three specific Acquisition targets as follows.
Auckland Pathology
Regional Pathology

The current ownership of each pathology business is by a few doctor- pathologists working in a partnership arrangement at each organisation. No doctors have a cross ownership or partnership in either of the other businesses.

Business Model
While the acquisition process was quite clear, the technicalities involving acquiring a professional health services organization involving pathology was quite involved. The key issue that GTG New Zealand faced was that it did not have doctors on their staff and were ill qualified to run a testing laboratory which involved decisions that could have potential high-risk effects on individual's health.

As a result of negotiations with the government Health Department identified revealed that an alternative business model could be adopted to achieve the required involvement of qualified medical doctors.

The proposed acquisition corporate venturing model involved establishing a separate Legal entity to act as the acquisition vehicle. The owner doctors transferred their partnership share of the asset into the vehicle. And received shares amounting to 33% of the value of the acquisition vehicle.

GTG NZ held the majority of the remaining 67% of the acquisition as a majority shareholder. The details for each of the. Pathology labs is attached on Appendix One, Two and three.

Your Task

As the finance manager, your task is to assess which of the potential acquisition targets was the most suitable for GTG Limited. For you to accomplish this task you will be required to adhere to the specific acquisition guidelines policies of GTG Limited in Geneva.

You will be required to:

To determine the free cash flows from each of the potential acquisition targets

To evaluate the proposals.

Calculate the net present value of the acquisitions based on the cash flow information provided, using the proposed acquisition value as provided in each case.

In order to calculate the net present value in relation to each of the selected proposals the organization requires a minimum of the weighted average cost of Capital currently this is 5% plus a risk premium 2%. This will satisfy shareholders return in Geneva.

To finance the acquisitions

The company wishes to fund the acquisition using a Bond issue. Assuming the bonds will be issued for 5 years with a coupon rate of 6.5%, and GTG New Zealand wishes to raise $1,000,000 determine the price and number of bonds to be issued given that the market rate for similar bonds is 8%.

Prepare a board report (1 to 2 pages )the directors of GTG New Zealand and Geneva can review which highlights your recommendation based on your calculations. In addition, raise any concerns or aspects you may have other than quantitative analysis that may assist
in the evaluation of the potential acquisition. Note only one of the acquisitions opportunities can be selected.

Reference no: EM133668238

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