Zircon Cars plc

| April 17, 2015

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1 7BSP1245 Finance for International Business Coursework Semester B 2014-15 Assessment weighting 70% Zircon Cars plc (B) Zircon Cars plc is a manufacturer of luxury high performance sports cars based in the UK. The firms assembly plant is located 10 miles to the West of Reading in Berkshire. The firm produces only one model, the ZC500 F1, which has a list price of £340,000. The cars are assembled by hand in the same way as a Formula 1 Grand Prix car, with a single lead engineer overseeing the build from the start of assembly to delivering the car personally to the customer. After delivery, the customer has direct access to the lead engineer by phone, SMS, and e-mail, throughout the life of the vehicle. Thus each car produced is ‘owned’ by a Zircon engineer who oversees routine maintenance and any unscheduled servicing which may be required. This is the standard of service and excellence offered to Zircon customers. Production The ZC500 F1 is designed and assembled at a purpose built factory in Berkshire UK. Zircon have searched the world for the very best components thus most of the components are imported. The engines come from Japan whilst the carbon fibre composite body shells are manufactured in South Korea. Other components such as interior fittings, windows, wheels electronic control systems and the drive train are sourced from various European manufacturers including the UK. A breakdown of the cost base is given in Table 1 ——————————————————————————————————- This Case Study has been prepared for discussion, analysis and comment. It is not intended to describe either good or bad practice. This Case Study may not be reproduced without the prior written permission of the author. © Borlace Management Ltd – 2014 Component Proportion of Production Cost (%) Source Country Currency Engine 25.0 Japan Yen Composite Body shell 15.0 South Korea Won Other parts (eg Drive train) 20.0 Europe Euro Other parts (eg electronic controls) 15.0 UK Sterling Assembly cost 25.0 UK Sterling Table 1: ZC500 F1 Production Cost Structure 2 Sales Most of the ZC500 F1 cars are exported. There is a small but stable market in both Europe and the UK but the USA has been the main market for a number of years. A recent development is the growing importance of China which now accounts for 30% of output. A full breakdown of sales is given in Table 2. UK and European sales are handled directly by head office in Berkshire. Zircon operates in the USA , China and the Middle East through a wholly owned sales subsidiary in each location. The sales offices have showrooms which are located in Los Angeles, Beijing and Dubai. The ZC500 F1 has a number of competitors and the main ones are shown in Table 3 below. When compared to the direct competitors listed in Table 3 the ZC500 F1 currently has a market share of 21.5% in the UK and in all of the countries to which the vehicle is exported. In the USA there is additional competition from US domestic manufacturers of super-cars who produce such models as the Seleem Raptor (list price $400k) and the March 7 Falcon (list price $200k). Country Proportion of Zircon Sales (%) Currency United Kingdom 5 Sterling USA 35 US Dollar Middle East 20 UAE Dirham China 30 Renminbi Europe 10 Euro Table 2: ZC500 F1 Market Structure Model List Price Lamborghini Aventador £350k Noble M600 $300k Ferrari 458 €250k Porshe 918 £540k Table 3: ZC500 F1 Competitors 3 Finance Zircon Cars plc has a net profit margin of 20% and manufacturing cost is 70% of total cost. An abbreviated balance sheet is shown below. Zircon Cars plc Balance Sheet at 30th September 2014 £000 £000 Fixed Assets: 182,125 Current assets 66,615 Less: Current liabilities 58,120 8,495 190,620 Financed by: Creditors due after more than one year: 7% Debentures 2019 30,000 Shareholders funds Authorised Issued Ordinary shares of £1 100,000 95,000 8% Preference shares of £2 18,000 Share premium 25,000 Profit & loss 22,620 190,620 Typically, Zircon pay out 45% of their profits as dividends and their return on equity has been 17.5% on average over the last four years. Millennium ordinary shares are presently trading at £1.55 and their preference shares at £1.70 (both ex dividend) whilst the debentures are trading at £104.22 per £100 nominal. The prevailing rate of corporation tax in the UK is 21%. Millennium have been able to increase their dividend per ordinary share from 10p in 2010 to 13.5p in 2014. Developments In order to reduce costs, the management of Zircon are considering an opportunity to purchase Korean Composites Co, the South Korean company which makes the composite body shells for the ZC500 F1. The owners of the business, have indicated that they are willing to sell but it will be a major investment for Zircon as the purchase price is expected to be in the region of £35(m). There is an offset because if the acquisition goes ahead Zircon will get a 2.5% discount on the cost of body shells. Due to the pace of technology change Zircon have a seven year time horizon for this investment and the Finance Director has provided the details of Korean Composites Co given below. Korean Composites Co Korean Composites Co manufactures carbon fibre body shells for the automotive industry and has confirmed orders for 1000 units in 2016 at a price of W48.14(m) each. Demand is 4 expected to grow thereafter at 5% per annum (pa) and selling price by 3% pa. One third of output is sold to Zircon and this is expected to continue into the future as Zircon increases sales of the ZC500 F1. Due to the nature of composite manufacturing Korean Composites fixed costs tend to be rather high and will be 32% of sales revenue in 2016. Fixed costs are not expected to change before 2023. Variable costs are 48% of sales revenue and of this 40% relates to labour cost with the remaining 60% being other variable cost. Labour costs are expected to increase at 8% whilst other variable costs are expected to increase at 5%pa Korean Composites Co has depreciation of W4,300(m) pa and has fixed interest charges of W510(m)pa. The interest charge relates to debt issued to support working capital. Corporation tax in South Korea is 24.2% and the current exchange rate is W1694.62/£. Assume corporation tax is payable at the end of the accounting year in question (you may also assume for the purpose of this case that accounting profit and taxable profit are identical.) REQUIRED: Evaluate the Korean Composites Co investment project on behalf of Zircon Cars plc. Advise the firm on whether they should undertake the project and identify the maximum price Zircon should pay to acquire the Korean Composites Co. Also, advise the firm on the potential impact of foreign exchange on the project and evaluate the alternatives for financing the purchase. Your answer should be presented in the form of a report of 2500 words total (excluding the reference list). Submission requirements: You should use Arial font size 12 and 1.5 line spacing. Exceeding the word count by 10% or more or deviations from the formatting instructions will attract a penalty of up to 5%. The hand-in deadline for submission is 23.30 on 24th April 2015. Submissions up to 24 hours late will attract a 5% penalty whilst those beyond 24 hours but less than 1 week late will be capped at 50%. Reports submitted more than one week late will attract a mark of zero. Submit one electronic copy via Studynet as a Word or pdf file. This is an individual assignment and the report submitted should be entirely your own work. This assessment is subject to anonymous marking so do not put your name on any document you submit. However, you must put your SRN on each document you submit. 5 Guidance for the preparation of your report. The purpose of this assignment is simply to give you the opportunity to demonstrate that you have acquired the knowledge and skills identified in the Module Handbook and that you can apply them in a typical business situation. You should approach the task as a business manager dealing with a ‘real’ business and should: a) Adopt a coherent approach to dealing with the set task
with a clearly stated business purpose. b) Identify an appropriate theoretical dimension and consider the implications for practice. c) Adopt appropriate analytical methods and a critical perspective. d) Refer to empirical work where appropriate. You may wish to include charts, diagrams and/or calculations in the report but these should only be used where they demonstrate a point you are trying to make. 6 Guidance for the preparation of your report cont’d. Do refer to the assessment criteria given in the Module Guide which gives a general outline of how marks will be awarded. Further specific advice about how marks will be awarded for the Referral/Deferral Coursework is given below. Task Specific Assessment Criteria: Coursework Communication Skills (Written) – 20 Marks: Marks will be awarded for a) for the physical presentation and layout of your report, b) adopting logical well supported (ie using appropriate citations) arguments, c) the extent to which the report is accurate, brief, concise and clear, d) the standard of English, and, e) compliance with standard Harvard referencing. Equal account will be taken of each element. Knowledge & Understanding – 20 Marks: You should establish a clear business focussed conceptual basis for your report – ie you need to show what you are seeking to achieve and why it is important for managing the Zircon Cars plc business (supported using appropriate citations). Synthesis – 20 Marks: From the case data given you should identify the nature of the decision(s) facing Zircon Cars plc and identify appropriate theory to support the approach you adopt and give your reasoning. Ie which analytical tools are consistent with ‘business focussed conceptual basis’ referred to above? (supported using appropriate citations). Analysis – 20 Marks: Using the case data given, you should apply the analytical methods identified in the previous section and evaluate the impact on the business in relation to the ‘business focussed conceptual basis’ referred to above. Evaluation – 20 Marks: Conclusions should be arrived at on the basis of your analysis of Zircon Cars plc issues; ie what do the results of your analysis tell you? In your conclusions section you should summarise the results of your analysis. Your recommendations will assessed on the extent to which they are linked to the analysis of Zircon Cars plc issues and on the extent to which they are theoretically coherent – ie the extent to which they are consistent with the theoretical/conceptual base you establish.

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