You are analyzing KKP Private Limited
You are analyzing KKP Private Limited and you have collected the following information. KKP operates7 nurseries and provides landscaping services to the condominiums in Korea. It started in the year 2000and its revenues have grown at a compounded rate of about 12% a year. Its financial details for the past 3years are shown below:KKP plans to open another 3 nurseries. The initial capital expenditure required for this expansion isestimated to be $3 million, which is to be depreciated equally over three years to zero net book value. Nosalvage value is expected. Based on a market feasibility study which cost $100,000 to undertake, itanticipates 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 inthe first three years is estimated to be $75,000 per year and this will increase to $125,000 from year fouronwards. Net working capital is estimated to be 12% of sales, which is required at the start of the year. Asthe firm expects to fully implement a just-in-time inventory system, the net working capital will be fullyrecovered at the end of year three.For the purpose of investment appraisal, the company uses a market risk premium of 5% and risk-free rateof 3%. Its historical beta is 0.8 and marginal tax rate is 20%. Good Landscaping has a target debt ratio of16%. It issued bonds on July 1, 2013 for $200,000 with a par value of $100 and coupon rate of 8%. Thematurity of the bonds in on June 30, 2020. The market value of bonds is $108.53. Its shares are selling at$1.20.Question 1Compute the accounting ratios for FY 2012 to 2014 and evaluate KKP’s liquidity, profitability, assetutilisation and financial leverage. (25 marks)Question 2Calculate KKP’s cost of equity, cost of debt and weighted average cost of capital (WACC). (20 marks)Question 3Calculate the net present value (NPV) and examine whether Good Landscaping should proceed with thisgrowth strategy. (30 marks)Question 4Analyse and comment on the dividend policy over the last 5 years. (10 marks)Question 5In 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 ofvarious options and recommend an appropriate financing alternative. (15 marks)
