You are analysing Good Landscaping Private Limited and you have collected the following information. Good Landscaping operates 7 nurseries and provides landscaping services to the condominiums in Singapore. 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 before 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 FY 2014 FY 2013 FY 2012 $'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 2,400 2,100 1,900 FIN303 Assignment 2 SIM UNIVERSITY Assignment 2 – Page 3 of 4 Other non-current assets 250 140 175 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-year 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 On July 1, 2015, Good Landscaping 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 bonds will pay coupon semi-annually. The market value of bonds is $108.53. Its shares are selling at $1.20. FIN303 Assignment 2 SIM UNIVERSITY Assignment 2 – Page 4 of 4 Question 1 Compute the accounting ratios for FY 2012 to 2014 and evaluate Good Landscaping’s liquidity, profitability, asset utilisation and financial leverage. (25 marks) Question 2 Calculate Good Landscaping’s cost of equity, cost of debt and weighted average cost of capital (WACC). (20 marks) Question 3 Calculate the net present value (NPV) and examine whether Good Landscaping should proceed with this growth strategy. (30 marks) Question 4 Analyse and comment on the dividend policy over the last 5 years. (10 marks) 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.