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Corporate Financial Strategy - Case Study Example

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The case study “Corporate Financial Strategy” discusses companies’ strategies in which the opposite theories had been applied -   the Bird-in-the-Hand theory  (dividends affect the firms’ value), the Dividend Irrelevancy Hypothesis (dividends are irrelevant), and the Signaling Hypothesis…
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Corporate Financial Strategy
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Download file to see previous pages The company “Chesterfield Wanderers” was considering investing an excess fund of £1 million. Its choices were on the acquisition of a star player who could increase gate receipts, and on improving its facilities which could offer a premium audience section to corporate clients. Both options were mutually exclusive events, and each option has corresponding advantages and disadvantages. Consider the following facts of the case:
Acquire Bassa Ramsey, a central defender, at the cost of £1 million. Such investment will increase gate receipts by 250,000 on the first year and 130,000 on the succeeding years. It will also increase sponsorships and advertisement revenues. Moreover, the company will receive 220,000 for releasing Vinnie Smith to a rival company. This incremental increase on the cash inflow of the company is compared against the incremental increase in the cash outflow, which included the increase in the annual salary paid to players to the tune of 40,000 (Ramsey will be paid 80,000 while Smith is being paid 40,000). Loyalty bonus for Ramsey at the end of the five-year contract will also cost 20,000 more (Smith to receive 20,000 while Ramsey will be paid 40,000). These figures are tabulated below to analyze the net cash flow: At the end of the fifth year, investment on acquiring Ramsey would have produced a cumulative net cash flow of 323,000. Considering the time value of money, this project would have a net present value (NPV) of 62,942 and an internal rate of return (IRR) of 13.23%.
Since this option produced a positive NPV and an IRR that is higher than the project’s 10% cost of capital, it would be recommended that this project is a viable investment. But that is only viable if there are no other options available. Will the £1 million investment on acquiring Ramsey the best option available to Chesterfield Wanderers
Invest the accumulated funds of £1 million in improving the ground facilities. This investment involves the construction of an “all-seated area and ‘executive boxes’” which would help realize an additional stream of income in the amount of 400,000 beginning the second year of the project. Unlike the first option where cash out of £1 million is immediate (beginning of the project), the second option requires only the entire cash out at the end of the first year of the project. ...Download file to see next pagesRead More
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