The Purplephone Group Analysis - Example

PURPLEPHONE STRATEGIC REPORT Name of Student Institution Course Number Supervisor Date 1.0 Report Summary The Purplephone Group is a corporation that has its headquarters in France but functions in several countries. It plans to carry out three key strategic approaches that are critical to the company’s accomplishments. I. The report defines the proposed joint projects with a company that is based in Germany, and that is called EMF AG. This joint project is a 50:50 financial endeavor that is designed to be operational for the four years to come. The company is also established to evaluate the appropriate choices for reforming finance that will ensure that profit is maximized. Hence, this report puts across the thoughts that the company expects the proposed strategy to achieve. II. The organization is also evaluating the suitability of relocating the headquarters of the company to Monaco from France, which would be a worthwhile decision since Monaco provides a better market for the sale of Euros. III. The company has also thought of expanding to the International market of Asia. Therefore, it is crucial to comprehend the aspects that guide the kind of sources of financing that the organization is to use. Therefore, the study also outlines sources of finance that the Purplephone Company intends it exhaust during its venture to Asia. This report therefore exclusively relies on the methods of financial analysis and the returns expected. Hence, the appropriateness of the strategy will rather than depending on the comparative technique will rely on information that is independent. 2.0 The Joint Venture Strategy in Germany The two companies, EMF AG and Purplephone group, intend to come together based on a venture that is guided by equal cost sharing. They are both set to invest € 2 million each. The approach, therefore, calls for a precise analysis putting in mind the current financial status of the Purplegroup Company. Contributing € 2 million translates to 10% of the entire amount of capital of the company, which is € 20 million. The management should therefore critically analyze if this investment is worthwhile by looking at its hypothesized impacts. This investment will determine the performance of the company. Therefore, the challenges the financial expectations and the future results will provide a model of whether or not the joint venture is to be accepted or not. 2.1 Financial Viability According to Pike et al. (2012), states that the company’s financial position is very critical in determining whether or not it can form a collaboration with other firms in the same industry. When a corporation is stable financially and has a profit history that is sustainable, then the investors and stakeholders are assured of returns. Hence, the firms that intend to collaborate should analyze not only the financial competence of either organization but also the period that the joint ventures are expected to run. The appropriateness of the investment can be evaluated using the Payback method, The Net Present Value (NPV) technique, Accounting Rate of Return Approach, the Internal Rate of Return. The NPV method is essential since it provides an apparent and reliable consideration of the returns that are expected over the particular duration and describes the level of the feasibility of investment (Pike et al., 2012). These report, therefore, embraced the NPV approach to evaluating the size of the merits and demerits that the Purplephone Group could get if they move forward with the collaboration. To either reject or accept the joint venture, the method of NPV will provide numbers that will be the baseline for such a joint venture. 2.2 Suitability of the Net Present Value Technique During the process of determining the feasibility of a corporate collaboration, the implications that are financially based are incorporated. The Net Present Value analysis is rooted on the investment and the results that are predicted over a period and it is also preferable since it outlines the total capital of the firm. If all other factors are held constant, the size of the capital used during the operation determines the profits that are to be made. Depending on the cash flows to carry out calculations ensures that changes that may result in alterations from sources such as depreciation, which are secondary costs. NPV concentrates on cash flows since the evaluation of a business opportunity based on the profits that it has expected to accrue will be related to the misconceptions of a viable idea because of the benefits that the calculations bring forth. It also bases on the income obtained from the activities carried out each year and the period that the collaboration takes place which is four years for EMF AG (Atrill, 2011). 2.3 The Home and Foreign Currency Factor Since the calculations of home currency in euros are more unwavering as opposed to foreign currency in dollars to the estimates of the Net Present Value are grounded on it. The calculations carried out each year gave low numbers in dollars as opposed to euros. It is important for the financial concerns to be rooted in euros to ensure that the variables that are predicted to experience discounts while focusing on the present values. This is because the Purplephone Group will be based on the existing spot rates of euros receive their share of flow of cash. Exchange rates always undergo alterations. Hence, it calls for concentration on the spot rate at the time the deal was made so as to avoid any drastic changes that may occur due to the instability of exchange rate or inflation (DePamphilis, 2010). 2.4 Financial Analysis of the Joint Venture The financial analysis of the joint venture reveals that it is a workable commitment. This is because the evaluation shows that the € 2 million would produce an additional amount of € 1.433 million. It is the goal of every organization whether it is working in isolation or in partnership to maximize the profits that it makes. It has been proven by research and practice that connection assures the scale of operation merit. A good option of the Purplephone Group is the joint project as indicated by NPV. Nevertheless, it is essential to put in mind some factors. The approach assumes that if the joint venture experiences risks, it will affect the capital at an equal magnitude throughout the duration of the corporation. Besides this, the non-monetary factors are ignored (Fillippel, 2010). The method also projects the cash flow obtained at the end of a financial period, which is unrealistic keeping in mind that business ventures produce money throughout the fiscal year (Brealey & Myers, 2013). Nonetheless, the analysis of the joint venture evaluated the impacts of the non-financial factors, the effects of inputs, and the risk factors as separate entities for the comprehensive examination. 2.5 Non-Financial Factors 2.5.1 Organizational Culture The performance of a firm does not only depend on the financial factors but also the non-financial factors. One of the factors that the Purplephone group should put in mind is the kind of problems that are bound to come up due to the problems of management that the joint venture may undergo. The organizational culture of either of the firms will also be considered. It will explain the extent to which the two companies will exist during the four years of working together. The approaches of administration of EMF AG and the Purplephone Company are unlike therefore there is the need for organizational and management culture agreement. When there the facets are not united, and there is a conflict in the structure of control then the performance of the joint venture is bound to be affected (Brealey & Myers, 2013). Nevertheless, to escape any wrangles the two firms can frame a document that is legal in nature. The deed should state the performance, monitoring, and analysis of the activities of the joint venture and the strategic approach to management, besides the methods of incorporating the modification of the process and resolving conflict should be agreed on before the investment begins. Some non-financial factors that should be put in mind are access to technology, the availability of structures of communication, and the availability of both non-skilled and skilled labor. 2.5.2 Political Factors Another key non-financial concern that should be put into consideration is the political aspect. The political environment of Germany will impact on the functioning of the Purplephone group since it will be considered a foreign company and in Germany, the regulations of the government determine the extent to which the certain activities of an international company are to be carried out (Brealey &Myers, 2013; Verbeke, 2013). The financial effects will be eradicated from the home currency considerations Hence the activities that will change the inflation level and the exchange rates of the coin will not influence significantly on the flow of cash of the Purplephone Company. The Purplephone Group will face impartial risks since the two countries are active members of the European Union. Furthermore, the venture with a company that is already based in Germany will tone down the political effects. 3.0 Re-domiciling the Parent France Company Strategy Another aspect that calls for the reformation of the financial sector of the Purplephone Company is the plan to move the headquarters to Monaco from France this is due to the profits that the company has been making in Monaco. According to BBC (2015, the country is a small and Independent microstate which is known for its corporate culture. The economy that is dependent on tourism, especially of the Monarchy, is a real market for financial engagements including stock exchange and banking. The high sales of euros came from Monaco as depicted by the previous Company records. When the parent branch is relocated to the place, it is inevitable that it will experience some risks that are associated with the external business environment. 3.1 Restricted Operations Effect Most countries have formulated rules and regulations that are meant to control the activities of foreign companies and to make sure that the foreign companies do not dominate the local businesses and hence protecting the local enterprises. Therefore relocating the Purplephone Group to Monaco will mean that the firm will be under constant supervision by the government. The regulations have influenced negatively in the process transferring the generated income to a foreign economy from a local one. This is due to the fact the Monaco government has set rules to protect the country from the adverse withdrawals carried out by withdrawals that are foreign. Hence, it is clear that the company will face unwanted obstacles when moving income that has been acquired in France. Such regulations will affect the financial activities of the organization in France since the process of repaying loans will be impacted because it will be expensive to pay off the debt from Monaco. Also, the payment of those stakeholders located in France will be impossible due to the transfer of Funds restrictions by the government of Monaco. 3.2 Discriminatory Operational Practices Many countries have set out rules that discriminate against foreign investors enjoying the freedom of free trade in their countries including Monaco. The process of moving the parent company to Monaco will imply that such duties as taxes and fees of operation will be included as opposed to the local businesses in Monaco. It is important to consider the effects of these charges as they will influence negatively on the profit margin. The organization will be charged low quotas and high tariffs as compared to France. Due to the fees that are made, there will be restrictions on the imports made by the company while located in Monaco. The tertiary services costs will be a lot higher than that of the local Company. Also, the Government regulations state that the ownership of the company has to be shared by the residents and firms through the sales of the proportion of the organization. The practices that are discriminatory in nature will affect the size of the profits that could be obtained by the relocation strategy and the competitive power of the Purplephone Group in Monaco. 3.3 Profit Repatriation The capital operations are usually massive, and the foreign companies enjoy economies of scale as they take part in multinational business ventures to maximize the profits that they make. The revenue accrued is usually considered part of the income of the country in which the parent company is located. Some organizations will make arrangements for the profits to be returned to the financial sector of the parent branch. Fillippel (2010) defines Repatriation of Profit as the procedure of shifting generated profits to the parent firm’s financial reserves. However, most of the time the transfer of the additional income that is generated is not definite since various governments have distinct policies governing the transfer of profits that have been obtained through the activities conducted in their countries. Such profits will be high and thus, will affect negatively the benefits that are to be made by the companies that intend to shift the location of the parent branch. Nonetheless, the circumstances that adjoin Purplephone group are unique since the enterprise is moving to a place where most of its profits have been originating. 3.4 Human Resource The shift from France to Monaco will call for the relocation of some employees to Monaco since the process necessitates technology, financial support, and physical assets and the human resource that can ensure the sectors are running. The costs of transferring the employees to Monaco will be costly since they will need to get extra allowances such as the foreign allowances and extra pay due to the additional expenses. Some workers are also likely to forego the offer. Hence, the Purplephone Group should ponder the merits of carrying out the recruitment of new employees to help manage the firm. For organizations facing financial stagnation, it is not always advantageous to transfer personnel from one country to another hence the need to recruit and train new employees hence it is vital for the Purplephone Company to consider employing new staff from Monaco to match the requirements of the firm. It is essential for the management to keep in mind that the performance of the Purplephone Group in its new location is dependent on the employees and the skills that they can provide. 4.0 Expansion Strategy to Asia Asia as a continent has been developing quickly over the recent years. The development is as the result of the rapid economic growth and the rapid industrialization process that has been recorded. Asia because of its population offers a ready market for the services and goods manufactured in and out of the continent. India and China have been at the front of having a steady per capita progression. The larger percentage of development that is taking place in the region has been as a result of the improved technology and foreign investment. Since the area largely apes the French culture of corporate aspects then it would be a favorable place to relocate the parent branch. As opposed to India, investing in China will be advantageous due to the improved infrastructure in the area. Fillippel (2010) affirms that any obstacles coining from the difference in the business culture will be unraveled through the analysis of the market based on evidence of both the Industry and the market. The nature of competition in the market in Asia is not as competitive in Europe where the industry is located. The exit and entry laws are also discriminative and restrictive. As India and China as countries offer competition that is less threatening as opposed to that in Europe the firm choosing to invest in the two nations will mean that it will make profits from the market that is less competitive. Since the Purplephone Group is a financial Company, any non-monetary risks are manageable. 4.1 Factors Influencing the Choice of Financial Source The amount of capital to put into the business is determined by the time of foreign investment. The knowledge of the date of investment is necessary, as it will affect the financial sustainability of the firm. The number of years will define the size of investment in the business that the company intends to capitalize in Asia. The funds to be put in business are mostly influenced by the financial abilities of the organizations. Brealey and Myers (2013) suggest that a feasible business that does not need external funding should support the effect of the tax burdens that are related to internal funding. The structure of the organization regarding ownership is also another factor that describes the nature of project funding. This is because the organizations structure will affect the business operation and the shareholders. The decision inclined to a particular approach is a fundamental concept that should rely on the analysis of prediction and evidence. 4.2 Internal Financial Sources The internal source of investment of an organization is obtained from the working capital and the earnings that have been retained which is a reliable method. The method is worthwhile since it will save the company the trouble it will go through when sourcing finance from the external sources. Because there are factors that act as obstacles for businesses in the processes of repaying loans, the method protects the firm from such aspects. The business will not be liable for periodic payments and the shareholders position in the company will not be affected when using the working capital. Evans, (2011) mentions that a company can generate more money not by using or restricting the credit facilities acquired by the consumers but by disposing of the assets of the firm. 4.3 External Financial Sources Borrowing and selling of shares are some of the external mechanisms that the Purplephone Group can employ in obtaining finance. Borrowing encompasses asking a particular organization to lend you funds at an interest paid over a period of time. Some of the agencies that give the funds to the firm include the government, other industries, and banks. Purplephne Group is not advantaged in using this method of external funding since it is already faced with debt to repay. Giving out the shares of the company to an Individual or an organization can be advantageous since it helps the company raise the required funds fast enough. However, the approach will affect the paybacks acquired by the primary stakeholders. This can be combated if the shares are protected by the right issue, which in turn protect the ownership of the firm. 4.4 Possible Foreign Entry Modes To access the Asian market, the Purple group company will use the Foreign District investment. The method will encompass the identification of a business in Asia that operates on similar grounds and then getting a stake control. The method is advantageous since it is associated with less rigid regulations from the government of the foreign countries and the firms are looking for foreign investors to invest in their companies (Blonigen & Piger, 2014). Through aspects such as assets, liability control measures, profit, the FDI entry can be affected by the unpredictable alterations in politics. Furthermore, the company can embrace the opportunity of engaging in business unions where the firm merges with an identified Asian company or takes control of an existing company. The advantage is that the business will not incur the start-up costs Moreover the other option is to start a business from scratch in Asia, which is good because it will have total control of the firm’s activities though the cost will be relatively high. Recommendations Since the joint venture between EMF AG Company in Germany and Purplephone Group proved feasible according to the calculations of the Net Present Value carried out. Based on the current organization’s position the returns that are expected to be accrued on the investment are advantageous to the company. The engagement of the two firms will ensure that the profit margin is enhanced and that the cost of conducting the business activities. The € 250 million that the Purplephone Group ought to raise the concept to preserve the right issue to control the organization's structure. The approach is preferable since it will not subject the company to the payments of loans and interests that are regular. Since the company will not require the prospectus, the right issue will be less expensive. The Greenfield investment mode of entry into the market of Asia should be considered because it ensures that the firm has total control of the organization. A model that is predictive in nature should be formulated, and the assessment of risks carried out before carrying out the strategy of relocating the firm’s headquarters. The analysis of the political rules and regulations that many impact heavily on the business should also be conducted. The company should also analyze the enactment of the foreign companies in Monaco to find out the challenges faced by previous companies 6.0 Appendices Appendix 1: Table 1 Summary Cost of equity 14% Cost of debt 6% Tax rate (Germany) 30% Spot rate (£/€) 0.732 Duration (years) 4 Interest rate (UK) 2.5% Interest Rate (Euro Zone) 1.5% Growth in Projected cash flow 13% Appendix 2A: Table 2 COMPUTATIONS Year Expected Exchange Rate = Spot Rate x ((1+Rate in UK)/(1+Rate in Euro Zone))^Time Expected Exchange Rates 0 0.732 0.732 1 0732*[(1+2.5%)/(1+1.5%)]^1 0.739 2 0732*[(1+2.5%)/(1+1.5%)]^2 0.746 3 0732*[(1+2.5%)/(1+1.5%)]^3 0.754 4 0732*[(1+2.5%)/(1+1.5%)]^4 0.761 Appendix 2B: Graphical Representation of Yearly Rates Appendix 3: Assumptions i. The contribution for the joint venture remains with an equal mutual benefit of 50:50 ii. The inflation rate in Germany was considered to remain stable at 2.5% per annum iii. The interest rates in UK to remain 2.5% and the rate for the Eurozone to remain 1.5% iv. The operational cost will be 235,000 euros inclusive of a depreciation of 25,800 euros each year v. The spot rate to be used in NPV approach is 0.732 dollars for every euro vi. Taxes will be computed in Germany rate of 30% and the double tax system exists between France and Germany vii. The depreciation is not considered when calculating taxable profit however it defines the value of the gross income Appendix 4A: Table 3 COMPUTATIONS YEARS 1 2 3 4 UK Cash flows £'000 550 621.5 702.30 793.59 Exchange Rates 0.739 0.746 0.754 0.761 Converted Cash flows €'000 744.25 833.11 931.43 1042.83 Euro Cash flows €'000 980 1107.40 1251.36 1414.04 Total €'000 1724.25 1940.51 2182.79 2456.87 Appendix 4B: Graphical Representation of The Expected Incomes Appendix 5: Table 4 COMPUTATIONS   €' 000 Weight Equity 12,000 60% Debt 8,000 40% Total 20,000 100% Appendix 6: Table 5 Cost of capital Cost of capital =WE x KE + WD x KD = 60% X 14%+40% X 6%(1-29%) = 10.1% Appendix 7: Table 6 Computations  Year (figures in €'000) 1 2 3 4 Operating costs 235 235 235 235 Less Depreciation 25.8 25.8 25.8 25.8 Cash Operating costs 209.2 209.2 209.2 209.2 Add Inflation Adjustment - 5.23 5.23 5.23 Total Cost 209.2 214.43 214.43 214.43 Appendix 8: Table 7 NPV  YEAR 0 1 2 3 4 5 Gross Cash flows €' 000           1724.25 1940.51 2182.79 2456.87     Less OC €'000 209.2 214.43 214.43 214.43 Taxable Profits €'000 1515.05 1726.08 1968.36 2242.44 Tax Value 30%  - 454.52 517.82 590.4 672.73 Profits (AfterTax) €'000 1515.05 1271.56 1450.54 1652.04 -672.73 Initial Investment €'000 -2380 - 360 - - - - Net Cash flows €'000 -2380 1155 1272 1451 1652 -673 10.1 % Discount Factor 1.000 0.899 0.808 0.726 0.653 0.587 Present Values €'000 -2380 1038 1028 1053 1079 -395 NPV €'000 1433 References Atrill, P., 2011. 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Corporate Finance and Investment: Decisions and Strategies. 7th ed. London: Pearson. Verbeke, A., 2013. International Business Strategy. 2nd ed. Cambridge: Cambridge University Press. Read More