Description:
Assume that you are employed as an analyst for a leading consulting firm and that you are asked to prepare a financial
report of a potential client firm. This analysis will be presented as a teaser to the CFO and CEO in order to convince
them to employee you, so that you can advise them on optimising their debt and payout policy and on identifying an
acquisition target. Your presentation should demonstrate that you have a solid understanding of theories and practices
on debt and payout policy and on mergers & acquisitions and that you can communicate this clearly. Your report should
contain in the main body or appendix all your work, results and arguments along with the key financial data used. All
the relevant tables and figures should be contained and discussed also in the main body of the report and not only in the
appendix. The report should not exceed 3,500 words in total, without the appendix, and should include all of the
following four sections:
Section 1. Capital Structure Analysis: Describe the existing capital structure of the firm in terms of ingredients and
characteristics. Then, compare the leverage of the firm against that of comparable firms. Does the firm
have more or less leverage with respect to comparable firms and can this be justified? Furthermore,
analyse the appropriateness of the existing capital structure for supporting the particular
activities/strategy of the firm at the specific point of time in its life cycle and given the external
environment. (30 marks)
Section 2. Capital Structure Recommendation: Using the cost of capital approach, examine if an increase in the
Debt/Capital ratio by 0.04 (e.g., if the ratio is currently 0.03, this would increase to 0.07) would be
beneficial for the firm, by investigating how the increase would affect the risk and the value of the firm.
You should assume that credit agencies would downgrade the firm due to the increase in the debt by
one notch (for example from Aa1 to Aa2). (20 marks)
Section 3. Payout Policy Analysis and Recommendation: Describe the existing payout policy of the firm and
compare it against that of the comparable firms you chose in Section 1. Analyse the appropriateness of
the payout policy for supporting the activities/strategy of the firm at the specific point of time in its life
cycle and considering the external environment. Recommend whether and how the firm should change
its payout policy, justifying your recommendation. (25 marks)
Section 4. Acquisition Recommendation: Identify a public or private company which may act as an acquisition
target for the firm. Explain what the motive(s) for the acquisition would be and analyse any sources of
operating and financial synergy. Recommend whether the firm should use cash, stock or both as a means
of financing the acquisition. (25 marks)
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