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Managerial Finance - Silla Soft Drinks

The coursework is attached. Can I please have the references as well as the spreadsheet with calculation.

Silla Soft Drinks is an independent soft drinks company with a tradition of producing premium soft drinks and giving dependable quality and service, having been manufacturing soft drinks for over 100 years, and spring waters since 1993. The proud boast of the company is that their success has been based on the simple rule of putting the customer first by giving a personal service that exceeds the customer's expectations and working in partnership in order to develop business for mutual benefit.

Silla has plans to invest ?4 million in expansion plans which would enable the company to increase production capacity to match customers' needs and become a major producer of soft drinks and spring waters. At present the company supplies over 60 million bottles of product per annum mixed between established brands and customers own label products. With the additional production capacity Silla would have the potential to increase this to over 100 million bottles per year if required and if continental shift working over weekends was introduced.

Income Statement for the year ended 30 April

2007 2006
?000 ?000
Turnover 8,411 7,804
Gross Margin 3,365 2,547
Operating Expenses 1,682 2,243
Operating Profit 1,683 304
Interest Payable 140 140
Profit before Tax 1,543 164
Tax 414 47
Profit after tax 1,129 117
Dividends 537 537
Retentions 592 (420)

Balance Sheets as at 30 April

2007 2006
?000 ?000 ?000 ?000
Fixed Assets 5,779 5,370

Current Assets
Stock 935 1,168
Debtors 1,752 2,243
Bank 19 -
2,706 3,411
Amounts due within one year (911) (1,799)
Amounts due after one year
10% Debentures 2010 (1,168) 627 (1,168) 444
6,406 5,814

Financed by:
?0.25 Ordinary Shares 3,855 3,855
Retained Earnings 2,551 1,959
6,406 5,814
At the end of 2006 Silla's shares were quoted at ?2.30 each. After the announcement of the expansion plans they fell quite quickly to finish 2007 at ?1.40 each. The average price/earnings ratio for the soft drinks sector is currently 18.

Further details of the ?4 million plan mentioned above are given below:
? The outsourcing of production to a third world country. This would enable the company to make significant savings in wages costs;
? An aggressive marketing campaign aimed at increasing the company's share of the soft drinks market. The company is aiming to capture a significant share of the highly competitive, but rapidly growing, health and lifestyle drinks market;
? The company is projecting, as a result, increases to its annual net cash flows of ?500,000 in the first year. It is confident that these should grow 15% per year for at least the next four years after that. After this they should remain stable for the foreseeable future;
? The company's cost of capital is 15%.

Silla had hoped to raise the ?4 million required for the expansion by making a 1 for 7 rights issue at ?1.82 per share. The company concedes, however, that the fall in the share price has made this difficult.

a) Assess the financial health and performance of the company by calculating and analysing the following ratios:
? Gross margin
? Interest Cover
? Dividend Yield
? Dividend Cover
? Earnings per share
? Price/Earnings Ratio.

b) Using net present value recommend whether or not Silla should undertake the expansion programme.

c) Assuming that Silla's financial advisors recommend a discount of at least 20% on current share prices to ensure the success of a rights issue; explain why the company chose ?1.82 as their original rights price. Calculate what the terms of the offer would have to be given the current share price of ?1.40. Show the theoretical effect on share prices of a successful rights issue under those terms.

d) Some of the members of Silla's management team believe that a possible explanation of the company's poor share price performance could be ethical. They point out that the share price started to fall almost immediately after the announcement of the planned expansion.

Discuss and explain just what ethical issues might be troubling the financial markets enough to make the share price fall by so much.

e) Critically discuss the procedure, merits and disadvantages of fair valuation of financial and derivative instruments.

Solution Summary

Silla Soft Drinks is engaged in the manufacturing and marketing of soft drinks globally. The company has been thinking of an expansion plan which will involve a Euro 4 million investment. With the expansion the company will be able to increase production capacity to match customers' needs and become a major producer of soft drinks and spring waters. Currently the company supplies approximately 60 million bottles of product annually and with the expansion the supply level will go up to 100 million bottles.
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