Investment Strategy

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Future Telecom plc, a leading company in the telecommunication sector is planning future expansion, by providing new services including cable TV, fibre optics internet technology and a landline telephone network. The planned investment strategy is a step towards the achievement of the company’s main corporate objective of becoming a major provider of cable TV and internet services, rivalling the only two major competitors in the media and entertainment sector.

As the new project will be totally financed by equity, Future Telecom plc shareholders are demanding a full analysis of the company’s financial performance, policies and strategies over the last 4 years and an investment appraisal of the proposed project before any Board decisions are made.

The CEO of Future Telecom plc has commented on the performance and financial position of company.

“…………… a picture of great strength moving forwards. The last four years have seen our company’s operations become increasingly diversified, and our turnover has increased by more than 40% over the last four years – a clear indication of successful management. Our share price has risen over the same period. The sales from the new project will surely result in a substantial increase in the company’s share price, further boosting shareholder value ……………”

Investment Strategy

Future Telecom plc plan to offer international TV channels from all over the globe to capture the market of non-native residents in the country. The company also intends to provide cheap international calls through the newly proposed landline network.

A clear need for such an investment has been established by our comprehensive market research survey, which has just been completed at a cost of £50,000. The impact of this project on the company’s existing products has also been studied. Since the company is currently a mobile telephone network provider, the new fixed line network is expected to have an adverse impact on the existing sales which is estimated to be not more than £2 million a year. Future Telecom plc consider this a price worth paying for the increase in overall market share and brand visibility.

The capital cost of setting up the fibre optics internet, cable TV services and the aerial sites would be £50 million, an expenditure that would attract capital allowances on a straight-line basis over 10 years, commencing from the first year of operation. The capital expenditure will happen one year before operations start.

The company’s current 30,000 square foot headquarters office in Buckinghamshire can accommodate the required customer service offices for the new departments, which is assumed to make use of only 50% of the total space. The annual mortgage cost for the building is approximately £80,000.

Working capital of £1½ million will need to be invested before commencing operations, and it is expected that the same level of working capital would be sufficient for the duration of the project.

The proposed services that will be offered include fibre optics internet, cable TV and a landline telephone network. The total costs associated with the research implemented for development of these new technologies were £1,000,000 paid before the setting up process. The sales forecasts suggest that:

Landline subscribers are going to be 10,000 in the first year and would double each year over the following four years. Thereafter, the number of customers is going to remain constant for the rest of the project’s life.

The number of internet subscribers is expected to be 30,000 in each year.

Cable TV subscribers are expected to be 20,000 over the first five years of the project and would increase to 40,000 subscribers in year 6 where they would remain constant for the rest of the project’s life.

The number of the bundle subscribers is expected to be 10,000 in the first year and would increase by 10,000 each year until the tenth year when it would settle unchanged for the remaining life of the project.

The project does not have a limited lifetime, and although technology would develop in the future that would affect the type of services provided, Future Telecom plc are assuming that the sales and market share will remain unaffected. The company’s marketing department has estimated the average prices of the range of services as follows:

the annual landline subscription is going to be £240

the internet subscription is going to be £180 per year

the annual TV cable subscription is £240

the annual subscription of the bundle product is averaged at £400

The prices will be expected to rise every year according to inflation levels.

The main operating cost would be the annual staff costs, which is expected to be 30% of the same year’s revenue, while the maintenance and inventory costs are forecasted at 10% of the revenue. Other significant operating costs would be services such as gas, electricity, water, and other miscellaneous costs amounting to £1 million per year.

All the above revenues, costs and values are estimated at current prices before the implementation of the project, and take no account of inflation. The current level of inflation is 3% per year, and is expected to continue at this level for the foreseeable future, therefore a careful appraisal of this project necessitates adjusting both revenues as well as costs for inflation.

Based on current market rates of return, the after tax weighted average cost of capital for companies within the same industry is 18% (nominal or money interest rate). This rate would represent the opportunity cost of capital to fund the new project. The company will continue to pay corporation tax at the rate of 30 percent per annum for the foreseeable future.

The company is conservatively assuming that this project will not have a termination date. Although the equipment installed in year zero are to be depreciated over the next 10 years, the company does not require any further investment.

Financial Information

Income Statement summaries for the years ending 30 September (£ million)
2013201420152016
Revenue35404350
Gross profit25272934
Operating profit12141822
Interest payable(1)(1)(2)(2)
Earnings before tax11131620
Taxation(3.3)(3.9)(4.8)(6)
Net Income7.79.111.214
Dividends(6.16)(7.28)(8.96)(11.48)
Retained earnings1.541.822.242.52
Statement of Financial Position for the years as at 30 September (£ million)
Non Current Assets36373942
Current Assets
Inventory33.84.65.5
Debtors33.23.23.6
Cash1.11.51.51.6
Total Current Assets7.18.59.310.7
Total Assets43.145.548.352.7
Current Liabilities
Trade payables33.63.84.3
Taxation11.61.82
Overdraft0000
Other0.60.80.91
Total Current Liabilities4.666.57.3
Long-term Liabilities
Irredeemable debentures151518.0621.88
Total Liabilities19.62124.5629.18
Equity
Ordinary shares (50p pence par value)16161616
Share premium account5.966.685.55
Profit and Loss account1.541.822.242.52
Shareholders’ fund23.524.523.7423.52
Capital Employed43.145.548.352.7

Other Information

20122013201420152016
Future Telecom plc Share Price97130160177180
Share prices of major competitors over the last 4 years period (in pence)
Competitors20122013201420152016
Sky TV480562736732748
Virgin714242531
Talk Talk95112140126187
BT Telecom167129149179234
Major competitors’ key ratios over the last 4 years period (in pence)
CompetitorsP/B2016Dividend yield2016
Sky TV8.23.4%
Virgin2.14%
Talk Talk4.04.5%
BT Telecom5.73.39%
Indexes prices of market and industry sectors over the last 4 years period (in pence)
20122013201420152016
FT-SE All share index20122561292327353067
Mobile telecommunications29503166364837774250
Fixed line telecommunications23371852197620702738

Required

As the junior finance team of Future Telecom plc, prepare and submit the written report required by the CEO. The report should consist of two parts:

Part 1 Financial Performance Analysis – requires analysing and commenting on the financial performance and position of the company based on the financial information provided. A 4-year trend analysis (15 relevant ratios) and cross-sectional analysis is required. Any interpretations and recommendations should be based on clear reasoning and explanations. A critical evaluation of the chairman’s comments should also be included.

Part 2 – 10-Year Investment Appraisal – requires forecasting the future cash flows of the proposed project and implementing capital budgeting methods (NPV, IRR and PI). An excel spreadsheet of the investment appraisal should be included in the report. The report narrative should include a commentary on the relevant cash flows included in the appraisal and justifications as to the exclusion of others. Your conclusions should reflect your results from the first part and the fact that the company will need a substantial funding for the new project.

Students should also recalculate the NPV and IRR, assuming the project has an unlimited life.

Which of the following statements is true about open-perils policy and named-perils policy?

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Please – I only have one hour to answer these questions – can you assist? Thanks

32. Most insurance policies prohibit direct access from the original insured to the reinsurer. The prohibition exists because:

insurance companies realized that the original insured can take insurance directly from the reinsurance company and put them out of business.
direct assess of the original insured to the reinsurer is illegal.
reinsurance companies do not want to deal directly with original insureds.
the insurance company does not want the original insured to know that it is reinsuring the risks.
the reinsurance agreement is a separate contract from the primary insurance contract.

33. Identify the characteristics of a hard market.

Insurance rates and insurance capacity are high
Insurance rates are high and insurance capacity is low
Insurance rates are low and insurance capacity is high
Insurance rates and insurance capacity are low
Insurance rates are negligible and insurance capacity is very high

34. Soft market conditions occur when:

insurance losses and insurance prices are high.
insurance losses are high and prices are very competitive.
insurance losses are low and prices are very competitive.
insurance gains are low and prices are very competitive.
insurance gains and insurance prices are very low.

35. Each line of business has its own break-even point because:

the firm uses different strategies for each line to mitigate risks.
each line in an industry has a different loss payment time horizon but similar length of time for the investment of the premiums.
each line in an industry has varying length of time for the investment of premiums but similar loss payment time horizon.
all lines in an industry have similar loss payment time horizon and length of time for the investment of the premiums.
each line has a different loss payment time horizon and length of time for the investment of the premiums.

36. In the insurance industry, identify the consequence of having a low combined ratio.

Tightening of underwriting standards
Stringent redlining standards
Relaxed actuarial process
Loose underwriting standards
Decreased amount of cash that can be invested

37.    Which of the following statements is true about the insurance regulation scheme?

Under the current scheme, federal legislatures pass insurance laws that form the basis for insurance regulation.
To ensure the smooth operation of insurance markets and the solvency of insurers, insurance laws are concerned only with the operations and investments of insurers.
Trade practices, including marketing and claims adjustment, are not part of the law.
The laws provide standards of financial solvency, including methods of establishing reserves and the types of investments permitted.
State insurance laws are concerned not only with the licensing requirements for insurers,agents, brokers, and claims adjusters.

38. Nonlicensed insurers are permitted to sell insurance only if:

no licensed company is willing to provide the coverage.
they pay the nonlicense operation penalty to the commissioner of insurance.
they conduct a joint venture with a licensed insurance firm.
they are licensed in atleast five other states.
the commissioner of insurance specifically permits it.

39. The law of agency is significant to insurance in large part because:

the only direct interaction most buyers of insurance have with the insurance company is through an agent or a broker.
it allows the insurance companies to interact directly with the buyers without the help of agents or brokers.
it gives the insurance company the clarity it requires while passing it’s authority as principle to the agent.
it makes investigation of claims easier.
it provides clarity on the types of risks and makes risk classification easier.

40. An insurance company suspends an agent, but the agent retains possession of blank policies. Which of the following is likely to happen if the former agent issues those policies?

The company provides the suspension order of the agent in front of a judge and cancels those policies.
The company waives the agent’s authority and the existence of an agency relationship and cancels the policies.
The premiums of these policyholders are paid back, and the policy cancelled by their consent.
The court holds the authority to decide whether the policy stands or is canceled.
The company is estopped from denying the existence of an agency relationship and will be bound by the policy.

4 points

41. Students who misrepresent to their auto insurers where their cars are garaged take the chance of having no coverage at the time of a loss because:

location is a factor in determining premium rates and therefore, material fact.
the insurance contracts of minors are voidable.
auto insurers are very strict about misrepresentations and do not cover them even if the information is not a material fact.
the auto insurance contracts of students are voidable.
auto insurances do not cover auto thefts that occur in the insured’s garage.

42. With cancelable policies, the insurer is responsible under a binder for losses that:

occur due to pure risk exposures.
the underwriter thinks are insurable.
occur due to idiosyncratic risk exposures.
occur throughout the term of the policy.
occur prior to cancellation.

43. In an insurance policy, it states that the “insurer promises to pay….” This general description of the insurer’s promises is the essence of:

an insuring clause.
the conditions of a policy.
the exclusions of a policy.
an endorsement.
a rider.

44.   Which of the following statements is true about open-perils policy and named-perils policy?

Open-perils policies cover many perils not covered by named-perils policies.
An open-perils policy covers only losses caused by the perils listed in the policy.
A named-perils policy is also known as the “all risk” policy.
The exclusions in a named-perils policy are more definitive of coverage than in an open- perils policy.
A named-perils policy provides broader coverage than an open-perils policy.

4 points

45. The 1992 Chicago flood required that Marshall Fields downtown store close its doors for several days while crews worked to clean up damage caused by the flood waters. If Marshall Fields reduced its orders to suppliers of its goods, these suppliers would experience losses caused by the water damage, even though their own property was not damaged. Identify these losses.

Dependent losses
Contingent business interruption losses
Extra expense losses
Preventative losses
Facultative business interruption losses

46. Which of the following statements is true about exclusions?

Losses caused intentionally by the insured are not excluded.
Wear and tear is included in insurance coverage.
Exclusions encourage adverse selection and moral hazard.
Losses that are not accidental make prediction difficult.
Naturally occurring losses that are expected are not excluded in insurance coverages.

47. Motorized vehicles, furniture, business inventory, clothing, and similar items are properties that are not permanently attached to something else, and therefore are movable. Identify this category of physical property.

Personal property
Virtual property
Non-depreciating property
Real property
Non-movable property

48. If you have a $500 deductible on the collision coverage part of your auto policy, you pay the total amount of any loss that does not exceed $500. In addition, you pay $500 of every loss in excess of that amount. If you have a loss of $1,500, therefore, you pay $500 and the insurer pays $1,000. Identify this type of deductible.

Vanishing deductible
Franchise deductible
Waived deductible
Straight deductible
Disappearing deductible

49. Disputes over the rights to a domain name result from specific events. An event arises when a business or an individual reserves the well-recognized name or trademark of an unrelated company as a domain name with the intent of selling the domain name to the trademark holder. Identify this event.

Cybersquatting
Domain name hijacking
Reverse cybersquatting
Reverse domain name hijacking
Website hijacking

50. The Insurance Services Office (ISO) has an e-commerce endorsement that modifies insurance provided under commercial property coverage. Identify the correct statement about this endorsement.

Section I of the endorsement defines the period of coverage.
Section II of the endorsement describes the electronic data coverage.
Section III of the endorsement classifies covered and excluded perils.
Section IV of the endorsement defines the coverage of business income, extra expenses, and resumption of e-commerce activity.
Section V of the endorsement is for other provisions

Analyzing and Interpreting Equity Accounts and Comprehensive Income

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Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholders’ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholders’ equity.

June 30 (In millions, except per share amounts)2013
Shareholders’ Equity
Convertible Class A preferred stock, stated value $ 1 per share
(600 shares authorized)$ 1,137
Non-voting Class B preferred stock, stated value $ 1 per share
(200 shares authorized)—
Common stock, stated value $ 1 per share
(10,000 shares authorized; shares issued: 2013-4,009.2)4,009
Additional paid-in capital63,538
Reserve for ESOP debt retirement(1,352)
Accumulated other comprehensive income/(loss)(7,499)
Treasure stock, at cost (shares held: 2013-1,266.9)(71,966)
Retained earnings80,197
Noncontrolling interest645
Total shareholders’ equity$ 68,709
Consolidated Statement of Shareholders’ Equity



Dollars in millions;
Shares in thousands

Common
Shares
Outstanding


Common
Stock


Preferred
Stock

Additional
Paid-in
Capital

Reserve for
ESOP Debt
Retirement		Accumulated
Other
Comprehensive
Income
(Loss)


Treasury
Stock


Retained
Earnings


Noncontrolling
Interest



Total
Balance June 30, 2012$ 2,748,033$ 4,008$ 1,195$ 63,181$ (1,357)$ (9,333)$ (69,604)$ 75,349$ 596$ 64,035
Net earnings11,3129011,402
Other comprehensive income1,8341,834
Dividends to shareholders:
Common(6,275)(6,275)
Preferred, net of tax benefits(244)(244)
Treasury purchases(84,234)(5,986)(5,986)
Employee plan issuances70,92313523,5733,926
Preferred stock conversions7,605(58)751—
ESOP debt impacts55560
Noncontrolling interest, net(2)(41)(43)
Balance June 30, 2013$ 2,742,327$ 4,009$ 1,137$ 63,538$ (1,352)$ (7,499)$ (71,966)$ 80,197$ 645$ 68,709


(a) What does the term convertible (in reference to the company’s Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.



(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?


Answer

thousand shares

(c) For “employee plan issuances,” at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer



(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company’s common stock has increased or decreased since issuance.



(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?


Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)

The following selected transactions relate to investment activities of Ornamental Insulation Corporation. The company buys securities, not intending to profit from short-term differences in price and notnecessarily to hold debt securities to maturity, but to have them available for sale when circumstances warrant.

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The following selected transactions relate to investment activities of Ornamental Insulation Corporation. The company buys securities, not intending to profit from short-term differences in price and notnecessarily to hold debt securities to maturity, but to have them available for sale when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2012.
2013
Feb.21Acquired Distribution Transformers Corporation common shares costing $470,000.
Mar.18Received cash dividends of $7,000 on the investment in Distribution Transformers common
shares.
Sep.1Acquired $1,110,000 of American Instruments’ 10% bonds at face value.
Oct.20Sold the Distribution Transformers shares for $530,000.
Nov.1Purchased M&D Corporation common shares costing $1,750,000.
Dec.31Recorded any necessary adjusting entry(s) relating to the investments. The market prices of
the investments are:
  American Instruments bonds$1,067,000
  M&D Corporation shares1,817,000
(Hint: Interest must be accrued for the American Instruments’ bonds.)
2014
Jan.20Sold the M&D Corporation shares for $1,842,000.
Mar.1Received semiannual interest of $55,500 on the investment in American Instruments bonds.
Aug.12Acquired Vast Communication common shares costing $720,000.
Sept.1Received semiannual interest of $55,500 on the investment in American Instruments bonds.
Dec.31Recorded any necessary adjusting entry(s) relating to the investments. The market prices of
the investments are:
  Vast Communication shares$740,000
  American Instruments bonds$1,047,000
Required:
1.Prepare the appropriate journal entry for each transaction or event during 2013. (Do not round your intermediate calculations.)2.Indicate any amounts that Ornamental Insulation would report in its 2013 balance sheet and income statement as a result of these investments. (Do not round your intermediate calculations.Input all amounts as positive values except for losses and fair value adjustments down which should be indicated with a minus sign.)3.Prepare the appropriate journal entry for each transaction or event during 2014. (Do not round your intermediate calculations.)4.Indicate any amounts that Ornamental Insulation would report in its 2014 balance sheet and income statement as a result of these investments. (Input all amounts as positive values except for losses and fair value adjustments down which should be indicated with a minus sign.)