7BSP1276 for International Finance for Global Business Coursework 2, Semester A 2018-19: Organic Farm Foods plc (t0 = 2019)

D.Fairclough
September 2018
1
7BSP1276 for International Finance for Global Business
Coursework 2, Semester A 2018-19
Assessment weighting 30%
Organic Farm Foods plc (t0 = 2019)
Organic Farm Foods (OFF) was founded in the 1980’s when the Greystone family acquired
an arable farm in Buckinghamshire. Demand for their wholesome organic food was brisk
and the business expanded rapidly in the 1980’s but remained a family business. It was
restructured as a limited company in 1990 and subsequently experienced rapid growth until
2000.
In that year the then directors decided that the business had reached the limit of
development in its present form. Future development required large-scale expansion in
order to compete with the cost base of non-organic food producers, which in turn needed
an injection of capital that the Greystone family were unable to generate themselves The
conviction that there was much money to be made from “quality organic foods” had been
vindicated but the directors felt that it would be safer to look for other avenues for future
development.
They investigated a number of possibilities deciding eventually to expand production
facilities and establish their own packing/distribution system so that their newly ‘branded’
produce could be sold by independent quality food retailers. Upon raising the necessary
capital in the name of Organic Farm Foods plc, they embarked upon a, to date, successful
venture.
As the market grew and to keep abreast of new production technology, the directors agreed
to further update the plant and machinery. They financed updating of equipment and
premises by means of issuing debentures.
It is now September 2018 and the present directors of Organic Farm Foods plc believe that
the long-term success of the company lays in future diversification and expansion and a
number of new projects are under consideration.
The newly appointed finance director, Stephen Sterling, agrees with this opinion but insists
that the company must first appraise its own current position and, if necessary, make
changes to strengthen its existing financial situation before embarking on new plans.
————————————————————————————————————
This Case Study has been prepared for discussion, analysis and comment. It is not intended
to describe either good or bad practice. This Case Study may not be reproduced without the
prior written permission of the author.
© Borlace Management Ltd – 2018
D.Fairclough
September 2018
2
He is particularly concerned that the company should preserve adequate liquidity and
finance its assets in a beneficial manner. Members of the Greystone family still retain 30%
of Organic Farm Foods equity and other long-standing directors own a further 25%. A
change of control is unlikely to be welcome.
During the last year, the company has updated production and distribution assets and, in
what has been a difficult year, has been able to maintain sales and profit growth (see OFF
plc accounts in Appendix 1). There has been a great deal of uncertainty about world
economic growth and stock markets have been extremely volatile resulting in the firm’s
ordinary shares trading below their level of one year ago although the preference shares
have made some progress, increasing by 20p during the year. Ordinary share dividends have
achieved an average growth rate of 5% per annum over the past five years and this rate is
expected to be maintained in the future.
The present market prices for Organic Farm Foods plc shares and debentures are:

£1 Ordinary shares
£2, 6% Preference shares
6% Debentures 2022
£7.65 ex div
£3.20 ex div
£107.63 ex interest

Any new venture would be expected to achieve a return on capital employed in line with
that experienced recently by Organic Farm Foods plc and the finance director favours a
payback period of 5 years.
The favoured project under consideration involves extending the farming element of the
business by purchasing 1000 acres of good farm land in the Republic of Ireland. At €8,088
per acre, land in the Republic of Ireland is less expensive than in Buckinghamshire giving OFF
plc a cost advantage over their existing farm production. It is timely that a 1000 acre farm
has become available in County Kildare as the current owner wishes to retire. The price of
€8,088 per acre includes all of the farm buildings but an additional investment of €1.21m
will be required for agricultural machinery. It is company policy to depreciate machinery at
10% per annum on a straight line basis.
The finance director has provided estimated income and cost forecasts (under normal
weather conditions) for the first ten years of the project. The projected figures are, like the
UK Company’s, subject to alteration if weather conditions vary. Sales are expected to be
€968(k) in 2020 and grow at 20% per annum to 2029. Total variable costs (of which 40% is
labour cost) are expected to be €395(k) in 2020. Both labour costs and other variable costs
will increase by 3% per annum. There will also be fixed costs of €130(k) in 2020 which will
increase by 2% per annum.
D.Fairclough
September 2018
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The British government is currently negotiating new trade arrangements with the European
Union and a number of other countries and the performance of Organic Farm Foods will
depend on the outcome of those negotiations. If the UK government is able to obtain
favourable trading terms then the net cash flows from the project will be 15% higher than
under the base case scenario. The probability of this outcome is put at 30%. There is,
though, a small chance (15%) that trade terms will be unfavourable resulting in net cash
flows being 30% less than base case cash flows.
The beta of Organic Farm Foods plc is believed to be 1.45. The rate of return on 10yr UK
government bonds is 1.32% and the FTSE all-share index return for the last year is 5.3%. The
corporation tax rate in the Republic of Ireland is 12.5% and UK corporation tax is currently
19%. Both are payable at the end of the accounting year in question (you may assume for
the purpose of this case that accounting profit and taxable profit are identical). The current
rate of exchange is £1 = €1.21.
There would be no restriction on the transfer of profits/cash flows to the UK. It is considered
possible that, as the Irish economy develops further, even higher wages than forecast may
be demanded by the workforce.
Required:
Evaluate the Irish investment project on behalf of Organic Farm Foods plc and advise the
firm on whether the project is viable on a financial basis. Also, advise the firm on the
potential impact of foreign exchange risk on the project and evaluate the alternatives for
financing the project.
D.Fairclough
September 2018
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Submission requirements:
Your answer should be presented in the form of a report of 2500 words total (excluding the
reference list). You must also submit a working Excel spreadsheet containing your
calculations.
You should use Arial font size 12 and 1.5 line spacing. Exceeding the word count by 10% or
more or deviations from the formatting instructions will attract a penalty of up to 5%. Not
submitting a working Excel spreadsheet will attract a penalty of 10%
The hand-in deadline for submission is 23.30 on 16th December 2018.
Submissions up to 24 hours late will attract a 5% penalty whilst those beyond 24 hours but
less than 1 week late will be capped at 50%. Reports submitted more than one week late
will attract a mark of zero. Referred work submitted late will attract a mark of zero.
Submit one electronic copy via Studynet as a Word file.
This is an individual assignment and the report submitted should be entirely your own work.
This assessment is subject to anonymous marking so do not put your name on any document
you submit. However, you must put your SRN on each document you submit.
D.Fairclough
September 2018
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Appendix 1
Organic Farm Foods plc
All amounts are in thousands of pounds sterling
2017 2018
Sales 7844 6780
Opening Stock 208 200
Production Cost 5460 4760
Closing Stock -216 -208
Cost of Sales 5451 4752
Gross Profit 2393 2028
Administration Expenses 631.7 562
Selling Expenses 778 722
1410 1284
Operating Profit 983 744
Debenture Interest 60 60
Profit Before Tax 923 684
Corporation Tax 277 212
Profit After Tax 646 472
Ordinary Dividend 175 162
Preference Dividend 20 20
195 182
Retained earnings 451 290
Fixed Assets (net):
Land & Buildings 1078 994
Agricultural Machinery 516 400
Processing Plant 620 580
Vehicles 195 135
Office equiptment 160 139
2569 2248
Current Assets:
Stocks 216 208
Debtors 1176 839
Short-term Investments 255 255
Bank/Cash 140 136
1787 1438
Current Liabilities:
Trade Creditors 611 470
Corporation Tax 277 212
Final Dividend 175 162
1063 844
724 594
3293 2842
Long-term Liabilities:
6% Debentures 2022 500 500
2793 2342
Shares & reserves
£1 ordinary shares 1200 1200
£2 Preference shares (6%) 200 200
Profit & loss 1393 942
2793 2342
Abridged Trading, Profit & Loss Account for the year ended
30th June 2018:
Balance Sheet at 30th June 2018:
D.Fairclough
September 2018
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Guidance for the preparation of your report.
The purpose of this assignment is simply to give you the opportunity to demonstrate that
you have acquired the knowledge and skills identified in the Module Learning Outcomes and
that you can apply them in a typical business situation.
You should approach the task as a business manager dealing with a ‘real’ business and
should:
a) Adopt a coherent approach to dealing with the set task with a clearly stated
business purpose.
b) Identify an appropriate theoretical dimension and consider the implications for
practice.
c) Adopt appropriate analytical methods and a critical perspective.
d) Refer to empirical work where appropriate.
D.Fairclough
September 2018
7
Guidance for the preparation of your report cont’d.
Do refer to the assessment criteria which show how marks will be awarded. Further specific
advice about how marks will be awarded is given below.
Task Specific Assessment Criteria: Coursework
Communication Skills (Written) – 20 Marks:
Marks will be awarded for a) the physical presentation and layout of your report, b)
adopting logical well supported (ie using appropriate citations) arguments, c) the extent to
which the report is accurate, brief, concise and clear, d) the standard of English, and, e)
compliance with standard Harvard referencing. Equal account will be taken of each element.
Knowledge & Understanding – 20 Marks:
You should establish a clear business focussed conceptual basis for your report – ie you
need to show what you are seeking to achieve and why it is important for managing the
Organic Farm Foods plc business (supported using appropriate citations).
Synthesis – 20 Marks:
From the case data given you should identify the nature of the decision(s) facing Organic
Farm Foods plc and identify appropriate theory to support the approach you adopt and give
your reasoning. Ie which analytical tools are consistent with ‘business focussed conceptual
basis’ referred to above? (supported using appropriate citations).
Analysis – 20 Marks:
Using the case data given, you should apply the analytical methods identified in the previous
section and evaluate the impact on the business in relation to the ‘business focussed
conceptual basis’ referred to above.
Evaluation – 20 Marks:
Conclusions should be arrived at on the basis of your analysis of Organic Farm Foods plc
issues; ie what do the results of your analysis tell you? In your conclusions section you
should summarise the results of your analysis. Your recommendations will assessed on the
extent to which they are linked to the analysis of Organic Farm Foods plc issues and on the
extent to which they are theoretically coherent – ie the extent to which they are consistent
with the theoretical/conceptual base you establish.

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