I just want the solutions of PartA Question1 &2 from the past exam paper of my document.
Cass Business School Coursework Test Term 3 Elective Module Module Code Module Title SMM225 Corporate Restructuring Date Time 10th July 2020 10am Division of Marks: Section A is worth 35 marks Section B is worth 35 marks Section C is worth 30 marks Instructions to students: Answer all questions This paper contains 7 questions and comprises 5 pages including the title page Module Leader: Stefano De Cesaris 2 Part A – Thyssenkrupp Thyssenkrupp (“TK”) is a conglomerate with six operating segments: 1. Components Technology: Manufacturing components for the automotive, construction and engineering sectors and for wind turbines. 2. Elevator Technology: Construction, modernization and servicing of elevators, escalators, moving walks, stair and platform lifts as well as passenger boarding bridges. 3. Industrial Solutions: International supplier in special and large-scale plant construction. 4. Marine Systems: naval shipbuilding. 5. Materials Services: Global distribution of materials and provision of complex technical services for the production and manufacturing sectors. 6. Steel Europe: Flat carbon steel manufacturing activities. Question 1 Using the information in exhibit 1 below, discuss whether TK is in need of restructuring. 15 marks Exhibit 1 Capital employed = Operating assets (mainly property, plant and equipment, inventories and receivables) minus Operating liabilities (mainly trade accounts payable and provisions). ROCE (Return on Capital Employed) = Earnings Before Interest and Tax (EBIT) / Average capital employed michelleting michelleting michelleting michelleting 3 Question 2 Using the information in exhibit 2 below, estimate TK’s value per share using the sum-of-the-parts method to aggregate the value of each business segment. Show all your workings. 20 marks Exhibit 2 Adjusted EBIT: Earnings Before Interest and Tax (EBIT) adjusted for certain one-off items (e.g. impairment expenses and restructuring expenses). At 30 September 2019, TK had total debt of €18,519 million, total cash of €3,706 million and 623 million shares outstanding. Valuation assumptions: - The four business segments in the table below can be valued using a multiple of Enterprise Value (EV) to segmental adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA): Segment EV / Adjusted EBITDA Components technology 6 Elevator technology 18 Materials services 8 Steel Europe 7 - Industrial solutions: the Enterprise Value of this segment is estimated to equal the segment’s average capital employed figure. - Marine systems: the Enterprise Value of this segment is estimated to be worth 0.5 times the segment’s Net sales. - Corporate: these activities are expected to reduce TK’s total enterprise value by €2,500 million. - Consolidation: no value adjustments required. (Part A total marks = 35) michelleting michelleting michelleting michelleting michelleting michelleting michelleting michelleting michelleting 4 Part B – The Hertz Corporation On 22nd May 2020, The Hertz Corporation (“Hertz”), one of the largest car hire companies in the world, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware. In June 2020, Hertz announced a plan to raise capital by issuing new shares of its common stock in order to raise a maximum of $500 million in cash. Question 3 Briefly explain the pros and cons of the Chapter 11 process, from the perspective of Heinz’s directors. 10 marks Question 4 Speculate about the possible reasons why Hertz’s directors decided to file for Chapter 11 instead of liquidating the business. 10 marks Question 5 Explain the likely benefits and risks of Hertz’s proposed share issuance from the perspective of: i. The company (Hertz), and ii. An investor considering a purchase of the newly issued Hertz shares. 15 marks (Part B total marks = 35) 5 Part C – United Technologies On 11th March 2020, the board of directors of United Technologies (“UT”) approved a spin-off of its Otis and Carrier subsidiaries. • Otis is a leading manufacturer of elevators, escalators and moving walkways. • Carrier is a global provider of heating, air conditioning, refrigeration, fire safety and other products. After the spin-off approval, the shares in Otis and Carrier were admitted for listing on the New York Stock Exchange. The table below contains the following information: - UT’s consolidated balance sheet, before the separation; - Balance sheet of the subsidiaries to be spun off (Otis and Carrier). Amounts in $ millions United Technologies consolidated (pre-separation) Otis and Carrier Cash 8,001 2,756 Other assets 131,571 28,467 Total assets 139,572 31,223 Financial debt 46,319 17,568 Other liabilities 51,223 11,510 Total liabilities 97,542 29,078 Common stock (share capital) 23,099 10 Retained earnings 51,596 2,235 Treasury stock (32,665) (100) Shareholders’ equity 42,030 2,145 Total liabilities and equity 139,572 31,223 Question 6 In a presentation to investors, UT stated that the spin-off would provide “strategic flexibility and management focus to drive greater long-term success and shareowner value”. Provide your interpretation of UT’s statement, elaborating specifically on the potential benefits of the spin-off for UT’s shareholders. 15 marks Question 7 Build UT’s pro-forma balance sheet after the spin-off, showing all your workings, 15 marks (Part C total marks = 30) Bookmarks Corporate Restructuring Term 3 Lecture Corporate Restructuring Week 1 1.1 Corporate Restructuring – What is it? Corporate actions that change the existing structure of the business (Structure: current activities, organization, capital structure) Typically, actions that implement the firm’s strategic plan - Conceived and promoted by the board of directors (planned to achieve strategic objectives) Sometimes, forced onto the directors - By shareholders or debtholders (activist investors) - By other stakeholders - By significant events Key Types of Corporate Restructuring Operating restructuring - Internal - Cooperative (JV) - Divestitures (sale) and other separations - M&A Financial restructuring (capital structure) - Recapitalization - LBO (recapitalization and transfer of control (PE) Restructuring in financial distress - Reorganization / Administration - Liquidation Match the correct type of restructuring Spin-off (OpRes – separations) Shutting down the Latin America operations (OpRes – internal) Selling a division (OpRes – divestiture) Entering a merger agreement (OpRes – M&A) A large share buy-back program financed with debt (less equity, financed with debt -> D/E increases -> recapitalization) Chapter 11 (in the U.S.A.) (Reorganization) Forming a joint-venture ((OpRes – cooperative) 1 Corporate Restructuring Term 3 Lecture Corporate Restructuring – Drivers - Underperformance / Competitive pressures - Strategic refocusing - New technologies - Regulatory changes - Globalisation Corporate Restructuring Professionals Why should you be interested in this subject? Learning about these contents will help you to: - Pull together your knowledge from various other modules (accounting, financial analysis, corporate valuation, M&A etc) - Take job interviews for corporate finance-related roles - Pass the exam Who works in corporate restructuring? - Management in business that undertakes restructuring - Etc - Tax adviser Reading 1.1 DePamphilis (8th edition) Chapter 1, Understanding Corporate Restructuring Activities section 2 Corporate Restructuring Term 3 Lecture 1.2 Corporate Restructuring and Financial Performance Financial Performance and Restructuring Corporate restructuring often aims to improve a company’s economic efficiency What financial metrics would you focus on to establish whether a business would benefit from restructuring? Examples of metrics that are commonly utilised - Profitability (earnings high enough -> Return on Sales, EBIT margin, GP margin) - Cash flow - Financial leverage - Return on investment (result of items above) The Value Creation Framework An analytical framework to assess economic efficiency Key principle: Business investments must cover the firm’s cost of capital (that relates to investment) Return on Net Operating Assets (RNOA) RNOA is also known as ROCE (Return on capital employed) or ROIC (return on invested capital) 3 From BS -> NOA (net of op liability) NOA financed by NFO and Equity NOA -> generate EBIT (revenues-op expenses) Tax EBIT -> NOPAT RNOA = NOPAT/NOA Corporate Restructuring Term 3 Lecture But always check the specific definition of these ratios! ‘Return on invested capital (ROIC) is a measure of the return generated on capital invested by the Group. The measure provides a guide rail for long-term value creation and encourages compounding reinvestment within the business and discipline around acquisitions with low returns and long payback’ Benchmarking the RNOA How do we know if a given RNOA is high or low? The benchmark is the required return on capital => The WACC (weighted average cost of capital) of the firm RNOA vs WACC – Example The following information is available about Firm ABC: Assume ABC’s WACC is estimated at 8% 4 Corporate Restructuring Term 3 Lecture Conclusion: ABC is not covering its cost of capital What can ABC’s directors do to remedy this situation? - Consider all available restructuring options RNOA vs WACC – Exercise A company operates three separate divisions. The following data is available: What restructuring options would you consider? Combined: 9bn of investment and generates return 9.56% > WACC Difference is relatively small (only exceeding 0.45%) If WACC higher -> no excess return at all Division C: RNOA < wacc="" -=""> value destructive Can be caused by non-recurring events (lawsuit..) But if it is ongoing and situation doesn’t change Restructuring options: 1. Internal restructuring -> can BoD increase RNOA (cutting costs) 2. Divestiture -> may create value for other company -> put on sale and redeploy funds received into other two business 3. Liquidate: shut down and sell all assets -> transfer funds to shareholders Corporate restructuring -> improve by partnering up with investors - Engage in acquisition-> improve