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© The Chartered Institute of Management Accountants 2013

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T4 – Part B Case Study Examination

Thursday 23 May 2013

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open your answer book and start writing or to use your calculator during the reading time.

This booklet contains the examination question and both the pre-seen and unseen elements of the case material.

Answer the question on page 17, which is detachable for ease of reference. The Case Study Assessment Criteria, which your script will be marked against, is also included on page 17.

Maths Tables and Formulae are provided on pages 24 to 27.

Write your full examination number, paper number and the examination subject title in the spaces provided on the front of the examination answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.

Contents of this booklet:

Page

Pre-seen material – BVS – Fleet maintenance case 2

Pre-Seen Appendices 1- 5

12

Question Requirement Case Study Assessment Criteria

17

17

Unseen Material 19 - 22

Maths Tables and Formulae

24 - 27

T4 - Part B Case Study 2 May 2013

BVS – Fleet maintenance case

Industry background Many companies worldwide operate and manage a fleet of vehicles, irrespective of whether they are leased or owned vehicles. The types of vehicles they operate range from executive cars to large articulated trucks and lorries. Within most companies, the vehicle fleet is managed by its own in-house fleet management department, although this can be out-sourced. The fleet management department is responsible for all aspects of the vehicle fleet. This includes vehicle acquisition and de-fleeting, vehicle financing, vehicle maintenance, driver management, speed management, fuel management and health and safety management. Therefore, fleet management is a function which companies undertake in order to reduce the risks and the costs associated with a range of activities including vehicle investment, improving the efficiency of their fleet and providing compliance with respective regulations on vehicle safety and road-worthiness. All vehicles need to be maintained in order to meet regulations as well as to maintain operational efficiency and to reduce running costs. A well maintained vehicle will breakdown far less often and therefore provide a greater degree of operational efficiency. With the pressure on companies to reduce operational costs and to increase efficiency, it is more important than ever for vehicle fleet costs to be better managed. Within Europe alone, the number of commercial vehicles deployed in company fleets is forecast to grow to four million vehicles by 2014. Many companies operate their own in-house fleet management department but choose to outsource the maintenance of their vehicles to one, or more, specialised fleet maintenance companies.

Fleet maintenance This case study concerns fleet maintenance specifically and does not encompass the many other aspects of fleet management, such as the cost and selection of vehicle acquisition. Fleet maintenance is crucial in order to run a safe, efficient and cost effective transportation operation. The penalties for a company failing to meet regulations, which are becoming increasingly more complex, are severe. For this reason most companies choose to outsource their fleet maintenance requirements to specialised fleet maintenance companies, which are able to deliver a one-stop service to meet all their needs. These needs are typically routine servicing of vehicles, mechanical repairs and tyre replacement. There is a range of large multi-national companies which operate their own fleet maintenance departments. Some of these large companies offer a maintenance service to other companies. In addition, there are many specialised fleet maintenance companies which offer services to small fleets of 30 or fewer vehicles, as well as to larger fleet operators with over 5,000 vehicles.

Background on JAR Fleet Maintenance (JAR FM) A large telecoms company, JAR, was a state-owned industry in its home European country until it was privatised in 1994. JAR then established separate fully-owned subsidiary companies for the various parts of its business. To support the telecoms business, JAR owned and operated a large fleet of vehicles. JAR had always managed its own in-house fleet which was then split into two separate subsidiary companies. One was fleet procurement and the other was fleet maintenance. The fleet maintenance subsidiary company, called JAR FM, operated a large number of vehicle workshops throughout this European country and it also outsourced a small proportion of its maintenance to a range of smaller workshops in certain areas of this country. JAR FM had been loss-making for many years, as its facilities were under-utilised and badly managed. JAR FM maintained only JAR‟s own fleet of vehicles at this time. As part of the

May 2013 3 T4 - Part B Case Study

re-structuring of JAR during 2005, and in order to improve company-wide profitability, all of JAR‟s subsidiary companies, including JAR FM, were given profit targets to meet over the 5-year period ending 31 March 2010. Despite the operating profit targets that had been set for JAR FM, the level of operating losses continued at around the same level as previously. This prompted the main Board of JAR to recruit a more experienced Chief Executive for JAR FM. Toby Baum was appointed to this role in August 2007. Toby Baum had been recruited from outside the JAR group as he had extensive knowledge of the fleet maintenance industry. He started a review of business activities and made changes in the way the company operated. He was trying to improve the quality of the service the workshops provided to JAR‟s fleet of vehicles. However, he met much opposition and was unable to reduce headcount, due to opposition from trade unions. Therefore, he considered that if he could not cut costs in the short-term, he needed to increase the revenues for JAR FM. He was instrumental in marketing JAR FM‟s vehicle maintenance facilities in order to generate revenues from new customers. By 31 March 2008, JAR FM had reduced its operating losses to €3.0 million, the lowest level for many years. At this stage JAR FM had just 2 new fleet maintenance customers, in addition to the JAR fleet of vehicles. During the year ended 31 March 2009, Toby Baum was able to secure vehicle maintenance contracts with a further 6 vehicle fleet operators, which helped to improve workshop utilisation levels and generate substantial revenues. Additionally, the business had closed some of its workshops. Operating profit for the year ended 31 March 2009 was €0.5 million. This was the first time JAR FM had been profitable for many years. The Board of JAR was under pressure to increase group profits and to concentrate on its core activities. This led to the Board of JAR making the decision in June 2009 to sell off, or close, a number of its subsidiary companies, including JAR FM. The Board of JAR wished to dispose of the selected subsidiary companies within 9 months, by 31 March 2010. The Board of JAR announced in June 2009 that it would be seeking a trade buyer for JAR FM. Employee reaction in JAR FM to this news was one of disbelief, particularly after the significant improvements that had taken place over almost 2 years since Toby Baum was appointed. All employees feared that they would lose their jobs and some of the administration staff sought to transfer to another company within the JAR group. At 30 June 2009 JAR FM employed almost 1,500 employees, including Head Office staff and employees based at the 260 workshops across its home country. During the year ended 31 March 2010 some further contracts were signed with new customers, bringing in maintenance work for a further 2,800 vehicles, offset by a fall in JAR‟s fleet size. This resulted in an end of financial year (31 March 2010) figure of 47,500 vehicles being maintained.

Management Buy-Out in April 2010 Toby Baum was not totally surprised at the JAR Board‟s decision to sell off the fleet maintenance business and he considered that this would be a good opportunity for a Management Buy-Out (MBO) by some of the current management team of JAR FM. However, Toby Baum considered that a particular area of weakness was the lack of management information and financial control of the business due to a weak and ineffective Finance Director who had worked in JAR FM for many years. However, he had confidence in Leo Willems, Operations Director and the newly recruited Sales and Customer Support Director, Phillip Beck. He discussed his ideas of a MBO with his 2 key operational colleagues, Leo Willems and Phillip Beck, and received confirmation from both colleagues that they would be prepared to go ahead. They also agreed that the new company (post MBO) would require a new Finance Director with strong financial skills. Toby Baum identified an experienced accountant, through a recruitment advisor, and appointed her as a consultant, to work for him personally, in order to help to prepare a business plan and to try to identify a private equity provider. Toby Baum also informally approached some of the members of the Board of JAR to establish whether it would be receptive to a MBO for JAR FM, or whether it had already identified a trade


buyer for the JAR FM business. He was informed that no buyers had yet been found, due to the history of losses, and that a MBO would be possible, providing that the required finance could be raised. Following approaches to, and negotiations with, banks and private equity providers in late 2009 and early 2010, a deal was finally reached. Raising funds for a MBO was especially difficult during this period due to the economic environment and restrictions on lending. The new MBO company was to be called BVS. Toby Baum‟s business plan for BVS, together with his confident charismatic personality, persuaded a private equity investor, PIE, to take a 60% stake in the company. A summary of BVS‟s key personnel is shown in Appendix 1 on page 12. Negotiations took place with JAR on the valuation of the business, its assets and employee liabilities. Toby Baum knew the company well, which is always a distinct advantage with MBO‟s, and had already identified which assets, workshop facilities, and which staff he wished to employ in the new company. After much negotiation an agreement for a valuation of the JAR FM business was reached. The agreed valuation was €4.0 million. This net valuation included:

120 specified workshops that would be transferred and managed by BVS (some owned workshops and some leased).

Liabilities for 860 employees that would transfer to the new MBO company.

Inventory of materials and spare parts. A 5-year maintenance agreement was also agreed for JAR‟s fleet of vehicles. The agreement was to be at a fixed price per vehicle, based on vehicle type. The price would vary by the size of JAR‟s fleet, which was forecast to reduce over the 5-year business plan period. There was also a clause for the fixed price to be index linked to inflation each year. The 5-year maintenance agreement for JAR‟s fleet had benefits for both parties. JAR was able to reduce its total fleet maintenance costs and BVS would commence trading with a guaranteed 5-year contract for JAR‟s fleet of vehicles, which covered 34,100 vehicles at 1 April 2010. JAR FM had operated 260 workshops at 30 June 2009. However, Toby Baum did not want BVS to be overly burdened with the employee and other running costs associated with operating such a large number of workshops. BVS chose to acquire only 120 workshops from JAR FM, as it planned to outsource the remaining volume of the maintenance work to a range of carefully selected outsourced workshops, which met its quality and customer service requirements. JAR was responsible for the closure costs of the other 140 workshops that BVS was not acquiring. JAR was also responsible for all of the remaining employees of the JAR FM subsidiary company, who were not employed by BVS. News of the impending MBO was announced in January 2010 to all employees in JAR FM. Negotiations then took place as to which employees would transfer into BVS and which employees would transfer elsewhere within JAR or be made redundant. BVS would be totally responsible for all future staff costs and liabilities for the 860 employees transferred into BVS.

Structure of BVS BVS is a private limited company and not listed on any stock exchange. It has 400,000 shares in issue, each of €0.50 par value. The company has an authorised share capital of 1,000,000 shares. When the company was established, at 1 April 2010, a share premium of €4.50 was agreed. All shareholders purchased shares at a cost of €5.00 per share. Each of BVS‟s 4 executive directors purchased their shares in cash and all of them had to raise personal loans secured against their homes to generate the required level of financing for the MBO. Therefore they are all personally very committed to making a success of BVS and to see the company grow and achieve the business plan.


The shareholdings are as follows:

Number of shares held at

31 March 2012

Percentage shareholding

% Toby Baum 70,000 17.5 Leo Willems 30,000 7.5 Phillip Beck 30,000 7.5 Annika Larsen 30,000 7.5 PIE (private equity provider) 240,000 60.0

Total 400,000 100.0

The Board of BVS has not yet declared any dividends. The agreed acquisition price was €4.0 million, payable to JAR in 4 instalments:

€2.5 million on the date of acquisition, 1 April 2010.

3 further instalments of €0.5 million each, of which 2 instalments were payable on 31 March 2011 and 31 March 2012, and the last instalment is payable on 31 March 2013.

Once PIE was signed up for its 60% equity stake, Toby Baum was able to negotiate and obtain a bank loan for €1,400,000, at an interest rate of 12% per year. This loan is secured against the assets of the company. The bank loan is repayable on 31 March 2015. The bank also agreed to an overdraft facility to help meet the peak demands in working capital. The overdraft interest rate is 14% per year. Therefore, the overall structure of the book value of finance provided at 1 April 2010 was as follows:

The business plan The business plan was to grow the existing vehicle fleet maintenance business and to expand its geographical coverage of maintenance workshops to two neighbouring European countries. Underpinning BVS‟s plan is for BVS to provide a seamless one-stop service to fleet managers operating vehicle fleets across three countries. The Board planned to deliver this service through the use of managed and outsourced workshops which would all deliver a high quality of service, excellent customer care as well as the provision of management information on the fleet vehicles through BVS‟s new IT systems.

Management €0.8 million

PIE private equity

€1.2 million

Bank loan financing

€1.4 million


The principles behind BVS‟s business plan are shown in the following diagram:

The business plan includes a growth in revenues from €84 million to almost €140 million by 31 March 2015. Toby Baum, Managing Director, considered that this is challenging, but achievable. Extracts from BVS‟s business plan are shown in Appendix 2 on page 13. The core business that BVS offers to its customers is a fixed annual price, per type of vehicle, for vehicle servicing. The price per vehicle varies depending on the type of vehicle and its expected mileage. BVS‟s customers require that their vehicles are serviced on time, so as to minimise the risk of breakdowns and failures, and the associated risk to its fleet safety. Furthermore, they require that BVS‟s maintenance work should be of a high standard and that quality replacement parts should be used, particularly for safety-critical elements such as brakes and tyres. BVS‟s customers have differing requirements for the frequency of vehicle servicing, depending on the mileage and type of vehicle. Other factors include the vehicle manufacturer‟s recommended service frequency and the need for more frequent servicing in different geographical regions and for harsher environmental conditions, such as during winter months. Revenues are generated from four streams, which are: 1. Fixed price maintenance service (for which minor parts are not chargeable to customers) 2. Mechanical repairs, for which BVS charges its customers based on labour time as well as

the cost of bought in parts, with a small mark-up on parts. BVS does not provide vehicle crash repairs at its own, or its outsourced, workshops.

3. Replacement tyres. BVS also makes a charge for the labour costs associated with replacing

tyres and balancing the vehicles wheels to ensure safe and accurate steering of all vehicles. 4. Additional fleet management services, as detailed on the next page.

Monitor performance

Profitability analysis

Strategy reviews

Operating reviews Customer responses

Operational planning

Sales planning

Resource planning

Capacity limits

Planned improvements

Adapt and change

Develop the strategy

Vision

Strategic analysis

Business strategy


Additional fleet management services offered by BVS BVS also offers a range of administrative services to help its customers manage their fleets. These additional services are at an extra cost to customers, but many fleet managers want to outsource them to a specialised company. BVS offers the following additional services:

Fleet administration services and provision of vehicle management information.

Management of vehicle road testing certificates.

Accident management and arranging for vehicle repairs at specialist repair facilities.

Management of vehicle insurance claims.

Breakdown recovery service.

Reporting of vehicle mileage and carbon emissions. Toby Baum recognised that many company fleet managers wanted to outsource much of their fleet operational work and BVS‟s customer were under pressure to control and reduce their fleet operating costs. Furthermore, market research and contact with potential customers identified that they were seeking a “one-stop” outsourcer which could not only service and maintain their vehicles, but also provide key management information on each vehicle‟s operating efficiency. This includes data on mileage, operating costs, tyre usage and carbon emissions. This information can be gathered using new “telematic” technology. A telematic device is defined as a piece of electronic equipment which is installed in each vehicle which allows the vehicle‟s fleet management department, and its outsourced maintenance supplier (such as BVS), to gather a range of data on each vehicle‟s operation. This information is far more sophisticated than merely providing information on vehicle location, as it can also provide data on how the vehicle has been driven. For example, it can report on whether speed limits have been observed, how aggressively a vehicle has been driven round corners and the usage of brakes. The flow of data to the fleet manager, and also to BVS, generates information on all vehicles, the mileage driven and helps BVS to plan its customers‟ vehicles maintenance requirements. This enables BVS to ensure that its customers‟ fleet vehicles are maintained to minimise breakdowns and to ensure that all vehicles meet all of the legal and safety requirements. An added opportunity exists for the use of data from vehicles fitted with telematic devices, as BVS is able to monitor and report to its customers‟ fleet managers on carbon emissions for those customers who have selected to subscribe to this additional fleet management service.

Current operations of BVS The majority of BVS‟s work is generated from vehicle servicing, vehicle repair work and tyre replacement. However, the additional fleet management services are a growing area of BVS‟s revenues. Furthermore, these additional services have been instrumental in BVS winning several large fleet maintenance contracts from competitors over the last few years. Fleet managers are under increasing pressure to reduce their operating costs but also to meet increasingly demanding vehicle safety compliance measures, especially in respect of the 3 key areas of vehicle safety, concerning brakes, lights and tyres. BVS‟s Fleet Maintenance IT system, FLIS, (see page 9) helps provide information to BVS‟s customers‟ fleet managers for them to closely monitor their fleet vehicles. This IT system identifies the need for regular checks to be undertaken and provides reports on vehicles that are due for any safety related maintenance work. Some of BVS‟s customers‟ fleets include vehicles which use alternative fuel sources. These include vehicles which use a mix of fuels including bio-diesel, electric vehicles and hybrid vehicles, which are capable of running on electric power or alternative fuel. Therefore, BVS has had to adapt to the changing needs of its customers‟ fleet vehicles and offer a wider range of maintenance services. This has enabled BVS to expand its skills and it has provided training for some of its employees in the maintenance work required for these alternative vehicle types. These services are currently offered at workshops located near major cities.


Outsourced suppliers Leo Willems was responsible for selecting and appointing a range of outsourced workshops to undertake BVS‟s customers‟ vehicle maintenance in the geographical areas where BVS did not retain its own managed workshop. Only 120 workshops were retained by BVS after the MBO and with BVS‟s expansion into two neighbouring countries, it was necessary to appoint reliable outsourced companies which have the vehicle capacity and experience to meet BVS‟s strict criteria for maintenance and repair work. BVS has appointed 5 outsourced suppliers for vehicle maintenance. By 31 December 2012 these 5 outsourced suppliers undertake maintenance work for BVS‟s customers‟ vehicles at over 320 locations. These outsourced suppliers are independent chains of garages and workshops which have spare capacity, or can provide increased capacity, to undertake maintenance work which meets the strict criteria for quality of work and spare parts fitted as well as excellent levels of customer service. These outsourced suppliers are presented to BVS‟s customers as “BVS‟s partners”. These outsourced workshops have BVS‟s signage and BVS‟s logo on all paperwork. This ensures that BVS‟s customers would not necessarily be able to distinguish between any of BVS‟s own managed workshops and an outsourced workshop. BVS‟s contracts with these outsourced suppliers are based on BVS paying an agreed fixed hourly rate plus an agreed mark up on parts bought and used for customers‟ vehicles. These outsourced costs are invoiced to BVS at the end of each calendar month, and are analysed by vehicle and by outsourced workshop. As BVS is utilising a significant proportion of the 5 outsourced company‟s total workshop capacity, the contracted hourly rate with BVS is lower than these outsourced companies charge their other customers. Additionally, all work undertaken by all of the outsourced workshops is updated on BVS‟s Fleet Maintenance IT system, FLIS, (see page 9). This IT system therefore reflects all of the work that has been undertaken for all of BVS‟s customers‟ vehicles irrespective of whether the work occurs at an outsourced workshop or in one of BVS‟s managed workshops. Toby Baum chose to acquire only 120 workshops from JAR in April 2010 and to outsource the remainder of the maintenance work to gain greater flexibility. The volume of work allocated to outsourced workshops depends on a number of factors. These include:

Geographical location.

Customers‟ selection of the workshop, or workshops, in which they choose to have their vehicles maintenance work undertaken.

Availability and utilisation levels at BVS‟s 120 managed workshops.

The overall number of vehicles BVS is responsible for maintaining. BVS‟s customers want their vehicles off the road for the shortest possible time and they choose where to book their vehicles for maintenance and repair work. The business plan assumed that the 120 managed workshops would have utilisation levels of 90%, rising to 92% by Year 5. However, the business plan included a high growth in the number of vehicles being maintained, and much of this increased volume of work was planned to be undertaken by its outsourced workshops. The number of vehicle hours planned to be outsourced was forecast to rise from fewer than 300,000 hours in the year ended 31 March 2011 to over 1,000,000 vehicle hours forecast in the year to 31 March 2015.

BVS’s new IT systems Toby Baum recognised the lack of operational and management information provided by JAR FM‟s IT systems, which had not been updated for many years. The first task that he undertook when the MBO was approved was to appoint a global IT consultancy company to select and implement new IT systems for BVS. However, until these new IT systems were operational, at various dates during BVS‟s first year of trading, JAR allowed BVS to use its existing IT systems for a small licence fee. By selecting the best available software solutions and integrating these systems together, BVS was able to reduce the implementation time for these new systems. BVS


now incurs annual software licencing fees of €0.24 million each year. This is included in administrative expenses. BVS‟s new IT systems include:

a multi-currency nominal ledger including integrated sales and purchase ledgers and a fixed assets register.

a fleet maintenance IT system, called Fleet Information System (FLIS).

a cash flow forecasting modelling system. The Fleet Maintenance IT system, FLIS, provides management information tailored for the needs of workshop managers, Head Office staff, the senior management team as well as for BVS‟s customers. FLIS is installed at all workshops, both BVS‟s managed workshops and outsourced workshops. It provides BVS‟s customers with improved reporting on fleet repair costs, vehicle downtime, mileage data and more. FLIS incorporates detailed reporting with the capability to track the maintenance needs for all of BVS‟s customers‟ vehicles. FLIS holds statutory data, including vehicle taxes, mileage and maintenance and repair data as well as carbon emission monitoring data. FLIS also provides a range of management information reports, analysed by vehicle, by customer, by each engineer, and by managed workshop or outsourced workshop. FLIS can also be remotely accessed by BVS‟s customers for them to book their vehicles for maintenance and repairs and to access information on vehicle status whilst in for servicing or repair. This allows a seamless interface for customers, irrespective of whether the vehicle is maintained by one of BVS‟s managed workshops or by an outsourced workshop. The planned implementation cost for all of these new IT systems was €2.0 million, for both hardware and software licencing costs. However, the final cost was €2.3 million, which was charged in full (in Administrative expenses) against profits in the year ended 31 March 2011. This cost was net of the agreed payment received from outsourced suppliers, for installing FLIS at all of the outsourced workshops. Jonas Kral, PIE‟s representative on the BVS Board, was not happy with this cost over-run, but was re-assured by Toby Baum that the IT systems were robust and that they were all fully operational by the planned completion date. During the year ended 31 March 2011, all employees and outsourced workshop personnel were trained extensively in the use of these new IT systems. Additionally, they all receive regular annual training in respect of FLIS system updates and any new features it offers.

Customers’ fleet profile BVS maintains four categories of vehicles, which are:

Vans.

Cars.

Articulated lorries.

“Other” vehicles, for example street lighting trucks and earth-moving plant vehicles. The majority of the vehicles maintained are vans and cars, with less than 10% of the total vehicles that BVS maintains being articulated lorries and “other” vehicles. Phillip Beck has been actively involved with meetings and presentations to many fleet managers. He has been promoting the services that BVS offers to its customers, its quality of service and maintenance standards as well as the range of management information that BVS can provide to help each fleet manager run his or her fleet as cost effectively and efficiently as possible. Phillip Beck has had a real challenge to achieve the high growth in new sales, to meet the agreed business plan vehicle and sales revenue targets. When BVS commenced operations on 1 April 2010, it was responsible for 47,500 vehicles. This comprised 34,100 vehicles in JAR‟s fleet and 13,400 vehicles for other customers‟ fleets. At 1 April 2010, these 13,400 vehicles comprised:


10 customers, each of which operates a fleet size of more than 300 vehicles, including 1 large fleet operator with 4,500 vehicles.

84 different customers, each of which has a fleet size of 300 vehicles or fewer. The forecast for 31 March 2013 is that other customers‟ fleets will have grown to comprise 33,200 vehicles (see Appendix 5 on page 16). BVS does not offer any maintenance services to the general public. JAR had signed a 5-year contract with BVS for maintaining its entire vehicle fleet, which included 34,100 vehicles at 1 April 2010. This 5-year contract gave JAR assurances that its vehicle fleet would continue to be maintained (as it had been previously by JAR FM) and it also generated a large revenue stream for BVS. However, JAR‟s fleet size is forecast to reduce, as part of JAR‟s planned cuts and efficiency improvements, to 26,000 vehicles by 31 March 2015, as included in BVS‟s business plan. Over the first 2 years of trading, Phillip Beck was pro-active in speaking to company fleet managers to win new business. He considers that BVS offers a competitive service, clearly priced with good levels of service and quality of work. BVS‟s geographical expansion to cover 2 neighbouring countries, as well as its home country, also enabled it to attract fleet managers who were looking for a single outsourced fleet maintenance company across these 3 countries. Phillip Beck has worked closely with regional and central government departments in BVS‟s home country over the last year in order to try to win the fleet maintenance work for some of the government‟s fleet of vehicles, including emergency vehicles such as police cars. A contract for 20,800 vehicles was signed with the central government department in June 2012, and maintenance work commenced from 1 October 2012. The contract was for a rolling annual contract with the possibility for a further 12,000 vehicles to be added in future.

Procurement Leo Willems is responsible for all areas of procurement, including negotiations of prices with outsourced suppliers as well as procurement contracts with a range of suppliers of vehicle parts and tyres. The speed of delivery of spare parts for repairs is of great importance as the “down time” of customers‟ vehicles whilst being repaired is crucial for its customers‟ businesses. Therefore, BVS has in operation a large number of contracts with large, as well as small, vehicle parts suppliers. These suppliers are normally able to meet the time-critical demands for getting spare parts delivered to BVS‟s managed and outsourced workshops in the shortest possible time, which is usually the same day as the order is placed. BVS also has contracts in place with a range of specialist tyre manufacturers. BVS fitted over 500,000 tyres in the year to March 2012 for its customers. BVS considers that the cost, as well as the quality of these tyres, is very important. Some customers specify which manufacturer‟s tyres they require to be fitted, whereas other customers leave the choice of tyre to BVS‟s expertise based on quality and value for money. BVS has a contract with a large European tyre manufacturer which attracts a good volume discount. The reduced tyre cost is passed onto BVS‟s customers, giving them a reduction in their fleet maintenance costs.

BVS employees BVS took on responsibility for 860 employees at 1 April 2010. By 31 December 2012, employee numbers had grown slightly to 890 employees, due to additional work carried out by Head Office staff, in order to provide an efficient service to its customers. The split of employees between BVS‟s 120 managed workshops and Head Office is as follows:

Workshop based: 724 employees.

Head Office: 166 employees.


Toby Baum and the rest of the BVS Board recognise the important role all employees contribute towards the company‟s success and the need to deliver high quality of service to customers. Each of BVS‟s customers has an account manager as a point of contact, who has a small support team. The account manager and the team provide support and management information on their customers‟ vehicles and they try to ensure customer satisfaction. Some of BVS‟s account managers provide support to many customers, especially those customers which have small vehicle fleets. Regular customer surveys are carried out and the general feedback is positive. BVS has not lost any of its customers to date. In order to try to ensure goal congruence and to help BVS to succeed, Toby Baum established performance related pay (PRP) for all employees from 1 April 2010. PRP is linked to the achievement of different, specific objectives which are: 1. All employees – the achievement of the annual business plan operating profit. 2. Workshop based employees – the achievement of a “satisfactory”, or better, assessment of

the quality of work carried out within each of BVS‟s managed workshops based on customers‟ assessment of their maintenance work at each workshop.

3. Sales employees and customer account managers – the achievement of high levels of

customer satisfaction as well as the number of new customers‟ vehicles for which BVS acquires the maintenance work for each year.

Therefore, if BVS meets, or exceeds, the business plan annual operating profit, then a proportion of the annual profits will be paid to all employees, assuming that the assessment of their work has shown them to be satisfactory or better. Any employee with a poor assessment will not receive any PRP. PRP based on operating profit was not paid for BVS‟s first year, but it was paid in respect of the year ended 31 March 2012. Most of BVS‟s managed workshops met the satisfactory assessment requirement and the employees at these workshops received PRP. Additionally, all of the sales and customer account managers received PRP for the higher than planned levels of new customers‟ vehicles to be maintained by BVS, although there are some customer service issues still to resolve. It is forecast that PRP will be paid in respect of the current year ending 31 March 2013. PRP relates to BVS‟s employees at the 120 managed workshops only.

Financials The planned level of operating profit was for €1.2 million in the year ended 31 March 2011 rising to €10.0 million by the year ended 31 March 2015. In its first year of trading, BVS‟s operating profit was lower than planned at €0.5 million. However, in its second year, operating profit was higher than planned at €4.4 million, an increase from plan of €0.6 million. An extract from BVS‟s accounts for the year ended 31 March 2012 is shown in Appendix 3 on page 14. BVS‟s Statement of cash flows for the year ended 31 March 2012 is shown in Appendix 4 on page 15. The latest forecast for the year ended 31 March 2013 has higher than planned operating profit at €6.6 million due to an increase in the vehicle numbers compared to the business plan. This also includes revenues and costs relating to the new government contract, which commenced halfway through the current financial year. The latest forecast for the year ended 31 March 2013 is shown in Appendix 5 on page 16, compared to the business plan for this year.


Appendix 1 BVS’s key personnel

Toby Baum - Managing Director, BVS (since 1 April 2010) Toby Baum, aged 48, was recruited as the new Chief Executive of JAR FM in August 2007 to try to improve profitability. He had previously worked as the Fleet Maintenance Operations Director of a smaller, but highly profitable, fleet maintenance company. Despite reducing the losses that the subsidiary company made, the JAR Board decided to sell off JAR FM. He was instrumental in preparing the business plan and for identifying an interested private equity investor, PIE, in order to establish BVS on 1 April 2010. He borrowed funds to invest in 17.5% of the shares in BVS. Leo Willems - Operations Director Leo Willems, aged 55, has spent his whole career in the vehicle industry. He has worked for several companies in middle management positions involved in fleet management and also fleet maintenance. He joined JAR in 2005, when the company recruited a number of senior managers to improve operational efficiency and profitability. He borrowed funds to invest in 7.5% of the shares in BVS. Phillip Beck - Sales and Customer Support Director Phillip Beck, aged 40, was recruited in November 2007 by Toby Baum to identify new external customers and to market and sell JAR FM‟s fleet maintenance services. He had previously worked as a fleet manager for eight years, responsible for a large fleet of vehicles. In his previous role he had been dissatisfied with the outsourced maintenance service and had changed the outsourced service provider twice. As a fleet manager, he knew what service he wanted to provide, and his previous experience of running a fleet helps him understand the needs from a fleet manager‟s perspective. He has brought in, and retained, many large customers with fleets of thousands of vehicles. This has helped generate large levels of revenues with a relatively small impact on fixed costs. He borrowed funds to invest in 7.5% of the shares in BVS. Annika Larsen - Finance Director Annika Larsen, aged 40, is a qualified accountant. She was recruited by Toby Baum initially as a business consultant to help him arrange and establish the MBO. She had previously worked in an international business consultancy firm, but had held senior finance roles in the retail and distribution industries. She had no specialised knowledge of the vehicle maintenance industry but Toby Baum considered that her financial skills were excellent. Whilst working directly for Toby Baum as a consultant, she was offered, and accepted, the role of Finance Director in the newly established company. She borrowed funds to invest in 7.5% of the shares in BVS. Jonas Kral - Non-executive Director – PIE’s representative Jonas Kral, aged 45, was selected to be PIE‟s representative on the BVS board. He is extremely experienced in helping newly established businesses and MBO‟s to achieve their business plans. He has undertaken a Board representative role many times before and brings management experience to BVS. It is his role to ensure that BVS delivers the levels of cash flow and profitability that are included in BVS‟s business plan. It is also his role to steer BVS towards a flotation so that PIE can exit and realise its investment. PIE owns 60% of BVS‟s shares. Jan Grein - IT Manager Jan Grein, aged 32, was recruited by Jonas Kral in April 2010, immediately after BVS was established, in order to help implement and manage the newly created IT systems. Jan Grein previously worked as an IT manager in a competitor‟s fleet maintenance company and understands the business well. He has also established good relations with many of the workshop managers, who consider that he is approachable and helpful when they experience IT problems or are confused about any aspects of the new IT systems. Carmen Kemp - Human Resources Manager Carmen Kemp, aged 55, was recruited to the newly established company in April 2010 and was given a remit to ensure that all employees understood the importance of creating value in the business and to deliver outstanding levels of customer service.


Appendix 2 BVS’s Business Plan

Year ended 31 March

2011 31 March

2012 31 March

2013 31 March

2014 31 March

2015

Business statistics: No. of vehicles – End year: JAR 32,100 30,100 28,100 27,000 26,000 Other customers 18,600 24,800 32,200 42,600 55,000

Total vehicles 50,700 54,900 60,300 69,600 81,000

No. of vehicles – average for year 49,100 52,800 57,600 64,950 75,300

Utilisation level at managed workshops 90.0% 90.0% 91.0% 91.0% 92.0% Outsourced vehicle hours „000 hours 274 385 516 736 1,034

Financial plan:

€ million

€ million

€ million

€ million

€ million

Revenue 84.0 92.2 102.6 118.1 139.8 Cost of sales 64.9 71.6 79.7 91.9 109.5

Gross profit 19.1 20.6 22.9 26.2 30.3

Distribution costs 0.2 0.2 0.2 0.3 0.3 Administrative expenses 17.7 16.6 17.6 18.7 20.0

Operating profit 1.2 3.8 5.1 7.2 10.0

Finance costs 0.2 0.2 0.2 0.2 0.2

Profit before tax

1.0

3.6

4.9

7.0

9.8

Profit after tax

0.7

2.5

3.4

4.9

6.9

Business Plan - Number of vehicles - End year

81,000

69,60060,30054,900

50,70047,500

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Mar

2010

Mar

2011

Mar

2012

Mar

2013

Mar

2014

Mar

2015

Nu

mb

er

of

veh

icle

s (

en

d y

ear)

Business Plan - Operating profit

7.2

10.0

5.1

3.8

1.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015

Op

era

tin

g p

rofi

t (€

millio

n)


Appendix 3 Extract from BVS’s Statement of Comprehensive Income,

Statement of Financial Position and Statement of Changes in Equity

Statement of Comprehensive Income

Year ended 31 March 2012


€ million € million

Revenue 93.9 84.9 Cost of sales 72.8 66.2

Gross profit 21.1 18.7

Distribution costs 0.2 0.2 Administrative expenses 16.5 18.0

Operating profit 4.4 0.5

Finance income 0 0 Finance expense 0.2 0.2

Profit before tax

4.2

0.3

Tax expense (effective tax rate is 30%) 1.3 0.1

Profit for the period 2.9 0.2

Statement of Financial Position

As at 31 March 2012

As at 31 March 2011

€ million € million € million € million Non-current assets (net)

3.2 3.4

Current assets

Inventory 1.6 0.9

Trade receivables 17.8 13.1

Cash and cash equivalents 0.3 0.1

Total current assets 19.7 14.1

Total assets 22.9 17.5

Equity and liabilities

Equity Issued share capital 0.2 0.2 Share premium 1.8 1.8

Retained earnings 3.1 0.2

Total Equity 5.1 2.2 Non-current liabilities

Long-term loan

1.4

1.4

Liability for acquisition (to JAR) – due over 1 year 0 0.5

Current liabilities

Liability for acquisition (to JAR) – due within 1 year 0.5 0.5

Bank overdraft 0 0

Trade payables and other liabilities 14.6 12.8

Tax payables 1.3 0.1

Total current liabilities 16.4 13.4

Total equity and liabilities 22.9 17.5

Note: Paid in share capital represents 400,000 shares of €0.50 each at 31 March 2012.

Statement of Changes in Equity

For the year ended 31 March 2012

Share capital

Share premium

Retained earnings

Total

€ million € million € million € million

Balance at 31 March 2011 0.2 1.8 0.2 2.2 Profit 0 0 2.9 2.9 Dividends paid 0 0 0 0

Balance at 31 March 2012 0.2 1.8 3.1 5.1


Appendix 4

Statement of Cash Flows


€ million

€ million

Cash flows from operating activities: Profit before taxation (after Finance costs (net)) 4.2 Adjustments: Depreciation 0.4 Finance costs (net) 0.2

0.6 (Increase) / decrease in inventories (0.7) (Increase) / decrease in trade receivables (4.7) Increase / (decrease) in trade payables (excluding taxation) 1.8

(3.6)

Finance costs (net) paid (0.2) Tax paid (0.1)

(0.3)

Cash generated from operating activities 0.9 Cash flows from investing activities:

Purchase of non-current assets (net) (0.2)

Cash used in investing activities

(0.2)

Cash flows from financing activities: Payment of instalment for acquisition (0.5) Dividends paid 0

Cash flows from financing activities

(0.5)

Net increase in cash and cash equivalents

0.2

Cash and cash equivalents at 31 March 2011 0.1

Cash and cash equivalents at 31 March 2012

0.3


Appendix 5

Latest forecast for year ended 31 March 2013 compared to Business Plan



Forecast

Plan

Business statistics:

No of vehicles - end year JAR 28,100 28,100 Government contract (from October 2012) 20,800 - Other customers 33,200 32,200

Total vehicles - end year

82,100

60,300

No of vehicles - average for year 69,000 57,600

Utilisation level at managed workshops 91.5% 91.0%

Outsourced vehicle hours („000 hours) 851 516

Financial plan:

€ million

€ million

Revenue 122.9 102.6 Cost of sales 98.5 79.7

Gross profit 24.4 22.9

Distribution costs 0.2 0.2 Administrative expenses 17.6 17.6

Operating profit 6.6 5.1

Finance costs 0.2 0.2

Profit before tax

6.4

4.9

Profit after tax

4.5

3.4

End of Pre-seen material


BVS – Fleet maintenance case – Unseen material provided on examination day

Additional (unseen) information relating to the case is given on pages 19 to 22.

Read all of the additional material before you answer the question.

ANSWER THE FOLLOWING QUESTION

You are the Management Accountant of BVS.

Toby Baum, the Managing Director, has asked you to provide advice and recommendations on the issues facing BVS. Question 1 part (a)

Prepare a report that prioritises, analyses and evaluates the issues facing BVS and makes appropriate recommendations.

(Total marks for Question 1 part (a) = 90 Marks)

Question 1 part (b) In addition to your analysis in your report for part (a), Toby Baum, the Managing Director, has asked you to prepare a presentation to the Board on the range of share prices possible for BVS when the company plans to become listed during 2015/16. Your presentation should contain no more than 5 bullet points, including your recommendation, and 1 graph (a column or a bar chart or a line chart). This graph, as an attachment to your presentation, should show 4 alternative share prices. These 4 share prices are the original share price in April 2010, the alternative share prices based on two different P/E ratios and the share price if the government contract were to be terminated.

(Total marks for Question 1 part (b) = 10 Marks)

Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.

Assessment Criteria

Criterion Maximum marks available

Analysis of issues (25 marks)

Technical 5

Application 15

Diversity 5

Strategic choices (35 marks)

Focus 5

Prioritisation 5

Judgement 20

Ethics 5

Recommendations (40 marks)

Logic 30

Integration 5

Ethics 5

Total 100


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BVS – Fleet maintenance case – unseen material provided on examination day Read this information before you answer the question

Proposal for tyre pressure checking service Leo Willems, Operations Director, had asked one of his regional managers to investigate different ways in which vehicle maintenance can reduce BVS‟s customers‟ fuel consumption. Whilst all vehicle drivers perform a range of checks before a vehicle is driven each day, it is rare for tyre pressure to be checked. A recent 2 month trial, with 1 of BVS‟s customers, which has a fleet of over 500 vehicles, has been undertaken. It has been confirmed that the checking and correction of tyre pressures reduces fuel consumption. This customer has indicated that it would be very interested in taking this new service, depending on the price. The proposal is to undertake a weekly tyre pressure checking service for an additional fee. These tyre checks will be undertaken at BVS workshops (both managed and outsourced workshops) or at customers‟ premises. This will ensure that customers which select this service will have their vehicles‟ tyres operating at their optimal level. These checks will be performed by BVS‟s staff, who will check and pump up all tyres to their correct tyre pressure and check that the tyre tread meets specified criteria. If necessary, tyres will be replaced. The proposal is to offer this new tyre pressure checking service to all of its customers as follows:

Investment cost (Year 0) of €500,000. This includes tyre pressure equipment costs and IT systems costs.

An average of 12,000 vehicles will use this new service in Year 1.

Growth in vehicles taking this new service is forecast to be 30% each year.

Revenue for this new service is €300 per vehicle per year.

BVS employee costs. These are forecast to be fixed at €2,900,000 for year 1. From year 2 onwards, it is forecast that employee costs will be €240 per vehicle.

Travel costs to customers‟ premises to perform checks are forecast at €30 per vehicle per year on average (as some checks will occur at BVS workshops).

You should assume that all cash flows, except capital investment cost, occur at the end of the year to which they relate. It is forecast that BVS‟s customers will save around €420 per vehicle per year as well as savings of 320,000 kg of carbon emissions per vehicle per year, through reduced fuel consumption. All customers which select this service will need to have telematic devices installed in their vehicles, at a cost of €500 of per vehicle, payable by BVS‟s customers. This will ensure that BVS‟s employees can identify where each vehicle is, in order to carry out this service. Many of BVS‟s customers with larger fleets already have telematic devices fitted in their fleet vehicles.

The manpower costs associated with employing around 110 new employees in year 1, who will be dedicated to undertaking these tyre checks across all 3 countries, is €2,900,000 (as shown above). If demand for this service is more than 12,000 vehicles, then additional employees will be recruited at the start of Year 2. The average manpower cost is forecast to be €240 per vehicle from Year 2, based on a minimum of 12,000 vehicles using this service.

Annika Larsen, Finance Director, considers that an appropriate pre-tax cost of capital is 12% and that the proposal should be evaluated over 3 years. She is concerned about the sensitivity of the proposal due to the variation in the number of vehicles that may be selected by customers for this service.


Government vehicles contract

BVS tendered for, and won, a contract with the central government department for its fleet of 20,800 vehicles in its home country. The work commenced in October 2012 and is forecast to generate revenues of €31.2 million in the first year of the contract (which spans 2 of BVS‟s financial years). The contract is a rolling annual contract with a notice period of 6 months. Due to the current economic environment, the central government in BVS‟s home country is making substantial spending cuts. In early May 2013, the government called for re-tendering for its vehicle maintenance work for a new 1 or 2 year contract period. It asked for tenders to be submitted by the end of May 2013. The head of the government department responsible for the vehicle fleet has advised Toby Baum that despite being very pleased with the quality of service that BVS provides, the contract will be terminated unless BVS submits a tender at a lower price. The government department responsible has indicated that the total contract price, including repairs and tyres, would need to be between 5% and 8% lower than the current contract. The government department will accept the lowest tender price submitted. Annika Larsen received information yesterday from a contact of hers, who works in the government procurement department. The information indicates that all of the tenders submitted so far by other companies, are within a 6% reduction from BVS‟s current total price. She has discussed this information with you, as Management Accountant, as to whether she should inform Phillip Beck, Sales Director, or not, as he is responsible for submitting BVS‟s tender. The forecast revenues, costs and other data (based on actual and forecast data), before any price reductions, are:

Forecast revenue

for 12 month contract

Forecast total costs

for 12 month contract

Forecast operating

profit for 12 month contract

€‟000 €‟000

€‟000

Fixed-price vehicle servicing 11,086 10,650 436 Vehicle repairs 11,024 9,811 1,213 Tyre replacement 12,397 10,785 1,612

Total 34,507 31,246 3,261

For each of BVS’s 120 managed workshops:

BVS managed workshops

Average hours on government vehicles at each managed workshop

Hours 2,704

Total available hours at each BVS managed workshop 11,100 Total hours at forecast utilisation level of 91.0% 10,101

The current cost of outsourced workshop work is €32.00 per hour. However, Toby Baum is concerned that if this contract is not renewed, then the outsourced workshops will require a higher hourly rate, to compensate them for the loss of this work. It is forecast that they will require an additional €1.00 per hour. It is also forecast that in 2013/14, outsourced workshops will undertake 1,390,000 hours of work in total for BVS, including 216,000 hours of work on this government contract.

You are asked to evaluate the profit for the current contract and the financial impact on BVS‟s profit and workshop utilisation levels for the alternative options which are:

(A) To re-tender at a price of 5% or 6% or 7% or 8% lower than the current contract price. (B) To not re-tender for this contract at all and assume that the contract will be terminated. BVS‟s effective tax rate is 30%.


Customer profitability Annika Larsen, Finance Director, is concerned about the overhead costs being incurred and the level of profitability for different categories of customer, excluding the government contract and the contract with JAR. The categories are:

Large fleet customers with fleet size of 2,001+ vehicles

Medium fleet customers with fleet size of 31 to 2,000 vehicles

Small fleet customers with 30 or fewer vehicles The cost drivers and the forecast cost per activity are shown in the table below:

All figures are for each average customer Large fleet customer

2,001+ vehicles

Medium fleet customer

31 to 2,000 vehicles

Small fleet customer

30 or fewer vehicles

Average annual revenue of customer €‟000 4,906 1,253 28 Contribution before the following cost items 15.7% 14.6% 14.0%

Customer support Cost driver: Days 60 30 2 Relevant cost is €150 / day Billing & administration Cost driver: Days 60 48 6 Relevant cost is €215 / day Cost of finance based on 12% of revenue Number of days in cash operating cycle Cost driver: Days

33*

0*

23* Other fixed costs Cost driver: Vehicles 2,610 670 19 Relevant cost is €160 per vehicle

* The cost of finance represents the net number of days that trade receivables exceed trade

payables.

Unauthorised use of workshop space During routine visits to some of BVS‟s managed workshops, Leo Willems spotted that some of the workshops were undertaking servicing work on vehicles that were not owned by any of BVS‟s customers. On investigation it has been identified that these vehicles, which were taking up space in 7 of BVS‟s managed workshops, belong to BVS employees or their families. The employees have not paid for this servicing work or for any spare parts and tyres used. The use of workshop space and spare parts and tyres for private use is an abuse of BVS company rules which were communicated to all employees when BVS was established in April 2010. However, Leo Willems is aware that in the past, before BVS was established and JAR FM managed these workshops, employees were allowed to undertake routine servicing of their own vehicles. Leo Willems has sent an email to all workshop managers advising that severe disciplinary action will be taken against any employee whose vehicle is found to be utilising workshop space in future. This could include termination of an employee‟s contract of employment. He has also emailed Carmen Kemp, Human Resources Manager, stating that he wants to record an adverse comment on the employee records for the 7 workshop managers where these unauthorised vehicles had been serviced. These adverse comments would result in these 7 workshop managers not receiving any performance related pay for the current financial year.


Flotation plans for BVS When BVS was established in April 2010, it was envisaged that after 5 years of trading the company would be listed in order to give the private equity investor, PIE, an exit route. The company has now been trading for over 3 years. All investors paid €5.00 per share for BVS shares in April 2010. There has not been any sale or purchase of BVS shares since then. The BVS Board is planning a flotation during 2015/16, on the Alternative Investment Market stock exchange in its home country, which is appropriate for a small company such as BVS. Annika Larsen has asked you to calculate a range of forecast share prices at the end of 2014/15 based on a proxy Price / Earnings (P/E) ratio. It is forecast that the proxy P/E ratio could vary between 4.0 and 5.0, depending on business confidence and the size of BVS‟s customer base. The Board is concerned that if the contract for the government department, for 20,800 vehicles, is not renewed, then this could result in a P/E ratio at flotation of 4.0. BVS has 400,000 shares in issue. The latest forecast for 2014/15 is as follows:

Latest forecast for the year to 31 March 2015

Includes the government

contract before any price reduction

Value of the

government contract before any price

reduction

Revenue

€ million

180.2

€ million

34.5 Operating profit 14.0 3.3 Profit after finance costs and tax (Tax at 30%)

9.7 2.3

Toby Baum, in preparation for a Board meeting, has asked you to discuss and advise on the impact a flotation could have on BVS‟s future sources of finance and ownership of the company.

End of unseen material


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APPLICABLE MATHS TABLES AND FORMULAE Present value table Present value of 1.00 unit of currency, that is (1 + r)

-n where r = interest rate; n = number of periods until

payment or receipt.

Periods

(n) Interest rates (r)

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods


11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026


Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of

each year for n years

r

r n)(11

Periods


1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods


11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870


FORMULAE

Valuation Models

(i) Irredeemable preference share, paying a constant annual dividend, d, in perpetuity, where P0 is the ex-div value:

P0 =

prefk

d

(ii) Ordinary (Equity) share, paying a constant annual dividend, d, in perpetuity, where P0 is the ex-div value:

P0 =

ek

d

(iii) Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constant rate, g, where P0 is the ex-div value:

P0 =

gk

d

-e

1

or P0 =

gk

g

e

0][1d

(iv) Irredeemable (Undated) debt, paying annual after tax interest, i (1-t), in perpetuity, where P0 is the ex-interest value:

P0 =

net

][1

dk

ti

or, without tax:

P0 =

dk

i

(v) Future value of S, of a sum X, invested for n periods, compounded at r% interest:

S = X[1 + r]n

(vi) Present value of £1 payable or receivable in n years, discounted at r% per annum:

PV = n

r ][1

1

(vii) Present value of an annuity of £1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum:

PV =

n

rr ][1

11

1

(viii) Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum:

PV =

r

1


(ix) Present value of £1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum:

PV = gr

1

Cost of Capital

(i) Cost of irredeemable preference capital, paying an annual dividend, d, in perpetuity, and having a current ex-div price P0:

kpref =

0P

d

(ii) Cost of irredeemable debt capital, paying annual net interest, i (1 – t), and having a current ex-interest price P0:

kdnet =

0

][1

P

ti

(iii) Cost of ordinary (equity) share capital, paying an annual dividend, d, in perpetuity, and having a current ex-div price P0:

ke =

0P

d

(iv) Cost of ordinary (equity) share capital, having a current ex-div price, P0, having just paid a dividend, d0, with the dividend growing in perpetuity by a constant g% per annum:

ke = g

P

d

0

1 or ke = g

P

gd

0

]1[0

(v) Cost of ordinary (equity) share capital, using the CAPM:

ke = Rf + [Rm – Rf]ß

(vi) Weighted average cost of capital, k0:

k0 = ke

DE

D

d

D

E

VV

Vk

V

V

EV


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