5BUS1094 Principles of Corporate Finance
Group coursework 2013/14
Hatfield Rovers FC
Hatfield Rovers is a professional football club which enjoys a loyal following of local fans and has recently had such considerable success that they were promoted to a higher league at the end of last season. Wishing to capitalise on this success they have decided to spend £11 million on further development. The board of directors of the club are considering two mutually exclusive options.
Option 1 – to acquire a new player
The club are keen to acquire a new striker and have identified Theo Willcox who currently plays for club rivals, De Havilland Rangers. De Havilland Rangers have agreed to an immediate transfer of Willcox for a fee of £11 million. If Hatfield Rovers acquired Theo Willcox, they would sell their existing striker, Wayne Mooney, to another club. Hatfield Rovers have received an offer of £2.5 million for Mooney but this transfer will only occur if Willcox joins the club.
If the transfers do not happen and Wayne Mooney stays on at the club, he will receive an annual salary of £500,000 for the next five years until his retirement and a loyalty bonus of £250,000 at the end of the five year period.
Assuming that Theo Willcox is acquired, the club expects that gate receipts will increase by £2.5 million in the first year and £1.3 million in each of the four following years. There will also be additional advertising and sponsorship revenues of £1.25 million per annum for each of the next five years. At the end of the five years, it is expected that Theo will be sold to another club for an estimated fee of £1 million. Theo will receive an annual salary of £900,000 during his period at the club plus a loyalty bonus after five years, of £450,000.
Option 2 – to improve ground facilities
The club would improve its facilities by extending the north stand to provide extra seating and executive boxes for businesses who wish to offer corporate hospitality to their clients. These improvements would cost £11 million and take one year to complete. During the period of the building works, the north stand would be closed, resulting in a reduction in gate receipts of £1.8 million. In the following four years it is anticipated that gate receipts for each year would be £4.55 million higher than current receipts.
Payment for the building works would be made when the work is completed at the end of the first year and the cost would be depreciated over 5 years.
Whichever option is chosen, additional ground staff will be needed. The additional wages bill will be £350,000 per annum over the next five years.
The club has a cost of capital of 10%. Ignore taxation.
PART 1
In pairs, produce a written report of 2000 words, evaluating the proposal on behalf of Hatfield Rovers. Your report should include the following areas:
1. An investment appraisal of the base case of each project, using payback, NPV and IRR, resulting in a firm recommendation as to which project Hatfield Rovers should proceed with, and why. This should include a short discussion of why academics prefer the NPV method.
2. A sensitivity analysis of the two proposals, stating the justification for your analysis. (You should include as an appendix to your report, the detailed spreadsheets showing the relevant calculations). Explain how your original recommendation (in part 1) might change as a result of your sensitivity analysis.
3. Discuss the non-financial factors which Hatfield Rovers will need to take into account when evaluating these proposals.
4. Provide a final, firm recommendation, taking into account the base case, the results of your sensitivity analysis and the non financial factors.
Your work should include relevant research, appropriately sourced and referenced using Harvard format. Relevant sources are text books, academic journal articles, professional journals.
