90.2K

Verified Solution

Link Copied!

Brief: You have recently been employed at Short Stop Technology as an analyst to provide experience in valuation techniques and for your fundamental knowledge of financial theory. Your new employer is within the financial technology firm and employs many computer science and engineering graduates. As such, many of your new colleagues have little knowledge of your field of expertise and, possibly more importantly, neither does your manager or her boss. Your manger has little knowledge of finance therefore it is your responsibility to provide financial theory and all mathematical calculations for any investment(s). Background: Your manager, for whom you are writing the report, is an engineer and will, after reading your report, deliver the highlights of the report onto the company board. While your manager's knowledge of maths and statistics is extensive, her knowledge of financial theory and financial mathematics is almost nonexistent. As the objective of the company is to expand the business to position the company in the FinTech space, mangers within the company have identified several possible expansion projects that are appealing. These projects have basic estimates of the cash flows and are both short and long term in duration. In your capacity as an analyst, you do not need to identify other investments at this stage of your employment and, as such, the report should only detail the viability and the surrounding financial theory of the investments. Lastly, the company has access to funding for these projects through loans or internally generated revenue, it is not expected that you make a judgement on the ability of investment or how many projects the company can invest. Rather you are expected to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments. The company has an opportunity to purchase a small company (Trek Travel) which will augment the current operations of the company. The cash flows from the company are variable as it is still a growing company. The owners of the company have indicated that they would be willing to sell the company to Short Stop for \$2 million dollars. An independent accountant has reviewed Trek Travel's annual statements and has estimated the future (yearly) cash flows from its operations to be: Yr 1: $100,000, Yr 2:$300,000, Yr 3: $500,000, Yr 4:$600,000, Yr 5: $800,000 and Yr 6:$1,100,000. Short Stop requires a rate of return, for an investment of this kind, of 9% p.a. As this project is the purchase of another company, your manager wishes for you to explain the objective of maximising / enhancing shareholder wealth. How would the managers of a company achieve this goal? - Discussion / Workings Providing the full description of the mathematical workings for all projects and discussion on the theoretical aspects identified by the manager

Answer & Explanation Solved by verified expert

See Answer