Current Issues in Financial Management

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Coursework Template

Module Title Current Issues in Financial Management
Module Code 600543
Coursework Element May Exam Replacement
Module Leader Dr Qin Xiao
Word Count indicator See requirement below
First Sit or Resit? First sit
Submission Date 06 May 2020 4pm

1Assignment Title

SME Valuation, the Case of Ai Mei Shen

The Case:

In late March 2016, Zhejiang Talent Television and Film (ZTTF), a media company listed in Shenzhen, announced its plan to buy 51% of Ai Mei Shen (AMS), a young company owned by the then popular actress Fan Bingbing, in an all-cash transaction.

The deal values Ai Mei Shen at around Rmb800 million.

Ai Mei Shen was only established in July the previous year with a registered capital of Rmb3 million.

The Argument for the valuation given by ZTTF is as follows. The Empress of China, which stars Fan in the leading role as Wu Zetian, brought in Rmb190m for ZTTF in 2014. With the proposed acquisition, ZTTF will have a fuller control over one of China’s most popular actresses, hence securing a stable revenue stream.

But just because Fan stars doesn’t necessarily guarantee a hit! Film producer Chun Qiu Hong tapped Fan to star in the historical drama Lady of the Dynasty, a film that cost Rmb235m, but had taken in only Rmb134m in ticket sales. The market capitalisation of Chun Qiu Hong fell from Rmb900m to Rmb232m in the weeks after the film was released.

The proposed acquisition has caught the attention of Shenzhen Stock Exchange, which asked how ZTTF can value Fan’s production firm at such a level. The deal was cancelled consequently.

After story: Fan Bingbing was fined around RMB883m for tax evasion and other offences in Oct 2018, and was effectively ruined as an actress in the foreseeable future.

The Requirement:

  1. Suppose AMS will bring to ZTTF a perpetual extra net cash flow of RMB100m. What is the implied investor required rate of return (discount rate) when this income stream is valued at RMB800m? (20 Marks)
  2. Suppose Fan Bingbing will remain at the top of her popularity only for the next two years. Afterwards, she will bring no more cash flows to ZTTF. What is the implied net cash flow that was expected to be brought in by her in the next two years when investor required return was 25% per annum? (20 Marks)
  3. The following table gives the required rate of return sought by venture capitals. With reference to these rates, how reasonable is the implied discount rate in part 1 and what might be the likely outcome to investors should the proposed acquisition went ahead? Discussion the social economic factors which might have affected the above discount rates (hint: refer to lecture 8, “Entrepreneur financing &Venture capital methods.” Indicative word counts: 500 words.) (35 Marks)
  1. Suppose after conducting some market research you have gathered the following information:

Market portfolio return Standard deviation Correlation coefficient between market portfolio return and cash flow brought to ZTTF by Fan Bingbing Market Risk Premium Risk free rate

       
1 10 1.5 5% 2%
2 25 1.5 10% 5%
3 30 1.5 15% 6%
4 20 1.5 12% 5%
5 10 1.5 6% 3%

You have further conducted a scenario forecast based on the information given above as follows:

  Net Cash flow brought to ZTTF by Fan Bingbing (RMB million) Probability Net cash flow brought to ZTTF by Fan Bingbing (RMB million) Probability
0 -800 100% 0 0%
1 100 80% 0 20%
2 100 50% 0 50%
3 100 36% 0 64%
4 100 20% 0 80%
5 100 10% 0 90%

Based on CEQ valuation method, is this an investment worth pursuing by ZTTF? (Hint: Refer to Lecture 7, “RADR & CEQ method.” (25 Marks)

—– THE END —-

2Learning outcomes to be assessed

  • L01: Explain and evaluate recent and future potential developments in corporate finance.
  • L04: Critically assess the political nature and socio-economic influence of financial information.
  • L06: Explain and evaluate recent developments in understanding the pathology of corporate failure.

3Assessment criteria

  • Collecting and analysing relevant information in appropriate ways;
  • Seeking academic support;
  • Understanding the implications of both theory and empirics;
  • Displaying capability of integrating knowledge and using it to serve the purpose (persuasively argue for the points you are trying to make, whatever it might be).

4Grading descriptors

First (>=70)

  • Direct & penetrating in answering question, drawing on wide range of relevant evidence.
  • Fluent, reasoned & sustained argument, with excellent use of supporting evidence.
  • Excellent & critical understanding of concepts of current conceptual issues, & of current debates &/or issues in field of study.
  • Clear evidence of critical ability & of insight, perceptiveness & originality. Extensive & comprehensive information base.
  • Clear evidence of familiarity with relevant literature, including recent research literature*.
  • Significant ‘value added’ to material from lectures & prescribed reading.

Upper Second (60 – 69)

  • Direct in answering question, drawing on range of relevant evidence.
  • Reasoned & sustained argument, with effective use of supporting evidence.
  • Clear understanding of concepts, of current conceptual issues, & of current debates & or issues in the field of study.
  • Evidence of critical ability & perhaps some evidence of insight or perceptiveness.
  • Wide & sound information base.
  • Evidence of familiarity with relevant literature, including the recent research literature*.
  • Considerable ‘value added’ to material from lectures & prescribed reading.

Lower Second (50 – 59)

  • Answers question, drawing on limited range of relevant evidence.
  • Some evidence of ability to develop reasoned & sustained argument, with adequate use of supporting evidence.
  • Understanding of concepts & conceptual issues. Limited evidence of critical ability.
  • Adequate information base.
  • Evidence of awareness of relevant literature & of some of the recent research literature*.
  • Little or limited ‘value added’ to material from lectures & prescribed reading.

Third (40 – 49)

  • Attempts to answer question, but may digress at times & may have limited awareness of implications of question.
  • Argument not always fully reasoned or sustained, perhaps with limited use of supporting evidence.
  • Limited understanding of concepts & conceptual issues.
  • Little or no evidence of critical ability.
  • Limited &/or shaky information base.
  • Little awareness of relevant literature, with little or no awareness of the recent research literature*.
  • No significant ‘value added’ to

Fail (<40)

  • Does not answer question directly, or does so with weak &/or flawed argument.
  • Little understanding (or misunderstanding) of concepts.
  • Poor information base, perhaps with factual errors.

For more information, please refer to UG Programme Handbook.

5Model answers (where appropriate)

Supplied to examiners

6Assessment Submission (for your information)

eSubmission is the approved method for your programme of study. You must hand in your assessed Assignment(s), for all modules that you are taking during the 2019/20 Academic Year using the Canvas system. Submission of a printed copy is NOT allowed. You should submit via the Assignments menu item on the relevant module Canvas site.

Assignments must be submitted by the date and time stipulated. Deadlines will be strictly adhered to. Students submitting late, and who do not have mitigating circumstances approved by the Mitigating Circumstances Panel, will be subject to penalties for late submission specified by the University. Please note that Saturday and Sunday are treated as “working days” for the purposes of the late submission policy.