GBC2011 Case Report

CIMA Global Business Challenge 2010-2011 CIMA 2010-2011
THE CASE CONCERNING CERTAIN ISSUES FACING VYP
REPORT
This report is prepared by Team:5wings From: Huazhong University of Science & Technology, School of Management Team member Team leader: Team member 1: Team member 2: Team member 3: Substitute member (if applicable): Name of mentor (if applicable):
CONTENTS
1. Introduction .................................................................................................. 4 2. Terms of reference ....................................................................................... 4 3. Prioritization of the key issues...................................................................... 4 4. Analysis of the issues .................................................................................. 5 4.1 VYPs three proposals on new development........................................ 5 4.2 Potential financial pressure raised by these investments ................... 10 4.3 The conflict between new development and existing commissioning sales ........................................................................................................ 11 4.4 The necessity to secure more income sources and raise popularity .. 12 4.5 Challenges: the human resource ....................................................... 13 4.6 Ethic issues ........................................................................................ 14 5. Recommendations ..................................................................................... 15 5.1 VYPs three proposals on new development...................................... 15 5.2 Potential financial pressure raised by these investments ................... 15 5.3 The conflict between new development and existing commission sales ................................................................................................................. 16 5.4 The necessity to secure more income sources and raise popularity .. 16 5.5 Challenges: the human resource ....................................................... 16 6. Conclusion ................................................................................................. 17 7. Appendix .................................................................................................... 19 Appendix 1: SWOT analysis .................................................................. 19
CIMA (Chartered Institute of Management Accountants) T. 400 820 4080 E. gbc.china@cimaglobal.com Web. http://gbc.cncima.com
Appendix 2: The PEST analysis ............................................................ 21 Appendix 3: Porters Five Forces analysis ............................................... 22 Appendix 4: Ansoffs matrix...................................................................... 24 Appendix 5: NPV Analysis of the ETN Proposal ...................................... 25 Appendix 6: NPV Analysis of the GTN Proposal ...................................... 30 Appendix 7: The Financing Strategy for the ETN Proposal ...................... 32
1. INTRODUCTION
VYP is an independent TV production company which is within the top 20 of its industry in the UK. In the current television production industry, the commission revenue is decreasing substantially in the latest period. The growth prospect in this industry is rather limited under the recession and fierce competition. As the entire environment changes, VYP is now thinking about applying for the TV license to be operating as an independent TV operator so that it can achieve its long-term growth and ultimate goals. Thus, VYPs management team has proposed three ambitious investment projects based on some strategic focus and relevant estimations.
2. TERMS OF REFERENCE
As independent consultants and qualified members of CIMA, we have first made scenario analysis in both financial and non-financial aspects regarding the new development of VYP and then give our recommendations on the strategic future direction for VYP. To get a better understanding of VYPs internal and external constraints, we have used the SWOT analysis (Appendix1), PEST analysis (Appendix 2) and Porters Five Forces analysis (Appendix 3).
3. PRIORITIZATION OF THE KEY ISSUES

According to the analysis above, the decision of whether to adopt the 3 proposals is the most important and urgent since it determines the future strategic direction of VYP.
Considering the enormous initial capital expenditures and long investment period of the proposals, VYP has to release the potential financial pressure in the beginning stages of ETN, GTN and Chinese CNN. Moreover, VYP has to avoid the conflict between new business and existing commissioning program sales if it wishes to operate the new business well and to achieve its ultimate goal. In addition, it contributes much to the success of the new business to obtain certain market share and to broaden VYPs income sources. Lastly, the new business brings a challenge to VYPs HR management system, which is essential to the corporate culture development and staff management. According to the discussion above, we identify and prioritize the issues facing VYP as follows: I. VYPs three proposals on new development
II. Potential financial pressure raised by new investment III. The conflict between new development and existing commissioning sales IV. The necessity to secure more income sources and raise popularity V. Challenge: the human resource management
4. ANALYSIS OF THE ISSUES

4.1 VYPS THREE PROPOSALS ON NEW DEVELOPMENT 4.1.1 THE ETN PROPOSALBY STEVE & JOHN a. Financial analysis
To evaluate its feasibility, we perform the NPV analysis based on cash flow projection from the materials. According to the assumptions and calculations in Appendix5, we can get the numbers below: Net Present Value (NPV) = GBP 2,026,915 > 0 Internal Rate of Return (IRR) = 17.96% > 15.77% Payback period = 7.19 years < 10 years It can be judged from all the three methods that the ETN proposal is feasible and will create considerable value to VYP. Moreover, the stable growth in the present value of cash flows of this investment gives us great confidence that ETN will generate sustainable and significant profits for VYP.
Note: All the numbers are the PV of ECF at Year 0, discounted at 15.77%.
Although the project will lose money in the first three years, the cash inflows afterwards are going to increase continuously and significantly to cover the initial loss. Moreover, if VYP's commission program sales are not influenced and dividends are not paid in the first three years, VYP will generate adequate
free cash flows to cover the first installment payment of GBP 7 million at the end of the third year of the project. Though theoretically the project is feasible, risks and uncertainties exist in the real world. Since the advertising revenues for the commercial broadcast companies have been substantially reduced due to the current economic environment, the advertising revenues for ETN may fail to meet our expectations. b. Non-financial measures VYP has established good reputation for the production of comedy and entertainment. VYP also has done well in the documentary programs for that it has won many TV awards over the last 7years. All of these former success and experience will contribute a lot to promoting the popularity of the ETN channel. Furthermore, VYPs professional and creative staffs as well as sufficient outside program suppliers can grant ETNs ability to meet its 24-hour broadcasting plan. Unfortunately, profit is always accompanied with risk. As a start-up in the broadcasting industry, there is no doubt that ETN would face many difficulties such as the technical weakness in broadcasting unfamiliarity and the incomplete system in managing personnel.
4.1.2 THE GTN PROPOSALBY STEVE a. Financial analysis To evaluate its feasibility, we perform the NPV analysis based on cash flow projection from the materials. According to the assumptions and calculations in Appendix6, we can get the numbers below: Net Present Value (NPV) = GBP-11,282,767 < 0
Internal Rate of Return (IRR) = 10.35% < 15.77% Payback period = 8.47 years < 10 years From the results above, unfortunately, the GTN proposal has a significant negative NPV, which indicates that it is infeasible and unwise to process. For more support, we can refer to the IRR, which is lower than the discount rate (required rate of return). Also, the payback period is even longer than that of the ETN proposal, which covers almost the whole period of the project. The statistics clearly show that the doubling of costs overweight the increase in revenues. Also we do not consider the expenditure of on-line news footage. On the other hand, the initial capital expenditure required for launching ETN and GTN together is enormous, which needs an immediate cash outflow of at least GBP 20 millions. This will cause great potential financial pressure on VYP at the beginning stage of the investment because the free cash flows may be negative. What worse, if VYP are not able to pay off the loan, it will be forced to go into bankruptcy. Therefore the proposal of launching ETN and GTN together is unacceptable in terms of both profits and financing. b. Non-financial measures Strength Neutral point different from BBC & CNN Shared resources with ETN Weakness No experience for news programs No existing professional stuffs in news area Insufficient and unstable information collection Opportunity Expand global perspective Find potential partners all over the world Attract more investors Improve reputation and attract more attention Threat Strong competitors like CNN & BBC Might lose program contracts with BBC Incompatible with the current corporate culture Hard to control the full-time correspondents in other countries
4.1.3 THE CHINESE CNNBY TOM The information given is not sufficient for us to make an NPV analysis, but we can point out the benefits and drawbacks we see from this proposal. a. Advantages: This is an emerging market in terms of news coverage from the Eastern point of view. In addition, the success and experience of the international sales enable VYP to contacts with worldwide TV network, especially in the Asian markets. Since the new TV channel can be established in the form of joint venture with some TV media conglomerates in Hong Kong and Taiwan, VYP are able to survive from the great financial pressure due to the minimal initial investment by only providing the news coverage in Europe & N American and sharing the resources with other parties. With the success of Chinese CNN, VYP can step into the worldwide market and eventually achieve significant growth. b. Disadvantage: The project does not consider the cultural factors between different countries. Different regulations exist for news broadcast in UK and other countries; therefore we need to get a license in other countries. Moreover, no news coverage exists from western point of view in Asian market, which may result in offensive programs affecting reputation of VYP. Theoretically, the project can save costs and generate high benefits. However, successful international sales do not reflect the identical success of this project as it is processing in a different language. This is a new market. Further information is needed.
4.2 POTENTIAL FINANCIAL PRESSURE RAISED BY THESE INVESTMENTS All the three projects require enormous initial capital investments which are assumed to be financed by the ESL Bank and the internal cash flows of VYP. From the NPV analysis above we know that even the profitable ETN project will lose money in the first three years, thus VYP must select an appropriate financing strategy to secure the cash flows especially in the beginning stage of ETN. Following table presents the cumulative effective free cash flows of ETN in the first six years under three different financing strategies. GBP000 ICF only ICF+loan A ICF+loan B Year 0 (7726) 13274 12274 Year 1 (7594) 11306 10006 Year 2 (6280) 10520 8920 Year 3 (1628) 6072 (8828) Year 4 7221 13521 21 Year 5 21012 18912 13812 Year 6 41257 31457 34057
*detailed calculations are shown in Appendix 7 From the table we can see clearly that only when ETN is financed by both internal cash flows and the single loan can VYP maintain a positive free cash flow in each year and hence avoid potential financial pressures. In the NPV analysis of the ETN proposal we choose to take a single loan of GBP 21 million. We prefer the single loan to the short-term loan for the reason that we cannot afford the whole principle repayment for the short-term loan at the end of Year 3. On the other hand, the single loan delays the timing of repayment and separates it into three equal installment payments and hence is more reasonable for VYP. However, the single loan requires VYP's all tangible assets as security. If ETN is in the pessimistic situation as we assumed, it will not be able to pay off the
debts, which will force VYP into bankruptcy. Under this circumstance, the ESL Bank has the first claim on VYPs assets and this will hurt VYPs shareholders interest. Moreover, the payback period is relatively long. 4.3 THE CONFLICT BETWEEN NEW DEVELOPMENT AND EXISTING COMMISSIONING SALES a. Advantages: Sharing of the resources (humans and equipments) Simplification and integration of the whole process of film production (positive position in the issuance of the programs) Creativity and high growth rate in the broadcasting industry as a newcomer.
b. Disadvantages: Technical weakness and unfamiliarity with the production of the news Fierce competition from both the commission market and the existing part as an independent operator. Incomplete system in cost control and HR management Control of the balance between the self-made programmes and the bought ones
c. Alternative actions The following are actions needed to produce high quality commissioning programs while operating well as a broadcaster, based on the Ansoffs matrix analysis(Appendix 4). Cost control
VYP needs professional team to make the budget and financial training for producers and directors is also needed. Activity based costing can be considered to have a better allocation of the overhead cost to see which part of cost can be reduced.
Certain inspections are needed in the production process to reduce both the personnel cost and the materials cost.
Quality control Creativitymaintain the initial idea-team as well as expand it to stand competitive enough in the fierce competition..Achieve the differentiation goal under this condition
Techniquesbuy more high technical equipments to ensure the proposed effects of the programs, as well, the related professionals to use these equipments are needed Resourcesdespite of the self-made programmes, the outsourced programs should be drawn enough attention to assure the quality
Characteristicsconsider for enough openness as well as the necessary local character. Moreover, the culture issue should always be the focus point in the production(the propagation and extension of the culture to get the reputation, its also an ethical issue to the society) Time control
Efficiencythe simplification and integration of the television producing process, and certain inspection should be made in this part, the Balanced Scorecard can be adopted to evaluate the performance of the workers. 4.4 THE NECESSITY TO SECURE MORE INCOME SOURCES AND RAISE POPULARITY
For a newly developed channel, its very important to capture the market share in an efficient and effective way. VYP has to stand out among its competitors by not only making high quality products but also increasing popularity among its clients and the public audiences. In the past seven years, VYP laid its centre on earning commission revenue from four main TV channels which definitely limits its audience. In order to attract a wider range of audience, VYP can search opportunities into cooperation with other renowned companies.. It is a feasible way of enlarging its market share even into the global market. With the influence of the large companies, it will be easier to raise its fame. Besides, its an industry which is easy to raise a trend of pursuing a celebrity or drama image. When a production becomes quite successful, VYP can ask the actors to help make promotion of the products, though sometimes it is costly of doing so. In addition, its possible to explore other partners to expand its business into various products and in different areas.. As there are already so many popular programs produced by VYP, outsourcing by-products affiliated with their production is a way to enlarge its market influence.. Ordinarily, people trust the company which theyre familiar with. VYP need to make itself as well as its productions deep into peoples lives. Making commercial advertisement, having sponsorship and doing preaches are common ways of company promotion. Its possible to learn from the conduct of the successful self-sale company--TV Asahi --in self-sale promotion. Ads like LOGO presentation or products exhibition available for the public will be an easy access to promote the company. 4.5 CHALLENGES: THE HUMAN RESOURCE
As VYP will employ as many as triple from the present 60 people if it becomes a broadcasting operator, the VYPs existing culture may be diluted. Besides, VYPs existing HR management system will not be able to cope with. As a growing company, VYP needs a solid employment policy to meet the need of various kinds of works. Considering the cost-benefit principle, outsourcing the daily HR management work to specified company is a better choice. The outsourcing of Sonys HR management to Hewitt is a good example. Moreover, it contributes much to working efficiency to plan the development of its key staff and to provide professional ability training for its staff to maintain the innovative ability and excellent techniques. Additionally, it is a good way to maintain VYPs existing culture to plan its HR management strategy according to its corporate strategy. 4.6 ETHIC ISSUES VYP should continue doing its charity work like making documentaries concerning natural disaster as well as plight of child labor to implement its corporate social responsibility. Besides, VYP also need to consider about the security problem in the filming process as human lives should always be valued first. Then, VYP needs to care about the social environment as outside filming might do damage to the natural environment. UK has a reputation for diversified programs. However, therere programs which may be filthy or rude. VYP need also assure the content of its programs to be positive and healthy. This is a part of its social responsibility. In addition, it is the reflection of its caring for staff to provide continuous development for its employees. It is also a way to contribute to the society to hold the scheme allowing school children to view VT filming.
Last but not least, respect for humanity and culture should also be considered.
5. RECOMMENDATIONS
5.1 VYPS THREE PROPOSALS ON NEW DEVELOPMENT Based on the ultimate mission and goal of VYP to be operated as an independent TV operator, taking the NPV analysis and financing data above into consideration, we recommend that VYP should invest in the ETN project. The ETN should broadcast those entertainment programs on what VYP is strong at to appeal to its target audiences and gain more shares in terms of audience viewing figures and establish a good image among audiences. ETN must be managed consistently and operate effective internal control to maintain quality and profitability, which are crucial to the long-term development and ultimate success of ETN. Besides, ETN should also seek future development like China CNN in international markets. Since the international sales of VYP programs generate a high profit margin and Tom has good contracts with worldwide TV network especially in the Asian markets, VYP should capture this opportunity to get access to the lucrative global market. If the new channel succeeded, the same business model can be applied to other bigger communities so that VYP can achieve significant growth internationally. 5.2 POTENTIAL FINANCIAL PRESSURE RAISED BY THESE INVESTMENTS To relieve the potential financial pressure, we recommend that: Firstly, VYP should not pay dividends to its shareholders during the initial years so as to maintain adequate internal cash flows.
Secondly, VYP should try to negotiate with the bank for better loan terms or seek other appropriate forms such as the term loan with maturity of 10 years to delay the principal payments. Thirdly, instead of buying the initial capital required, VYP could raise it by signing a lease contract if it is available. By using this method of financing, VYP could delay the lease payment of the capital and maintain adequate free cash flows. 5.3 THE CONFLICT BETWEEN NEW DEVELOPMENT AND EXISTING COMMISSION SALES Regarding to the advantages and disadvantages faced with VYP to operate well in both the television production and the TV broadcasting, VYP needs to do a good job in the cost control, quality control as well as the time control, which are the most three important issues for the success of the production. 5.4 THE NECESSITY TO SECURE MORE INCOME SOURCES AND RAISE POPULARITY When a production becomes quite successful, VYP can ask the actors to hold will scenes or publish commentary words on their blogs to appeal the public. Then it can develop some by-products like toys or posters to expand its operation while getting more fans. VYP can cooperate with other renowned companies to produce more popular products. In addition, VYP can take self-sale strategy. 5.5 CHALLENGES: THE HUMAN RESOURCE To maintain its flexibility, VYP is recommended to outsource the daily HR work. To maintain its culture, the HR director should set up a team to apply VYPs corporate strategy into HR area.
Team spirit building, which affects the working efficiency, needs the work of Steve Voddil, the co-founder, who is excellent at this. Besides, VYP has to hold some activities to convey the existing culture to newcomers to avoid the culture dilution.
6. CONCLUSION
Generally speaking, to step forward in current competitive market and finally achieve VYPs main aim of making successful programs profitably and ultimately become an independent TV operator, the best strategic future direction for VYP is to invest in the ETN proposal as well as to seek future development internationally, on the basis of continuously promoting creative program productions. Three Aspect Theories of McKinsey Analysis (future development)
Go globally as the success with the local strategy like China CNN
Profit
Operate the ETN Channel to diversify the products
Further develop the creative television production
Time
Items Financing
The first stage
The second stage
The third stage
Internal financing: ICF External financing: term loans; leasing etc.
Production
sound analysis of the budget and actual consumption inspection of production and the process maintain creativity be efficient
get sufficient equipment support
understand culture difference and add local different sources elements of programs balance between ETN and its original production hire highly trained professional people utilize the equipment employee international stuff
Human Resource Management
Outsource daily HR work Set HR strategy express its culture to its stuff further training of the employees
Marketing
build its own brand image produce subsidiary products
expand its service cooperate with other companies Positive Program
increase its international cooperation
Ethics
Charity Work Security Internal Training
Respect different culture
7. APPENDIX
APPENDIX 1: Strengths
Production --certain types of programs have been awarded --adequate and flexible outsource suppliers --the continuity of the program creativity --Neutral point of view if VYP operates news channel, different from BBC and CNN Personnel --Experienced directors and staff with good team spirit and good incentive --positive working atmosphere --scheme for children providing successors --flexibility of HR management Financial --good cash flow and low debt -- Flexible cost base Sales --good reputation from successful series and awarded documentaries --bright prospect in International sales --most of the staff have a poor understanding of the financials Sales --low bargain ability with the broadcasters --commissioning revenue is reduced by broadcasters Financial
SWOT ANALYSIS Weaknesses

Production --Limited facilities --Low working process efficiency --unfamiliarity of broadcaster operation Personnel --limited professional stuff such as VT crews and innovative team members --not systematic management of the personnel for the expansion
Opportunities
Sales --relaxed regulations of the licensing to be a TV operator --larger market of TV broadcasting --future expansion in the International sales -- people have had more and more accesses to TV programmes Production --more flexibility in producing programmes as an broadcaster --further development of the competitive programs Financial -- potential benefit from better cost control -- Use Activity Based Costing to improve product profitability analysis --potential benefit from the increasing financial leverage
Threats
Sales
--conflict between new business and existing commissioning program sales of broadcasters like BBC, Channel 5 --intrinsic disadvantages of premium channels as high charges and relatively low popularity --low popularity as a new broadcaster --the trend of delaying funds from the broadcaster --commission revenues are influenced by the in recession economic environment --fierce competition as an indie Production
--working efficiency may be effected as many new comers joined if VYP starts new business --delaying delivery of commissioning programs may happen in busy periods Financial
-- potential financial pressure to lunch new business
APPENDIX 2:
THE PEST ANALYSIS
E S T
UK Broadcasting Authority has relaxed the application of TV broadcasting regulation that all legal entities can apply for TV license in UK. UK government has provided more support for public broadcasting companies. Different broadcasting regulations exist in the world. TV broadcast company which commissioned the program in the first place own the IPRs for initial broadcast and repeat broadcast in the home geographical region. Indies usually owns all (or part) of the IPRs for sales made to TV production companies elsewhere in the world. The Europe economic is still under recession The industry has increasingly delayed payments which could affect cash flow. Deceasing commission revenue exist in the industry VYP has experienced growing revenue for international sales. UK has been the largest export country (with 40% coverage) for TV programs Rise in the documentaries while VYP has established a reputation for documentaries. Current TV programs have a wide range of content. However, offensive program may affect reputation The US-made programs are popular these days Its peak viewing period from September to the next May Audiences preference shows a tendency of changing on a seasonal basis. Therere more and more TV operators and independent production companies There are more accesses nowadays for broadcasting a new program like video website or internet digital broadcasting. More and more satellite and cable TV are adopted in the UK families. Digital signals have also been quite popular in the UK The equipments are out-of-date rapidly VYP cant fully equip itself to make TV programs at its own rent premises.
APPENDIX 3: PORTERS FIVE FORCES ANALYSIS AS AN INDEPENDENT TV PRODUCTION COMPANY BARGAIN POWER OF CUSTOMERS: HIGH Every customer has a range of commission companies to outsource while the commission company has limited customers to choose. The customer can make some programmes by itself.
BARGAIN POWER OF SUPPLIER POWER: MEDIUM There are many small, discrete specialized outsourced companies to get works done. Famous actors, specialist facilities owners, famous directors are limited resource, must be well paid.
COMPETITORS POWER: HIGH A large number of commission companies exist and each companys market share is small. The US-made programmes are very popular. Recession of the economy makes the broadcasters reduce the commission payment.
NEW ENTRANTS POWER: MEDIUM Elements needed to success as a commission company, people, reputation and track record, are not easily obtained by new entrants. Elements needed to make successful quality programmes, good idea, good production skills and the ability to sell the programme ideas, can be easily obtained by new entrants.
SUBSTITUTE POWER: MEDIUM Viewers taste is easy to change. Programme ideas are innovative and unique. Many company provide the high quality programmes.
AS AN INDEPENDENT TV OPERATOR BARGAIN POWER OF CUSTOMERS: HIGH Cable channels and satellite channels have occupied the most market and have rich content. Online video websites provide cheaper access to programmes. Viewers can vote by feet.
BARGAIN POWER OF SUPPLIERS: LOW Many small, discrete commission companies can provide needed programmes. In-house producing can be the complement of commission.
COMPETITORS POWER: MEDIUM Some powerful large broadcasters have occupied the most market share and not likely to get out of the market. Basic channels have a lower subscription fee. Satellite TV channels have a larger market and richer content.
NEW ENTRANTS POWER: LOW Very few candidates can get the license. New entrants market share is small.
SUBSTITUTE POWER: MEDIUM Many broadcasters provide the high quality programmes; viewers are easy to change their tastes. The idea of the programme is unique.
APPENDIX 4: ANSOFFS MATRIX
Existing Market Existing Business

Continuously improve the quality of programmes Focus on high margin areas like entertainment Implement better cost control to reduce the producing cost Better HR management to maintain the innovative abilities and techniques Recruit capable directors and producers to producing sufficient high quality programmes Commissioning programmes to capable indies Obtain acquired programmes from other indies
New Market
Expansion in international market to increase sales Broadcasting high quality programmes on VYPs own channel firstly Expand producing staff to provide sufficient programmes Cooperate with on-line video web sites by providing programmes to them and sharing the advertising revenues
New Business
Obtain acquired programmes from other broadcasters Set up own video web sites to show VYPs high quality programmes to raise its popularity Recruit capable people to operate
APPENDIX 5: NPV ANALYSIS OF THE ETN PROPOSAL Assumptions and Calculations: a. Revenues 1According to the industrial data from 2001 to 2010 on the Internet, we assume that the annual growth rate of the household viewing is positively proportionate to the development of the project. The estimations are as follows: Possibility Optimistic Expected Pessimistic 20% 50% 30% Growth rate 30% 20% 10%
2We assume that the subscription fee for the premium channel remain GBP 50 per household. Therefore, the annual subscription revenue of ETN has the same growth rate of that of the household viewing. 3We estimate that the advertising revenue will be just 20% of the subscription revenue, which then has the same growth rate as that of the subscription revenue, not just in the first 2 years but over the 10-year period. 4The other revenues are ignored because they are relatively small. b. Cost 1) We assume that the operating costs consist of total regular cash expenditures (excluding depreciation) and depreciation of capital expenditures.
2) We use the 10-year Modified Accelerated Cost Recovery System (MACRS) to allocate the depreciation expense and assume that the capital equipment can be sold at salvage value at the end of this project. 3) We choose to use the GBP 21 million single loan and tend to ignore the cash flows of financing here because they are incorporated into the discount rate. 4) We assume that the effective income tax rate will remain 30% over the next 10 years and for simplicity there is no deferred tax. 5) We ignore the effect of inflation and set 15.77% as the discount rate. The calculations are as follows: From the profit of VYP in Year 2009 and Year 2010 we can estimate ROE as
= 82.96%
Suppose VYP has no debt before, then its market value of debt is now GBP 21 million with interest rate of 10%. The weighted-average cost of capital is =
=15.77%
The cash flows of the ETN proposal are in the next page.
When discount rate is 15.77%, NPV = GBP 2,026,915 Internal rate of return = 17.96% Payback period = 7.19 years
(GBP '000 ) (GBP '000 )
Year Year
0 0 (10000.00) advertising subscription total revenues
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10 231.00
capital expenditure revenues optimistic
1500.00 7500.00 9000.00 1500.00 7500.00 9000.00 1500.00 7500.00 9000.00 6600.00 5400.00 1000.00 13000.00
1500.00 7500.00 9000.00 1500.00 7500.00 9000.00 1500.00 7500.00 9000.00 6600.00 5400.00 1800.00 13800.00
1950.00 9750.00 11700.00 1800.00 9000.00 10800.00 1650.00 8250.00 9900.00 6600.00 5400.00 1440.00 13440.00
2535.00 12675.00 15210.00 2160.00 10800.00 12960.00 1815.00 9075.00 10890.00 6600.00 5400.00 1150.00 13150.00
3295.50 16477.50 19773.00 2592.00 12960.00 15552.00 1996.50 9982.50 11979.00 6600.00 5400.00 920.00 12920.00
4284.15 21420.75 25704.90 3110.40 15552.00 18662.40 2196.15 10980.75 13176.90 6600.00 5400.00 740.00 12740.00
5569.40 27846.98 33416.37 3732.48 18662.40 22394.88 2415.77 12078.83 14494.59 6600.00 5400.00 660.00 12660.00
7240.21 36201.07 43441.28 4478.98 22394.88 26873.86 2657.34 13286.71 15944.05 6600.00 5400.00 660.00 12660.00
9412.28 47061.39 56473.67 5374.77 26873.86 32248.63 2923.08 14615.38 17538.45 6600.00 5400.00 660.00 12660.00
12235.96 61179.80 73415.76 6449.73 32248.63 38698.35 3215.38 16076.92 19292.30 6600.00 5400.00 660.00 12660.00
expected
advertising subscription total revenues
pessmistic
advertising subscription total revenues
costs
production staff depreciation total costs
OCF
optimistic
EBIT tax(30%) net income OCF
(4000.00) 0.00 (4000.00) (3000.00) (4000.00) 0.00 (4000.00) (3000.00) (4000.00) 0.00 (4000.00) (3000.00) 1 (3000.00) (3000.00) (3000.00) (3000.00)
(4800.00) 0.00 (4800.00) (3000.00) (4800.00) 0.00 (4800.00) (3000.00) (4800.00) 0.00 (4800.00) (3000.00) 2 (3000.00) (3000.00) (3000.00) (3000.00)
(1740.00) 0.00 (1740.00) (300.00) (2640.00) 0.00 (2640.00) (1200.00) (3540.00) 0.00 (3540.00) (2100.00) 3 (300.00) (1200.00) (2100.00) (1290.00)
2060.00 618.00 1442.00 2592.00 (190.00) 0.00 (190.00) 960.00 (2260.00) 0.00 (2260.00) (1110.00) 4 2592.00 960.00 (1110.00) 665.40
6853.00 2055.90 4797.10 5717.10 2632.00 789.60 1842.40 2762.40 (941.00) 0.00 (941.00) (21.00) 5 5717.10 2762.40 (21.00) 2518.32
12964.90 3889.47 9075.43 9815.43 5922.40 1776.72 4145.68 4885.68 436.90 131.07 305.83 1045.83 6 9815.43 4885.68 1045.83 4719.68
20756.37 6226.91 14529.46 15189.46 9734.88 2920.46 6814.42 7474.42 1834.59 550.38 1284.21 1944.21 7 15189.46 7474.42 1944.21 7358.36
30781.28 9234.38 21546.90 22206.90 14213.86 4264.16 9949.70 10609.70 3284.05 985.21 2298.83 2958.83 8 22206.90 10609.70 2958.83 10633.88
43813.67 13144.10 30669.57 31329.57 19588.63 5876.59 13712.04 14372.04 4878.45 1463.54 3414.92 4074.92 9 31329.57 14372.04 4074.92 14674.41
60755.76 18226.73 42529.04 43420.04 26038.35 7811.51 18226.85 19117.85 6632.30 1989.69 4642.61 5533.61 10 43420.04 19117.85 5533.61 19903.01
expected
pessmistic
Year IATCF optimistic expected pessmistic ECF Note:
0 (10000.00) (10000.00) (10000.00) (10000.00)
ECF = 20% * IATCF(optimistic) + 50% * IATCF(expected) + 30% * IATCF(pessimistic)
APPENDIX 6: NPV ANALYSIS OF THE GTN PROPOSAL Assumptions and Calculations: In calculating this proposal's NPV, we only consider the optimistic situation. 1We assume that the annual growth rate of the household viewing about the combination of ETN and GTN is 20% optimistically, with zero growth in the first two years. 2We estimate that the advertising revenue gains a double optimistic growth rate, which is 40%. 3The assumptions regarding the regular cash expenditures and depreciation expense are almost the same as that in the ETN proposal but with new calculation numbers. 4The discounted rate is still 15.77%.
The cash flows of the ETN&GTN proposal are in the next page.
When discount rate is 15.77%, NPV = GBP-11,282,767 Internal rate of return = 10.45% Payback period = 8.47 years
(GBP '000 )
Year capital expenditure revenues
0 (20000.00) advertising subscription total revenues
10 462.00
2250.00 11250.00 13500.00
2250.00 11250.00 13500.00
3150.00 13500.00 16650.00
4410.00 16200.00 20610.00
6174.00 19440.00 25614.00
8643.60 23328.00 31971.60
12101.04 27993.60 40094.64
16941.46 33592.32 50533.78
23718.04 40310.78 64028.82
33205.25 48372.94 81578.19
costs
production staff depreciation total costs
13200.00 10800.00 2000.00 26000.00 (12500.00) 0.00 (12500.00) (10500.00) 1 (10500.00) 5% 41813.14
13200.00 10800.00 3600.00 27600.00 (14100.00) 0.00 (14100.00) (10500.00) 2 (10500.00) 8% 7573.12
13200.00 10800.00 2880.00 26880.00 (10230.00) 0.00 (10230.00) (7350.00) 3 (7350.00) 10% 997.46
13200.00 10800.00 2300.00 26300.00 (5690.00) 0.00 (5690.00) (3390.00) 4 (3390.00) 12% (4219.92)
13200.00 10800.00 1840.00 25840.00 (226.00) 0.00 (226.00) 1614.00 5 1614.00 15% (10083.62)
13200.00 10800.00 1480.00 25480.00 6491.60 1947.48 4544.12 6024.12 6 6024.12 18% (14190.79)
13200.00 10800.00 1320.00 25320.00 14774.64 4432.39 10342.25 11662.25 7 11662.25 20% (16201.81)
13200.00 10800.00 1320.00 25320.00 25213.78 7564.13 17649.64 18969.64 8 18969.64
13200.00 10800.00 1320.00 25320.00 38708.82 11612.65 27096.18 28416.18 9 28416.18
13200.00 10800.00 1320.00 25320.00 56258.19 16877.46 39380.74 40700.74 10 41162.74
OCF
Year IATCF discount rate NPV
0 (20000.00) 2% 39465.75
IRR PBP
10.35% 8.474
APPENDIX 7: THE FINANCING STRATEGY FOR THE ETN PROPOSAL Suppose VYP will not pay out dividends and retain all the earnings as internal cash flows for the new investments over the 10-year period. The growth rate of earnings from 2009 to 2010 is (GBP2274000 GBP1651000) / GBP1651000 = 37.73% We assume that earnings generated from VYPs existing commission sales will continuously increase at the rate of 37.73% for the next 10 years. The effective cash flows(ECF) of ETN, the internal cash flows(ICF) and the cash flows of the single loan of GBP 21 million (Loan A) and the short-term loan of GBP 20 million (Loan B) are as follows: (GBP 000)
Year ECF ICF Loan A Loan B
0
(10000) 2274 21000 20000
1
(3000) 3132 (2100) (2400)
2
(3000) 4314 (2100) (2400)
3
(1290) 5942 (9100) (22400)
4
665 8184 (1400)
5
2518 11272 (8400)
6
4720 15526 (7700)
7
7358 21384
8
10634 29454
9
14674 40568
10
19903 55876
There are three financing strategies available for the ETN proposal: a. Use internal cash flows only; b. Use both internal cash flows and a single loan; c. Use both internal cash flows and a short-term loan. We now present the cumulative cash flows of the combination of ECF and the three strategies in the following table: (GBP 000) Year ECF+S.a ECF+S.b ECF+S.c 0
(7726) 13724 12274
1
(7594) 11306 10006
2
(6280) 10520 8920
3
(1628) 6072 (8828)
4
7221 13521 21
5
21012 18912 13812
6
41257 31457 34057
7
70000 60200 62800
8
110087 100287 102887
9
165329 155529 158129
10
241108 231308 233908
From the results above, we can clearly see that only under the strategy (b) could the cash flows over the entire period maintain positive. Thus, VYP
should use both internal cash flows and the single loan to finance the ETN proposal.

GBC2011 Case Report

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GBC2011 Case Report

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CIMA Global Business Challenge 2010-2011 CIMA 2010-2011

THE CASE CONCERNING CERTAIN ISSUES FACING VYP

3. PRIORITIZATION OF THE KEY ISSUES

4. ANALYSIS OF THE ISSUES

Further develop the creative television production

The first stage

The second stage

The third stage

Internal financing: ICF External financing: term loans; leasing etc.

get sufficient equipment support

Human Resource Management

build its own brand image produce subsidiary products

expand its service cooperate with other companies Positive Program

increase its international cooperation

Charity Work Security Internal Training

Respect different culture

SWOT ANALYSIS Weaknesses

-- potential financial pressure to lunch new business

THE PEST ANALYSIS

APPENDIX 4: ANSOFFS MATRIX

Existing Market Existing Business

(GBP '000 ) (GBP '000 )

0 0 (10000.00) advertising subscription total revenues

capital expenditure revenues optimistic

advertising subscription total revenues

advertising subscription total revenues

production staff depreciation total costs

EBIT tax(30%) net income OCF

EBIT tax(30%) net income OCF

EBIT tax(30%) net income OCF

Year IATCF optimistic expected pessmistic ECF Note:

0 (10000.00) (10000.00) (10000.00) (10000.00)

ECF = 20% * IATCF(optimistic) + 50% * IATCF(expected) + 30% * IATCF(pessimistic)

Year capital expenditure revenues

0 (20000.00) advertising subscription total revenues

2250.00 11250.00 13500.00

2250.00 11250.00 13500.00

3150.00 13500.00 16650.00

4410.00 16200.00 20610.00

6174.00 19440.00 25614.00

8643.60 23328.00 31971.60

12101.04 27993.60 40094.64

16941.46 33592.32 50533.78

23718.04 40310.78 64028.82

33205.25 48372.94 81578.19

production staff depreciation total costs

13200.00 10800.00 1320.00 25320.00 25213.78 7564.13 17649.64 18969.64 8 18969.64

13200.00 10800.00 1320.00 25320.00 38708.82 11612.65 27096.18 28416.18 9 28416.18

13200.00 10800.00 1320.00 25320.00 56258.19 16877.46 39380.74 40700.74 10 41162.74

EBIT tax(30%) net income OCF

Year IATCF discount rate NPV

Year ECF ICF Loan A Loan B

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