Case Study Finance

Topics: Portugal, Inflation, Corporate finance Pages: 5 (1270 words) Published: March 25, 2014
NOVA School of Business and Economics
Corporate Finance, 2nd Semester 2012/2013

Case Study
TOSCO is a company listed in the Portuguese Stock Exchange operating a supermarket chain established in Portugal for many years. The market for traditional food retailers is saturated, and there is no room for growth under the same business model. TOSCO’s  shareholders  have  been   pressuring the management to pursue new opportunities in order to increase the value of their shares.

The management of TOSCO has hired Nova Investment Bank (NIB) to study the possibility of expanding their activities to Spain. For  this  they  will  pay  NIB  a  fixed  fee  of  €100,000. You are an analyst at NIB and your job is to perform a financial analysis of this opportunity. Bellow you can find the number of stores they plan to have fully operational in the beginning of each year for the next 3 years (some will be rented, others will be bought).

# New Stores





Also, you know that today the average monthly rent per square meter in Spain  is  €30  and   the market value per square   meter   sold   is   €6,000.   Additionally, TOSCO will need to invest €13,000,000 in the acquisition of a distribution center one year before the first stores open. Own stores will be fully depreciated in 20 years.

In Spain, each store will employ 50 employees, and the distribution center will employ 75. If opened today, each employee would earn an average monthly salary  of  €1,000.  However, these salaries will grow at a rate which is 0.5 percentage points above inflation, every year. Social security and corporate tax rates in Spain are as follows:

Coporate Tax Rate
Social Security Rate Employer
Social Security Rate Employee


In Portugal, where TOSCO has 320 stores, this year (Y0)  they  expect  to  sell  €3,000,000,000   with   COGS   of   €2,100,000,000.   The   stores   have   a   selling   area   of   150𝑚 out of a total area of

250𝑚 . These characteristics are expected to be the same for the Spanish stores. Sales per square meter in Spain will be the same as in Portugal whereas the gross margin is expected to be 3 percentage points lower. According to their plan, other than the ones already mentioned, TOSCO expects to have the following costs:

Other Costs

14.380.000  €

36.800.000  €

53.450.000  €

Further Assumptions:
1. All cash inflows and outflows will occur at the end of the year. 2. The investment for the construction of both the stores and the distribution center takes place one year before the stores start to operate.

3. The investment in the stores purchased and in the distribution center is constituted by land (70.0%) and construction (30.0%).
4. Salaries are paid 14 months during each year.
5. Inflation rate in Spain is 2.5% each year.
6. TOSCO’s  operations  in  Spain  will have 0 days of accounts receivable, 45 days of accounts payable, 25 days of inventories and 30 days of VAT. Consider 365 days a year and consider a VAT rate of 21.0% (VAT relates only with sales and with purchases). 7. The company uses the straight line method to depreciate its assets. 8. For Y3,  assume  a  CAPEX  equal  to  €1,000,000. 9. After the third year, you know that the NOPLAT, the net fixed assets and the net working capital will grow at a nominal growth rate of 1,00% forever. 10. Unless stated otherwise, all values are expressed as of year zero (i.e. they do not account for future inflation movements).

11. All the revenues/costs that the firm will attain/incur in if it decides to expand to Spain are expressed above. You should not need to consider any further revenues/costs in your calculations.

For each part, please hand in a hard copy of the report with a maximum of 10 pages and upload on Moodle one compressed file containing the PDF file and the Excel spreadsheet until the due date. In addition, please include  your  group  number  in  the...
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