NOVA School of Business and Economics
Corporate Finance, 2nd Semester 2012/2013
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:
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.
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