Project: Financial Analysis

Final Report

Group 3 4/4/18 Project: Financial Analysis

 Title page:
Student names: Denise Haasler 3425835
Zornitsa Stoyanova 3461475
Agne Baliukonyte 3322424
Alexandru Voinescu 2957892
Saskia Gerhalds 3437450

Cohort:
 2016

Learning arrangement: HLA10 – Financial Analysis

Lecturer: M.Grotenrath

Institute: Fontys International Business School

Course of studies: International Finance & Control

Study phase:
 Main Phase

Date of complementation:

Place:
 Venlo, Limburg

Spelling: British

Page I
Preface
At the point of writing this report we are in our second semester of International Finance &
Control Studies. The reason we are writing this report is because we consider this as a great
opportunity to gain first hand practical experience in report writing if it is connected to financial
related subject. On top of that, it was also a great way to review our work done in the excel file
and check it for any potential mistakes.
In this report our main audience is our HLA10(Financial Analysis) teacher Ms.Grotenrath, who
is responsible for the assessment of this report.
First of all, I would like to thank Fontys International Business school, our HLA10 teacher, Ms.
Grotenrath for providing us the lessons and knowledge that we needed in order to perform this
financial analysis. We would also like to thank our fellow classmates for their support.

P a g e II
Table of contents

Title page: .................................................................................................................................... I

Preface ....................................................................................................................................... II
Table of contents ...................................................................................................................... III
1. Introduction ....................................................................................................................... IV
2. Project description ............................................................................................................. - 1 -
2.1 Problem definition ....................................................................................................... - 1 -
2.2 Project Goal ................................................................................................................. - 1 -
1.3 Research questions ...................................................................................................... - 2 -
3. GDP country comparison .................................................................................................. - 2 -
4. Calculating the Cash Flow statement ............................................................................. - 3 -
4.1 Intools Life Cycle ........................................................................................................ - 3 -
5. Free Cash Flow ................................................................................................................. - 4 -
6. DCF Method ...................................................................................................................... - 4 -
6.1 WACC ......................................................................................................................... - 4 -
6.2 Long term stable growth rate ...................................................................................... - 5 -
6.3 Equity value................................................................................................................. - 5 -
7. Market multiples ............................................................................................................... - 6 -
8. Basic WCM optimisation scenario .................................................................................... - 8 -
8.1 DSO ............................................................................................................................. - 9 -
8.2 DPO ........................................................................................................................... - 10 -
9. Advanced Working Capital Management ....................................................................... - 11 -
10. Solar panels: .................................................................................................................. - 12 -
10.1 Scenario 1 - Intools sells electricity: ....................................................................... - 12 -
10.2 Scenario 2 - Intools rent their roof to Energy Effect: .............................................. - 13 -
10.3 Scenario 3 – Intools do nothing: ............................................................................. - 14 -
11. Sales and Leaseback ...................................................................................................... - 14 -
12. Balance Sheet of the SPV.............................................................................................. - 14 -
13. Conclusion ..................................................................................................................... - 15 -
14. Recommendation ........................................................................................................... - 16 -
Critical appraisal ................................................................................................................. - 17 -
List of Appendices .............................................................................................................. - 18 -

P a g e III
 1. Introduction
This is Traumann AG’s current situation. Traumann AG is a company that focuses on
machinery construction and is located in Germany. Currently, company is stagnating.
Therefore, the company wants to expand into the Eastern European market due to its investor
friendly climate. However, due to the company’s lack of expertise, they plan on acquiring a
company which already has some experience with that market. In order to find a company,
Traumann AG relies upon Adlerbank, who managed to find a company located in Bulgaria
called Intools. Intools mainly sells their products to: Romania, Bulgaria, Greece, Turkey and
Germany. This makes it a perfect company for Traumann AG to purchase for its experience.
In order to purchase Intools, the company plans to take a loan from Adlerbank and use a SPV
located in the Cayman Islands due to it being a tax haven for companies.

P a g e IV
2. Project description
2.1 Problem definition
Trauman AG business is stagnating, and the Trauman family decides to expand into Eastern
European countries due to highly friendly investor climate. Trauman AG is looking for
opportunities for expansions, therefore, the analysis of “Intools”, a company provided by
Adlerbank, will be conducted.
2.2 Project Goal
As a team, our MAIN goal for this project is to MAXIMISE value the company that the
Traumann family will be acquiring in Sofia, which is “Intools”, by means of a Leveraged Buy
Out. The purchase will be based on 70% loan, and 30% equity provided by Traumann Family.
The purchase price of Intools will be determined, as well as measures to improve the Free
Cash Flow for Intool's future. Improving the free cash flow for Intools will be important as
the loans and interest charge rates that are determined by Adlerbank, which will be a decision
based on the financial health of the acquisition target. We will create a 10-year plan of the
future free cash flows to achieve a specific loan from Adlerbank. Adlerbank will use the Z
score formula, so we must demonstrate that our likelihood of bankruptcy is low.
We know that the Z score formula is: 6.56a +3.26b+6.72c+1.05d.
If the final Z score is more than 2.6, Intools will be in the safe zone and the bank loan will be
higher, while the interest rates are lower. This score is related to the S&P rating, used to
determine the probability of default.

The goal of maximising the value of the company value of Intools will be achieved
through valuation techniques such as discounted cash flow method or market multiplies
method. We will not be reluctant to forget that the SPV will also be located on an island, well
known as a tax haven, the Cayman Islands. This could affect interest rates on the loan. We
will ensure that the acquisition of Intools is carried out by means of a Special Purpose
Vehicle.

The previous two years of financial statements from Intools is available, meaning we have the
basic, relevant information to develop the base scenario of the free cash flow. This is useful,
as our goal is to determine the purchase price, and this can be the basis, before valuation
techniques/methods are used. Once it is determined, we will use the average between the two
values to satisfy all parties. After base scenario planning, an optimized scenario will be
created to see how increasing the company’s value after the acquisition will be possible. So, a
base value of the company will be predicted at the start, while a new value will be created in
time to see how much it has changed (hopefully an increase).
The optimisation measures will be as follows:
1. Basic working capital management (internal source of short-term finance): analysis of
adjustment of the stockholding period, debtor collection period and creditor payment
period to the value of the third worst performing company in the industry
2. Advanced WC management:
3. Factoring (external source of short-term finance) versus soft credit policy versus tough
credit policy (internal sources of short-term finance
4. Just-in-time stock delivery (internal source of short-term finance)
5. Buying or renting out solar panels (external source of long-term finance)

Page -1-
 6. Sale and Leaseback (6 scenarios) (external source of long-term finance)

1.3 Research questions

1. What is the most accurate optimisation measure?

1.2.1. Which of the optimisations measures brings more value to the company?

3. GDP country comparison

For this task the data obtained from Economywatch will be used. That is because both
Econstat, and Eurostat do not cover all of the target markets like Bulgaria for Econstat, and
Romania for Eurostat. Even though Economywatch uses data from 2015, at least their data
covers all five of the target markets for Intools. On top of that, TheGlobalEconomy is used to
determine the political stability of the target markets.

GDP Growth Rates

Real GDP growth rate /National Cur. 2017 2018 2019 2020
Turkey 0,0297 0,0331 0,0343 0,0379
Nominal GDP / National Currency
Germany 3,651,87 3,934,81 4,074,23 4,211,9
Bulgaria 55,95 61,09 64,25 67,43
Romania 204,94 233,49 251,96 268,67
Greece 204,3 221,57 229,86 238,47
Nominal GDP growth rate/ National Currency
Germany 0,0153 0,0142 0,0129
Bulgaria 0,032 0,029 0,027
Romania 0,044 0,0379 0,0329
Greece 0,0264 0,0189 0,0195
Sales Growth rate 0,032375 0,02852 0,0272

Bulgaria
Bulgaria does not seem to be the most stable country. There are a few red flags, mainly: its
low GDP and high corruption within the country. The high corruption has also led to a lot of
money laundering, as well as organised crime within the country. Those are the things Intools
might want to look out for when expanding.
Germany
Germany is by far the safest and most stable country from the list of their target markets. It is
politically stable; the corruption is low and on top of that, it has a high GDP that has stable
growth. All in all, no red flags.

Page -2-
Greece
With Greece having low political stability and a relatively high corruption rate, Intools might
want to be careful when expanding there. Furthermore, there still is the elephant in the room
which is Greece’s already low GDP growth being negative, as they are still recovering from
the crisis.
Romania
Aside from Romania being a relatively poor country, things are not that bad for them. The
major red flags there are the money laundering through banks and exchanges, corruption, and
its mediocre political stability.
Turkey
Turkey was a good, and relatively safe country to expand to. However, due to the recent
political events its stability has dropped severely. Aside from that it, seems that it has a rather
lax money laundering control and it is also relatively corrupt
http://www.economywatch.com/
https://www.theglobaleconomy.com/rankings/wb_political_stability/

4. Calculating the Cash Flow statement

€ €
Net profit 46.72 € 98.58 93.16 € 84.90
€ € € €
Depreciation 150.00 165.00 181.50 199.65
€ €
Change in provisions 1.80 € 3.32 3.02 € 2.96

€ €
Increase in inventory 23.00 € 34.45 31.33 € 30.73
€ €
Increase in receivables 36.00 € 66.40 60.39 € 59.24
€ - € - €
Change in payables 19.20 69.66 29.99 € 29.23
€ € €
Operating cash-flow 120.32 € 96.39 215.95 226.78

4.1 Intools Life Cycle

By looking at the cash situation of Intools, we can list the criteria that allows us to identify
which life cycle phase the company is in. If Intools were in the first phase, we would see high
cash outflows and negative FCF’s, which is not the case of the current life cycle.
During the second phase, also known as the growth phase, we would see Intools with positive
OCFs, but negative FCFs; which is not the case for Intools. After eliminating the possibility
of the first two phases, we can identify that Intools is within the third phase, known as the
mature phase. Within this phase, we may see a decline in growth, which may lead to a
Page -3-
 reduction in investments, but still does not eliminate its necessity. Within this phase, we also
have positive OCFs and FCFs to repay some debts. In this phase, finance may turn negative.

5. Free Cash Flow

2017 2018 2019 2020
EBIT € 653,80 € 616,43 € 624,05 € 629,32
Adjusted Taxes € 18,34 € 12,41 € 11,84 € 11,14
€ € € €
NOPLAT 635,46 604,02 612,21 618,18
€ € € €
Depreciation and changes in provision 151,80 168,32 184,52 202,61
€ € € €
Δ Net working capital 78,20 69,47 59,97 29,66
€ € € €
Operating cash flow 709,06 702,87 736,76 791,13
€ € €
CapEx - 300,00 330,00 363,00
€ € € €
Free cash flow 709,06 402,87 406,76 428,13

6. DCF Method
The cost of equity is the return that the company pays to its shareholders/ investors. That is
the reward they get for taking the risk of investing into the company. The higher the risk of
the investment, the higher the reward for the shareholder/ investor.
The cost of debt occurs when companies borrow money from e.g. a bank. The cost of debt is
calculated by comparing it with the rate of a risk-free bond with a similar duration and terms,
and then adding a default premium to it.
The cost of equity tends to be higher than the cost of debt as it is always being riskier to invest
in a company than into a bond. The higher the risk of investment into a company, makes the
percentage in the cost of equity have a higher outcome than the result of the cost of debt
which has a smaller percentage.

6.1 WACC
In order to arrive at the value of equity of Intools using the DCF method, the WACC had to
be calculated. The WACC is based on two capital components which are Equity and Interest
Bearing Debt. We know that cost of equity tends to be higher than cost of debt among our
assumptions.
The formula for the WACC is seen in 4 different portions: Portion of Equity * Cost of Equity
+ Portion of Debt * After tax cost of Debt.

Page -4-
 WACC = (E/(E+D)) * Ce + (D/(E+D)) *
Cd * (1-Tc) WACC Calculation
2018 2019 2020
Bank Loan € 3.000,00 € 3.000,00 € 3.000,00
Bank Overdraft € 1.853,00 € 1.964,00 € 2.066,00
Total € 4.853,00 € 4.964,00 € 5.066,00
Weighting factor BL 0,62 0,60 0,59
Weighting factor BO 0,38 0,40 0,41
Cost of BL 9% 9% 9%
Cost of BO 12% 12% 12%
Cost weight of BL 0,06 0,05 0,05
Cost weight of BO 0,05 0,05 0,05
Total cost of debt Cd 0,10 0,10 0,10
Total Cost of equity Ce 0,37 0,37 0,37
Portion of equity 0,33 0,34 0,34
After Tax Portion of Debt 0,67 0,66 0,66
WACC 0,189013569 0,19231553 0,193401982

From this, we can see that the WACC changes every year due to the changes in factors such
as total cost of equity, and total cost of debt.

6.2 Long term stable growth rate

Using the assumption that the long term stable growth rate for Intools lies between the
average real GDP growth rate of Western countries for the past 10 years and the real GDP
growth rate of Turkey for the past 10 years; we were able to calculate the long term stable
growth rate. This is based on an assumption that the LTSGR of Intools represents 75% of the
average LTGR of Western European countries, and 25% of the long-term growth rate of
Turkey.

Turkey's average Real GDP growth rate 4.77%

Western European average Real GDP growth rate 0.86%
Long-term stable growth rate 1.83%

6.3 Equity value

To determine the equity value of Intools, we had to calculate the FCF’s for the 2nd stage and
discount all FCF’s in the first stage and terminal value. This meant using the Gordon growth
formula of CF0*(1+g)/(WACC-g).
Our first step was determining the terminal value, which only focused on the final year (2nd
stage) of the FCF, it was done using the Gordon growth formula. As we already had the
WACC from previous tasks, all that was left to calculate was the DCF. The WACC was
Page -5-
calculated with the help of the WACC formula WACC = (E/(E+D)) * Ce + (D/(E+D)) * Cd *
(1-Tc).

Company and Equity Value

Company Value CF (1+g) / (WACC –
Estimation g)
Gordon Growth Formula 2489,772

Year 2017 2018 2019 2020

FCF 709,06 402,8746 406,762 428,1292
TV 2489,772
WACC 0,187141 0,189014 0,192316 0,193402
DCF 597,2839 285,4177 241,6908 1479,379

Company Value 2603,771

Debt 4670
Bank Loan 3000
Bank Overdraft 1670
Equity value -2066,23

Once the DCF for each year was calculated, we then arrived at the company value; of which
was a total sum of all the DCF’s. As the company value was calculated, the equity value had
all information necessary to discover. This was done by lessening the company value with the
total market value of interest bearing debt. This lead to the final equity value of -2066,23. The
reason for a negative equity value is due to the large interest bearing debt.

7. Market multiples

Market Multiples is a company value method that we used alongside the DCF method, albeit
being less ‘sophisticated’. It is commonly used in investment banking and is used to
compliment the DCF method during mergers and acquisitions. It is most helpful when applied
if the Free cash flows projections are known to be speculative.
Market multiples revolves around the premise that similar assets will ultimately sell at similar
prices. Therefore, it is required that companies are able to be differentiated and stratified into
groups. This is based on characterises such as company size, market segment and so on.
Market multiples is based on the EBIT and sales of the company which have their own
corresponding multipliers. The calculations we used in this report are based off the 2017
financial operating year as that was the most recent and should be most reflective of intools
position.
Below is the table which was provided to us as a reference from which we could identify the
appropriate multiples based on the company’s current Industry. Intools was known to be

Page -6-
operating within ‘Factory equipment and machine construction’ industry and has turnover
below 50 million euro, therefore qualifies as a ‘smallcap’ business.

Below are the value relevant questions which we used to inform where within the range of
Sales and EBIT would influence the multiples.
5 (of 13) value relevant questionas for entrepreneurs:
1. Customers: the very long DSO is a possible indication for the market power of customers,
maybe there are a few big ones. One of the first optimization steps will be to reduce the DSO
to the level of 3rd worst company in industry. Thus, the customer power seems to be limited.
As Intools is operating in 5 different target markets the size of individual customers cannot be
very big.
2. Suppliers: the very long DPO indicate that Intools is able to wait with their payments
without jeopardizing supplier relationships
3. Competition: the very modest increase of sales last year is an indication for little or even
no market power of Intools.
4. Research and development: there is no investment into R and D according to any
financial data.
5. Not necessary for operation: The business maintains minimal cash reserves which gives it
little liquidity.
There were only 5 relevant questions, with only the one being positive. Therefore only a
multiple of 11.55 was used for EBIT and 1.189 for Sales (lower 20% band). This is
represented in the graph below.
Adjusted Market Multiples
Ebit Sales
From To From To
Factory Equipment and Machine con. 11 14.6 1.1 1.68
Difference 3.6 0.58
Weight factor yes 0.38461538 0.384615385
Weight factor no 0.61538462 0.615384615
Difference* weight factor yes 1.38461538 0.223076923
Adjusted by scoring 12.3846154 1.323076923

Below is the rest of the market multiples spread sheet where you can see how net
indebtedness was calculated to be deducted from the company value of EBIT and Sales at the
top, to then arriving at the Equity value and ultimately the market multiple purchase price.
Company value calculation
2017 Ebit multiple EBIT Sales Multiple Sales Company value EBIT Comapny value sales
12.3846154 653.8 1.323076923 6060 8097.061538 8017.846154

Net Indebtness
Page -7-
 Bank Overdraft 1670
Bank Loan 3000
(Cash) 18.44
Total 4688.44

Equity Value From To Adjusted

Based on EBIT 2503.36 4857.04 3408.621538
Based on Sales 1977.56 5492.36 3329.406154
Average Equity Value 3369.013846

Purchase price
Market Multiple 3369.01385
DCF -2066.22892
Price 651.392465

8. Basic WCM optimisation scenario

Inventory Management 2018 2019 2020

Stockholding Period
Industry Average 80 80 80
€ € €
Adjusted Inventory 329,09 338,48 347,69
The industry average for stockholding period is 80 days. To obtain the adjusted inventories,
we multiplied stockholding period with the COGS materials. The results of that were divided
by 365. Doing this led to the adjusted inventories of 2018, 2019 and 2020 being: 329.09,
338.48 and 347.69.

Page -8-
Year 2016 2017 2018 2019 2020
Tangible non-current assets
Freehold land and buildings, at net
€ 1.460,00 € 1.440,00
value € 1.477,38 € 1.518,51 € 1.563,74
Plant and equipment, at net value € 3.890,00 € 3.760,00 € 3.857,62 € 3.964,99 € 4.083,11
€ 5.350,00 € 5.200,00 € 5.335,00 € 5.483,50 € 5.646,85
Current assets
Inventories € 1.041,00 € 1.064,00 € 329,09 € 338,48 € 347,69
Trade Receivables € 2.015,00 € 2.051,00 € 2.117,40 € 2.177,79 € 2.237,03
Provisions doubtful debts -€ 100,75 -€ 102,55 -€ 105,87 -€ 108,89 -€ 111,85
Cash € 8,13 € 18,44 € 1,11 € 6,95 € 6,03
€ 2.963,38 € 3.030,89 € 2.341,73 € 2.414,33 € 2.478,89

Total assets: 8,313.38 8,230.89 € 7.676,73 € 7.897,83 € 8.125,74

8.1 DSO
Debtors Management 2018 2019 2020
Days Sales Outstanding
Industry average 69 69 69
€ €
Adjusted trade receivables 1.182,68 1.216,41 € 1.249,49

The industry average for the DSO is 69 in all three years. In order to obtain the trade
receivables we multiplied the days of sales outstanding with the annual sales. The results of
that were divided by 365. By doing this we got the following adjusted trade receivables:
1182.68, 1216.41 and 1249.49

Year 2016 2017 2018 2019 2020

Tangible non-current assets
Freehold land and buildings, at net value € 1.460,00 € 1.440,00 € 1.477,38 € 1.518,51 € 1.563,74
Plant and equipment, at net value € 3.890,00 € 3.760,00 € 3.857,62 € 3.964,99 € 4.083,11
€ 5.350,00 € 5.200,00 € 5.335,00 € 5.483,50 € 5.646,85
Current assets
Inventories € 1.041,00 € 1.064,00 € 329,09 € 338,48 € 347,69
Trade Receivables € 2.015,00 € 2.051,00 € 1.182,68 € 1.216,41 € 1.249,49
Provisions doubtful debts -€ 100,75 -€ 102,55 -€ 59,13 -€ 60,82 -€ 62,47
Cash € 8,13 € 18,44 € 15,27 € 4,44 € 18,49
€ 2.963,38 € 3.030,89 € 1.467,91 € 1.498,50 € 1.553,19

Total assets: 8,313.38 8,230.89 € 6.802,91 € 6.982,00 € 7.200,04

Page -9-
 8.2 DPO
Creditors Management 2018 2019 2020
Days Payables Outstanding 253,3708089
Industry average 36
€ € €
Adjusted Trade Payables 532,13 1.078,52 1.107,56

In order to determine the DPO took the closing capital and substracted the opening capital
from it. The result of that were added up to the COGS material. The result of the two
combined was then used to divide the trade creditors. And the result of that was then
multiplied by 365. Which then gave the following result: 253.3708089.

Year 2016 2017 2018 2019 2020

Tangible non-current assets
Freehold land and buildings, at net value € 1.460,00 € 1.440,00 € 1.477,38 € 1.518,51 € 1.563,74
Plant and equipment, at net value € 3.890,00 € 3.760,00 € 3.857,62 € 3.964,99 € 4.083,11
€ 5.350,00 € 5.200,00 € 5.335,00 € 5.483,50 € 5.646,85
Current assets
Inventories € 1.041,00 € 1.064,00 € 329,09 € 338,48 € 347,69
Trade Receivables € 2.015,00 € 2.051,00 € 1.182,68 € 1.216,41 € 1.249,49
Provisions doubtful debts -€ 100,75 -€ 102,55 -€ 59,13 -€ 60,82 -€ 62,47
Cash € 8,13 € 18,44 € 17,46 € 22,28 € 28,18
€ 2.963,38 € 3.030,89 € 1.470,10 € 1.516,34 € 1.562,88

Total assets: 8,313.38 8,230.89 € 6.805,10 € 6.999,84 € 7.209,73

DCF based
Basic WCM Optimization Z-score S&P Cost of equity
Scenario FCF 2018 2018 2018 debt value
402,87 547,99
1,1 IP without adjustment € 1,439 4,69 0,0500 €
1.160,27 601,62
1,2 IP with adjustment € 1,832 5,08 0,0500 €
1.160,27 601,62
2,1 DSO without adjustment € 1,832 5,08 0,0500 €
2.035,59 942,20
2,2 DSO with adjustment € 2,558334 5,81 0,0500 €
2.035,59 942,20
3,1 DPO without adjustment € 2,558334 5,81 0,0500 €
1.509,78 1.148,26
3,2 DPO with adjustment € 2,249373 5,50 0,0500 €

P a g e - 10 -
From this table it is clear with adjustment, DSO is the best option. That is because it beats all
the other ones in every single aspect, except FCF 2018.

9. Advanced Working Capital Management

9.1.1 “Just In Time”20%

“Just In Time” or “JIT” is a methodology at which production line receives necessary
components ( materials ) of a final product at the time they are needed. For example, if there
is a demand for one unit of any product company manufactures, it will be on production line
as soon as there is a demand for it. Instead of producing and pushing product on the market.
That methodology saves amount of materials actually needed for production, as they are
ordered on time there is a need for them. It increases COGS materials by 5% because of
higher costs for materials purchases, as they are ordered in smaller quantities. It led to 1,814 €
spent for materials on the first year of operating. Moreover, it decreases the stockholding
period by 20% which led to 263,27 € as amount for inventory worth.
9.1.2 “Just In Time”30%
It has the same principle of working, however in that case it decreases the stockholding period
by 30%, which in our case led to 230€ as amount for inventory worth in the end of first year
of operating. Moreover, the COGS materials increased by 10% and led to 2,127€ spent for
materials in the end of the first year of operating.
9.2 Factoring incl./ excl. Turkey
Factoring is the methodology of putting receivables on account of another company. As
payments are made on credit there is a chance of not receiving the money which stands out as
provision doubtful debt. Another company, which is represented as a factor takes the role for
receiving credit payments from customers of main company. Such lets getting rid of doubtful
debts and increase amount of cash. Which could be used for paying out the liabilities and
dividends.
Factoring including Turkey, stands for financial assumption in which credit payments made in
Turkey will also be taken by factor, due to the fact that Turkey is not in European Union, we
have to look at both actions. The only way such financial assumption changes the balance
sheet/ income statement is that it “Gets rid of” all trade receivables throughout whole period
of operating.
Factoring, excluding Turkey says about financial assumption in which we calculate Turkeys
credit payments separately and INCLUDE them in the balance sheet.
9.3 Soft Policy and Tough Policy
Soft or Tough policies are methodologies for controlling the trade receivables of the
company. Differences are that Soft policy does not lose customers goodwill. However, that
case increases the administrative expenses by 2% because of a need to train employees in
dunning process. Tough Policy, however, looses around 2% of sales because of loss of
customers goodwill. Moreover, it increases the administrative expenses by 3%.

P a g e - 11 -
10. Solar panels:
With the intention of maximising efficiency from the current space that they occupy, Intools
have considered the possibility of installing solar panels (a Photovoltaics (PV) system) on
their 1300 square meters of southern facing roof. There are numerous factors to consider in
this situation, so therefore three different scenarios shall be created and analysed. Within these
factors is the location and national incentives, as Bulgaria attracts more sunlight than most of
the World, with 2000-2400 hours of sunshine per year. With a national target of 16%
renewable energy sources by 2020, Bulgaria has implemented the Feed In Tariff (FIT). The
funding is granted following the sale of produced electricity to a local supplier, and the
amount received depends on the amount of KWh that is produced. As the area available
amounts to 1300 square meters, the Photovoltaics system would generate 190KWp (Kilowatt
Peak). Below you can see the divisions of funding, and Intools’ specified amount has been
highlighted.

Secondly, the installation of the solar panels would be conducted by a third party, Energy
Effect. Their services are available at the rate of 815.79€/KWp, and as Intools would generate
190KWp, total installation costs would equal 155,000€. Furthermore, annual costs must be
considered, as maintenance and insurance costs amount to 1% of the invested amount
(155,000€/100 = 155€). As well as this, depreciation is a considerable factor. The solar panels
have a 20-year lifespan and a residual value of 0.
Moreover, due to the high installation costs of the PV system, Intools would need to extend
their bank loan further, at an interest rate of 9%. Finally, the tax consequences that would
arise need to be addressed.
On the other hand, Energy Effect would consider renting the roof area from Intools, and then
installing their own solar panels, and selling the electricity. This would come at no cost to
Intools, but they would not benefit from the electricity itself. However, they would receive
1800€ per year as rent from Energy Effect.
10.1 Scenario 1 - Intools sells electricity:
As previously stated, Intools would have to pay for the installation costs which would amount
to 155,000€ due to the 190KWp that they would generate, which is a considerable investment.
Additionally, annual costs amount to 155€ each year for maintenance and insurance (1% of
initial investment); this is can be found under operating expenses in the balance sheet. As well
as this, depreciation needs to be considered as the lifespan of the PV system is 20-years, and
the residual value is 0. Therefore, each year the PV system declines in value by 7,750€
(155,000€ /20-years) (5% of investment) each year. This is also categorised as an operating
expense.

P a g e - 12 -
Continuing, Intools would be able to benefit from the Feed In Tariff that the Bulgarian
government offers. The optimal positioning for solar panels is to face directly south (0°), and
have a slope of 35°. However, Intools will only be able to have an orientation of 10°, and a
slope of 30°. Using the Photovoltaic Geographical Information System (PVGIS), which is an
online website service which calculates the generated electricity from PV systems. Using
Intools’ information it was possible to calculate that 1230KW of electricity would be
generated per year, for every 1KWp. This figure can then be multiplied by the 190KWp that
Intools would generate, to derive a yearly sum of electricity generate by Intools’ PV system;
which is 233,700KW. This information is essential for calculating the amount that Intools
would receive from the FIT scheme. As Intools operate in Euros, and not Bulgarian LEV, the
exchange rate of 0.51129 needs to be considered. After this, Intools will receive 0.08647€ per
KWh. The final step is to multiply the annually produced electricity, by the funding from the
government, to calculate the yearly income from the FIT program (233,700KWh*0.008647).
Finally, the EBIT Intools would receive from the FIT programme is 20,207.89€ per year, and
this would be noted on the balance sheet as other operating income.
However, this income then required taxation, at the rate of 10%. Therefore, Intools would be
taxed a further 2,020.80€ per year because of the FIT program (20,207.89/10). Therefore,
using receivables from the FIT program, and the deduction of taxes (20,207.89€-2,020.80€), it
can be seen that the PV system will generate 18,187€ each year. As well as these costs,
Intools would face further costs from the bank as they will need to extend their bank loan to
finance the installation, at a rate of 9%. This would amount to a further 13,950€ in debt to the
bank ([155,000/100]*9).
Conclusively, it can be seen that the installation will cost 155,000€, and annual costs amount
to 155€ in the first year, but that will decline each year due to depreciation; annual costs will
remain at 1%. The installation costs (155,000€), plus the interest owed to the bank for the
loan (13,951€) equals 168,950€. This sum can then be divided by the yearly FIT receivables
(18,187€), to calculate the time it will take for the PV system to earn back the initial costs; it
would take 9.29 years. Without the bank interest it would only take 8.52 years.
It would be recommended that, in 20 years (after the life of the PV system has ended), if the
installation cost of the new PV remained constant to the present, and Intools covered the costs
themselves, then it would take the current PV system 17.81-years (9.29+8.52) to generate the
funds required to return the investment, and pay for the next system, without the aid of a bank
loan. As well as this, they would have 2.19-years left on the life of the PV system which
would be only generating profit as current, and future costs would be covered in the previous
17.81-years. In these 2.19-years, Intools would generate 39,829.53€ profit after tax from the
Bulgarian governments FIT program. In the long-run (20-years), this would save Intools
13,950€ on the next installation and generate a significant amount of profit with.

10.2 Scenario 2 - Intools rent their roof to Energy Effect:

This scenario differs quite greatly from the first scenario as Intools will not be responsible for
the PV system, and will not benefit from it either. A third party, Energy Effect, would be
willing to rent the 1300 square meters of roofing from Intools, and they would be responsible
for all costs. However, this means that Intools would not gain anything from the PV system as
the PV system would not be an asset of their own, as It would belong to Energy Effect.
P a g e - 13 -
Therefore, the only benefit for Intools would be at 1800€ per year that they receive from
Energy Effect as rent. They would not face any additional costs, and would only benefit from
the situation.

10.3 Scenario 3 – Intools do nothing:

Within this scenario, it is evident that there will be neither advantages, nor disadvantages for
both Intools, and Energy Effect. The roofing space would remain dormant.

11. Sales and Leaseback

Sales and Leaseback method is financial tool which saves company money on assets.
It works in the following way:
Vendor or an acquiring company sells asset to the Purchaser or lessor. Lessor in return offers
company to lease their land back. In the first case Sales Price equals Fair Value of an asset.
Which led to best circumstances for companies. The transactions carried out at the fair price.
In the second case sales price was lower than fair value of an asset. And therefore lease
compensated the higher price than fair value.
In the third case sales price was higher than fair value. Therefore led to amortisation and high
sales price got balanced out by amortisation.
Sale and Z-score S&P Cost of
Leaseback FCF 2018 2018 2018 debt DCF based equity value
2.022,51 669,07
1.1 Salb Sp=Fv € 2,9772 6,23 0,05 €
2.038,05 995,12
1.2 Salb Sp< Fv € 2,4767 5,73 0,05 €
2.023,14 679,07
1.3 Salb Sp>Fv € 2,9540 6,20 0,05 €

12. Balance Sheet of the SPV

Balance sheet of the SPV as of January 2018
Owner's
Assets Equity
€
Investment in Intools € 1.619,93 11,96
€
Cash € 11,96 Debt 1.619,93

€
Total Assets € 1.631,89 Total Claims 1.631,89

P a g e - 14 -
 Forecast dividends
2017 2018 2019 2020-…
€ € €
961,06 € 2.256,51 606,72 396,76

Average Dividends for 10 years € 660,16

Bank Loan = Average Dividends * ANF

ANF = (1-(1+i)-ᶰ )/i 8,481076925
Average Corporate Bond yield 0,031133333
Interest rate of Adlerbank 0,031133333
Bank Loan € 5.598,86

Interest Payment 3 years

2018 2019 2020
€ €
Loan start € 1.619,93 1.428,93 1.237,92
€ € €
Annuity 191,01 191,01 191,01
€ €
Interest Payment € 50,43 44,49 38,54
€ € €
Redemption 140,57 146,52 152,47
€ €
Loan end € 1.428,93 1.237,92 1.046,92
Equity € 133,46

NPV € 4.138,23

13. Conclusion
The whole financial project laid its path from very beginning on how everything starts with
planning the acquisition of a company, to forecasting different possible situations and
preventing them. Base scenario showed us the possible outcome of company Intools after
acquisition. In order to improve their situation different methodologies were applied to find
out the best option for further development of a company. Basic and Advanced working
capital management manipulation methods helped improving the situation of intools by
forecasting possible negative and positive outcomes for a company. Moreover, such thing as
acquisition and holding solar panels, was one of the assumptions for correct development of a
company. Such measure could let company save money or receive alternative way of

P a g e - 15 -
increasing income. Moreover, sales and leaseback method improved situation of intools in the
way that there was no need in holding land as an asset. When it could be leasedback.

14. Recommendation
Firstly, by looking at 2018, we can see that a Z score of 2.6 is not possible under all scenarios.
Assuming we need a Z score of at least 2.6, the only scenario where we reach this is if Turkey
is not involved in the factoring. That would be the only scenario where the 2.6 Z score is
achieved.
Secondly, we recommend that Intools look into installing and fitting the solar panels
themselves. With calculations, we can see Intools earning a healthy profit of 39,829.53 within
20-years time. This calculation is with the costs already paid. If this is looked at as yearly
profit, that equals 1991.476 annually. This is a higher value than renting out the solar panels.

P a g e - 16 -
Critical appraisal

The first point of criticism is how the project could have been more interactive and
cooperative for the group. So far it seems as a project for one person, to test knowledge of one
individual, the tasks are for individuals. However, understanding the circumstances and how
hard it is to evaluate many students individually, it is impossible for the project not to be in
groups.
The second point of criticism is that ALL members of the project could have put more effort
in it. Mostly laziness and hope for someone else to appear and fix the project for others.
The first point of appraisal is how this report analyses multiple scenarios. Instead of just
simply analyzing one scenario and ignoring all other possibilities this report analyses multiple
ones. Thanks to this, the report is able to give a more useful and detailed recommendation to
the client.
The second point of appraisal is how the report not only shows the information but also
provides a brief explanation. This makes it much easier for the reader to understand the
numbers and what they do.

P a g e - 17 -
List of Appendices
Appendice 1: Working hours
Working Hours

Members Saskia Alexandru Agne Zornitsa Denise

Week 1 5 hours 5 hours 5 hours 5 hours 5 hours

Week 2 15 hours 15 hours 15 hours 15 hours 15 hours

Week 3 10 hours 10 hours 10 hours 10 hours 10 hours

Week 4 15 hours 15 hours 15 hours 15 hours 15 hours

Week 5 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 6 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 7 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 8 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 9 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 10 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 11 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 12 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 13 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 14 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 15 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Week 16 9.5 hours 9.5 hours 9.5 hours 9.5 hours 9.5 hours

Total Study Hours = 140 hours

P a g e - 18 -