Prepare a report fully appraising the redevelopment project that can be presented to the Board of Directors of Liverpool Inc.
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The coursework has two sections. You must complete both sections (three questions in
Section A: (50 marks)
Using the company identified above:
1. Estimate the Weighted Average Cost of Capital (WACC) of your firm.
2. Discuss the dividend policy of the firm.
Section B: (50 marks)
Using the information provided below:
3. Prepare a report fully appraising the redevelopment project that can be presented to
the Board of Directors of Luverpool Inc.
Section B: Luverpool Inc.
Luverpool Inc. is in the construction industry and also owns a number of sporting venues. Its CEO,
Jurgen Hop, wants to invest in a new project to redevelop one of their football stadiums that he
believes could generate income for the firm for many years to come. There is a board meeting of the
Luverpool Inc. directors early in the new year and Jurgen wants to submit a report to this meeting
outlining the details of the project.
The following information has been provided by Scout Plc, a firm that Luverpool Inc. hired to provide
a costing estimate of the stadium redevelopment. The fee for this was £2m which Luverpool Inc.
must pay in one year’s time.
About the stadium:
• The stadium currently holds 54,000 spectators.
• There is one game every week for 40 weeks.
• The price of a ticket is £20.
• Costs of £350,000 are incurred each time a game is played.
• The redevelopment project would increase the capacity to 60,000.
The direct costs associated with the redevelopment work are:
• £8.1 million incurred immediately to secure the necessary machinery and building license.
• £900,000 per year on wages.
• £1.3 million per year on materials.
• £10m at the end of the project to remove all the equipment.
Currently the stadium is sold out for every game and given the history, status, not to mention the free
flowing, attacking football being played there, Luverpool Inc. are confident that this will always be
the case, whatever the capacity. However, during the redevelopment work, the current capacity
would be reduced by 6,500 seats.
The redevelopment is expected to take three years to complete, however, privately Jurgen is worried
that it may take a bit longer than that.
About the Company
Luverpool Inc. is a listed company funded partly by debt, partly by equity. Should the project be
accepted it would not materially change the capital structure of the firm. The board, and in particular
the CEO are willing to accept risks, providing they earn a suitable return. Normally they like their
building projects to payback within 25 years, but always keep an open mind on any project.
Jurgen has little experience of using Internal Rate of Return, so he is unsure of what hurdle rate to
use, however an old colleague of his, Jose M. Losealot, who is CEO of a declining shirt retailer, has
said he always uses 20% as a hurdle rate when he appraises any new project.
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In analysing the project you can assume that:
• There is no taxation or inflation
• All annual costs/revenues are paid/received at the end of the year in which they are incurred
• The ticket price is fixed forever and cannot be changed
• The cost per game will rise by £5,000 each year
You should also assume that the WACC of Luverpool Inc. is equal to the WACC figure you
calculated for your selected company in Section A.
Question 1 – Weighted Average Cost of Capital
• An explanation of the process used and source of the numbers, is much more important than the final
• Clearly state any assumptions you make
• The firm’s latest annual report will be a key source of data
Question 2 – Dividend Policy
• You should review the firm’s payout policy over a minimum of 5 years
• Consider dividends themselves as well alternatives to dividends that the firm may have used
• Relate the dividend policy/strategy of the firm, to the theory – it’s not just about the numbers
Question 3 – Luverpool Inc.
• Provide a cash flow table for the proposed project
• Calculate the NPV
• You may wish to employ other suitable appraisal techniques
• Undertake some form of risk analysis
• Discuss the findings and make a recommendation