Analysis and Recommendations for ManeSalah Plc's Firmino Project

It is October 1st 2021. ManeSalah Plc has established itself as one of the leading supermarket chains in the UK. The firm’s debt is currently rated at A+, however recent developments in the UK market have hit the company and there are rumours in the stock market about a possible downgrade in the credit rating to just below Investment Grade status. The company however remains optimistic and is looking to expand further by undertaking the Firmino Project, details of which are given below.

ManeSalah Plc has 5000m shares in issue which currently trade at £1.60 each. Its only debt is in the form of 10m bonds that have exactly 5 years left to expiry, these have a coupon rate of 12% and face value per bond of £100.

The proposed project is to launch specialist “Firmino” Supermarkets in small towns around the UK, the outlets will all be part of the ManeSalah company but trade under the Firmino name. The aim is to build 100 Firmino stores across the UK, although this number is very dependent on the availability of suitable premises.

ManeSalah Plc has employed consultants Dalglish Inc to undertake a viability study of the proposed project. The agreed fee for the study was £180m, which is being paid in three equal installments; one has already been paid, the second is being paid today, and the final installment will be paid in two years time.

Based on the report provided by Dalglish Inc, the cash flows - per new Firmino outlet in Year 3 of the project – are expected to be: 

Using the information provided in the case above, write a report for the board of directors of ManeSalah Plc providing an analysis of the proposed project and recommendations for the company.

For this section you may assume the firm does open 100 stores.

1. An estimate of the current Weighted Average Cost of Capital (WACC) of the company
2. A detailed cash flow forecast for the whole project (100 stores)
3. An appraisal of the project using any techniques you think are appropriate
4. A final recommendation of whether the project should be accepted

• That the chances of opening 100 stores is only 75%, whilst there is a 20% chance that the firm will only open 80 stores and 5% chance they will only open 50 stores

For this scenario, the report should also include:

5. An estimate of the expected NPV, the standard deviation of the NPV, a recommendation