Dun-En Ltd. is a privately held engineering company established in 2009. The company is owned by three friends who are engineers by trade and own equal share in the company i.e. 33.33% each. Dun-En provides industrial process applications. However, the company specializes in manufacturing electrochemical cell, which is the smallest but the most important component of lithium-ion batteries that power electric vehicles. Since its inception in 2009, the company has supplied electrochemical cell devices to a broad range of companies who manufacture and supply batteries for the top electric vehicle companies based in America, Asia, and Europe.
While these business deals have helped Dun-En succeed and accumulate financial capital, they have raised company’s profile alike in the market as a reliable manufacturer and modern engineering solution provider. Furthermore, the company has developed reputation for “distinct disruptive innovator” by providing innovative and timely solutions to the healthcare industry, including clients such as the NHS UK, during the COVID-19 Pandemic, pertaining to energy efficiency across hospitals. Thereby, adding state, media and civic credentials to the company profile. Capitalising on their success and realizing the increasing demand for elective vehicles, the company is considering expanding its operations. Essentially, the company is considering starting manufacturing batteries and supplying directly to the electric car manufacturers with an intent to provide electric storage facilities at industrial level. The estimated expansion cost is £250 million.
The chief financial officer (CFO) of Dun-En has recently undertaken an intense internal review to establish the financial health of the company as well as evaluating the impact of potential growth on its value. These estimates suggest that the total value of Dun-En’s assets is around £1.3 bn. After initial consultations with the company CFO, the owners are willing to sell maximum of 20% equity stakes to raise the required financial capital, shall the company raise capital via the equity market. At the same time, the company is considering other options to raise capital. In effect, the company is looking to hire financial consultants who could provide the most suitable and competing strategy to rise the required capital, £250mil. Thus, the contract is available and is open for competing bids.
Task:
You have recently joined the Bluestone Inc. a world leading financial consultancy firm, as a junior finance and investment analysist. One of the seasoned hedge-fund manager and Investment Banker, Bill Adman who leads Bluestone is keen on bidding for the contract with Dun-En. You are part of a team at Bluestone, tasked to develop a strategy, best suited to raise the required £250 million. Specifically, you have been tasked to provide information on the latest trends in the financial markets i.e. equity/stock, debt market, private equity market, commercial lending and propose which market is most suitable to raise the required funds. In doing so, you are required to provide detailed analysis of the financial markets.
Consider the following information in building your argument: using Bloomberg dataset and Financial Times (and other reliable resources as advised) to analyse the current trends in financial markets.
(i) Provide an analysis on current trends in the equity market (8 Marks)
(ii) What route Dun-En shall take to the equity market to raise capital (consider traditional listing vs. the SPACs) (8 Marks)
(iii) Provide an analysis on current rates in the debt market i.e. bond yield (8 Marks)
(iv) Provide an analysis on current interest rates offered by the commercial banks (8 Marks)
(v) Consider private equity (PE) market and business angles (8 Marks)
Finally, conclude your argument by directly answering the following question: How Dun-En shall raise capital? Also, highlight the advantages and risks affiliated with the selected strategy.
Case 2: The Collapse of Barings Bank
In 1994, Leeson lost $296 million through his trading activities, but reported a profit of $46 million to management. His trading supposedly involved two main strategies: selling straddles on the Nikkei 225 and arbitraging price differential on Nikkei 225 futures contracts that were trading in different exchanges. A short straddle strategy involves selling calls and puts. It is profitable when the underlying index remains relatively unchanged over the life of the straddle, in which case, the calls and puts expire worthless, leaving the option write with the option premiums. The Nikkei 225 futures arbitrage involves taking a long futures position on one exchange where the price is relatively low and hedging with an offsetting position on another exchange where the price is relatively higher.
Leeson had previously incurred huge trading losses that would have cost him his job if they were revealed. In an effort to recover these losses, he abandoned the hedge posture in the long short futures arbitrage strategy and initiated a speculative long- long futures position in both exchange in the scope of profiting from an increase in the Nikkei 225. This move exposed the firm to enormous market risk and event risk, which stems from unexpected major events that, while not directly related to market, can affect markets.
On January 17, 1995, an earthquake hit Kobe, Japan. The Nikkei plunged, creating a huge loss on both the straddle and the double long futures position. The resulting margin calls were satisfied for a time because in 1994, Leeson had requested and received without question
$354 million from the London office because they believed his strategy was riskless. A few days later, he bought an additional 10,814 contracts, further increasing the risk exposure. This lack of oversight contributed to Barings’ failure as the Nikkei 225 continued to drop.
Task: Answer the following questions
1- Identify and discuss the factors that led to the bankruptcy of Barings (10 Marks) 2- Identify measures that may have prevented the collapse (10 Marks)
Note: do further reading i.e. articles, working papers, news items, covering the case. You may consider the film, The Rogue Trader (Available on YouTube:https://www.youtube.com/watch?v=MebaDb6HXyU&feature=player_detailpage). You are expected to provide a personalized critical view on the matter, informed by relevant academic literature (avoid using simple definitions available in the core text book, rather consult the afore-mentioned resources to articulate your argument).
Sample Solution
