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Valuation Essay

2122 words - 9 pages

The first section of this report is an overview of the base-case assumptions used to generate the pro-forma statement for the Body Shop’s forecast from year 2002 to 2004, followed with the amount of additional financing required by the Body Shop during this timeframe. The results of the sensitivity analysis is discussed the third section. Finally, the report is concluded with a list of recommendations that the Body Shop’s financial managers and general managers could look into.
Base-Case Assumptions
The percentage-of-sales forecasting is employed to generate the pro-forma financial statement. This method involves forecasting the future turnover. Once this is done, the estimated ...view middle of the document...

5%. This rate will decline by 1% in the following year and eventually 40.5% of sales in year 2004. The rate reduction in COGS is mainly due to economies of scale as the Body Shop would be able to achieve higher efficiency by increasing its production.
Operating Expense
Excluding Exceptional Costs
The excluding exceptional costs should decrease after the investment in supply chain development has been made in year 2001. Nevertheless, there might be a time lapse in between and it takes time for the implementation to be fully effective. This means that there is no immediate cost reduction but the cost will not increase as the turnover increases within the next couple of years. Hence, the historical average of 50.8% of sales will be used as the excluding exceptional costs from year 2002 to 2004.
Exceptional Costs
The Body Shop is projected to grow under its new strategy and the profitability of the Body Shop is highly dependent on its operation expenses and the COGS. Although several investments, supply chain development in particular, as well as several restructuring and reorganization, have taken place within the company, in order to further enhance the brand image and achieve greater

efficiencies, it would need to continue its investment and also to open up new stores. So, the exceptional cost in year 2002 is expected to be at 3.5% of sales, an increase of 5% from the previous year and 4.0% in 2003 and 4.5% in 2004.
Restructuring Cost
The restructuring costs incurred in the past are associated with sale of manufacturing plants, realignment and reorganisation. These are non-recurring items. Thus, the restructuring cost will be zero (0) for the upcoming years.
Dividend and Tax Rate
Historical data shows that there is no change in dividend from 1999 to 2001. Hence, it is assumed that the dividend would remain constant at ₤10.9 million from year 2002 to 2004. Likewise, the corporate tax rate is assumed to be constant at 30% over the period from year 2002 to 2004.
Cash and Account Receivable
The cash and account receivable are directly related with the turnover (Weygandt, Kieso and Kimmel, 2007). Nonetheless, the historical data suggest a downward trend for cash but no particular trend is observed in the account receivable. Thus, we postulate that the inconsistency is amended under the new strategies the Body Shop is adopting. The account receivable in year 2002 is forecasted to increase by 0.5% from the previous year at 8.6% of sales while the cash account will be increasing at 0.2% of sales each year through to year 2004. Most businesses utilize the credit period which justify why the percentage increase in account receivable is higher than the cash account.
It is crucial for the Body Shop to have an adequate supply of inventories as more inventories are needed when sales increase. Moreover, there is an upward movement in inventories based on historical financial statements. Nonetheless, the Body Shop would...

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