Investigative report into ABC Learning Centres Limited
This assignment gives you the opportunity to apply the material covered in Applied Corporate Finance(FIN342) to an Australian company that has been unsuccessful in the Australian marketplace.
While it has been a few years since ABC Learning Centres dominated the financial press, it does represent a good case study to analyse a number of corporate financial management issues relevant to this subject.
ABC Learning was a large Australian child care provider that achieved spectacular growth in the
mid-2000s. It held approximately 25% of the domestic market and had operations in Australia, New Zealand, the US and the UK. However, there was much media reporting as to the debt funding levels of the company, its ability to meet its debt obligations and delays in producing financial statements as required by the Australian Securities and Investments Commission (ASIC). The company was also headed by a high profile businessman.
For this assignment, you are to assume the role of an adviser to the government. You are required to undertake a review and prepare an investigative report that presents a strategic financial analysis of ABC Learning and identifies the key issues you believe led to the corporate failure of the company. The scope of your analysis should encompass the material covered in the subject notes — in particular, the material on driving shareholder value through asset management and financial strategy.
Your report will cover the following three (3) key areas:
1.analysis of financial performance and strategy
2.analysis of non-financial strategic issues
3.executive summary and conclusions
A detailed question is provided for each key area.
You will be assessed on the following criteria:
- a clear identification of the factors at ABC Learning that led to its demise
- a clear identification of the strategic financial issues faced by ABC Learning and an assessment of the possible best practice in this area
- a demonstrated understanding of the relevant theories outlined in the Applied Corporate Finance (FIN342) subject notes and how they relate to the various practical issues addressed in your analysis
- an ability to use the various tools and techniques discussed in Applied Corporate Finance (FIN342) and an ability to draw conclusions from your analysis
- a clear, succinctly written report within the limits prescribed
- an ability to undertake wide-ranging reading and research so as to fully answer the questions being asked and assimilate the information contained within the subject notes.
Further details of the assessment criteria to be applied to this assignment are available in the Criteria-based Marking Guide in KapLearn under ‘Assignment’.
Question 1 Analysis of financial performance
This section requires you to critically analyse the historical financial performance of ABC Learning.
(a)Review ABC Learning’s financial performance in the three years from 1 July 2004 to 30 June 2007 and identify and where appropriate calculate the key ratios and their trends over this time which, in hindsight, were indicators of its impending demise.
Your analysis will need to address any measures of financial performance that you believe are relevant.In order to assist you, the government has provided you with the financial information contained in theAppendix. This information should be used and addressed as part of your analysis. The government is employing you because of your sound financial analysis skills. You should assume that all calculations in the Appendix are correct and marks will not be awarded for ratio calculations etc. If you require further information it is recommended that you consider the use of broker reports and annual reports.
(b)Critically analyse, interpret and comment on ABC Learning’s financial performance from (a) above, in the three years from 1 July 2004 to 30 June 2007.
In undertaking this analysis, consider the impact that different divisions may have had on these results. Segment analysis is available in the annual reports.
(c)What was ABC Learning’s capital structure at the time of its demise? What were the shareholder distribution strategies? What was the rationale for these strategies?
In addressing these issues, consider the effect of the link between ABC Learning’s business strategy and its financial strategy options.
Note: Information on the capital structure is available in the Appendix or in ABC Learning’s annual reports.
(d)How was ABC Learning’s debt structured? Why did the company adopt this strategy?
(e)Discuss the issues relating to capital structure which contributed to ABC Learning’s ultimate failure.
(f)How might ABC Learning have managed its capital structure better? Justify your answer through evidence, examples and logical argument.
Note: Your response should provide solutions that could have been implemented in practice and accepted by creditors and shareholders alike. You are not required to provide a theoretical argument, for example, along the lines of M&M Capital Irrelevance Theory.
- All parts should be answered separately given their different focus.
- Your analysis of ABC Learning’s historical financial performance should be limited to the three financial years from July 2004 to June 2007.
- Marks will be awarded on the quality of the analysis of the data and not simply the reporting of the data.
- In analysing the financial performance of ABC Learning, consider its own statements, broker commentaries and annual reports etc.
- You are not expected to undertake a detailed valuation of ABC Learning, although you should review the changes in the value of ABC Learning both in absolute terms and relative to any industry peers during the specified period.
- Where you need to refer to share prices or market value, use time periods appropriate for your analysis. However, you are not required to comment on price movements after 30 June 2007.
- Carefully consider how you present your data in your report. Where possible, present your data in table format. When presenting your analysis of the data, you must provide more than a statement of fact — for example, you should give reasons why data is moving in a certain direction. The interpretation of the data is the critical component of your analysis.
Question 2 Analysis of strategic issues
(a)Discuss the other major non-financial strategic issues that were faced by ABC Learning and how they were addressed.
In your response, discuss how ABC Learning’s actions in this regard compared with best practice.
Note:This question requires you to identify the major strategic issues that faced ABC Learning and to explain how these issues were addressed and whether best practice was followed.
Your discussion of whether best practice was followed by ABC Learning should reflect research of the concept and include a brief analysis.
Do not explain issues relating to financial strategy addressed in Question 1.
(b)Explain ABC Learning’s inability to meet statutory reporting deadlines, the impact this would have had on its ability to satisfy shareholder information needs, and the effect it may have had on the perceptions of those providing finance.
(c)Describe a different business model that may have been more successful. Justify your choice.
(d)Identify three barriers to entry in the child care market, and comment on whether overall you consider the barriers to be low, medium or high.
- You are not expected to consider in detail the business strategies of individual divisions within ABC Learning.
- Your responses should provide solutions that could have been implemented in practice and accepted by creditors and shareholders alike.
Question 3 Executive summary and conclusions
Present to the Department of Prime Minister and Cabinet the results of your analysis in an executive summary and a series of conclusions. The executive summary must be in the form that a senior government official can read quickly and absorb the optimal amount of information.
For example, do not include definitions and new material.
Note: You must succinctly summarise the key points of your analysis of ABC Learning’s financial performance, strategic issues and financial strategy including recommendations and conclusions based on your reported analysis.