Tate & Lyle
a) Tate & Lyle is a food manufacturer, focused on corn and sugar products. The firm adds value through the processing of these raw ingredients into food and industrial ingredients. The company makes sweeteners, ethanol, acidulants, protein, starches and biogums. The company has manufacturing operations in the both the Americas and in Europe. The company's core products are sugar and sucralose (under the Splenda brand). The company has two primary means of value generation. One is processing. Tate & Lyle converts raw ingredients into products usable by both consumers and industry. The second area where the company adds value is in marketing. Both the Tate & Lyle and Splenda brands are widely recognizable and have generate considerable goodwill for the company.
b) The current strategic environment for Tate & Lyle is generally positive. The firm is subject to fluctuating cost of inputs, which are traded on global commodities markets. The company is subject to competition from other sugar and sweetener providers, some of whom are owned by the governments of the countries in which Tate & Lyle competes. The key drivers of success for the next year, as identified in the 2009 Annual Report, are going to be consumer demand and the price of corn. Consumer demand in particular was a difficult variable to assess. The global financial crisis hinted that consumer demand might fall, but this could be offset by the fact that Tate & Lyle's business has been steadily growing.
In terms of financial issues, Tate & Lyle has relatively few. The company is solvent and liquid, as evidenced by its healthy working capital ratios. It has a manageable gearing ratio as well. The gearing ratio was reduced last year as a result of the company's strong growth. Shareholder equity improved and the company was able to increase its dividend slightly. There is very little cause for concern with respect to Tate & Lyle's financials, or its immediate business environment.
2009
2010
Sales
Operating Profit
Finance Income
27
27
Finance Expense
(78)
(78)
Profit Before Tax
Income Tax Expense
(19)
(19)
Profit Continuing Ops
94
Loss/Profit Discontinued Ops
(24)
(24)
Profit for the Year
70
Profit for Minority Interests
5
12
Profit for Shareholders
65
Profit for the Year
70
Divdends Paid
(104)
(104)
Retained Earnings
67
Forecast Balance Sheet
Assets - Non-current
Goodwill/Intangibles
Property, plant, equipment
Investments in associates
8
8
Available for sale financial assets
11
11
Derivatives
34
36
Deferred Tax
30
30
Trade and receivables
5
5
Retirement Benefit Surplus
47
47
Sub-total
2057
1978
Assets - Current
Inventories
Trade and Receivables
Current Tax Assets
6
6
Derivatives
Cash
Assets held for sale
28
28
Sub-total
1942
Total Assets
Shareholder's Equity
Ordinary Share Capital
Share Premium
Capital redemption reserve
8
8
Other Reserves
Retained earnings
Minority interests
26
27
Total Shareholder's Equity
Liabilities - non-current
Trade and payables
11
11
Borrowings
Derivatives
57
18
Deferred Tax liabilities
78
78
Retirement benefit obligations
Provisions for other liabilities
21
21
Sub-total
Liabilities - Current
Trade and payables
Current tax liabilities
77
97
Borrowings and overdrafts
Derivatives
Provisions
11
13
Sub-total
Total Liabilities
Total Equiy and Liabilities
Projected Statement of Cash Flows
Operating
Profit from continuing ops
Adjustments
Depreciation
Exceptional Items
Amortization of intangibles
20
20
Share-based payments
5
5
Finance income
(27)
(27)
Finance expense
78
78
Working capital
31
31
Cash Generated from Cont. Ops 451
Interest paid
(86)
(86)
Income tax paid
(17)
(19)
Cash from discont. Ops 140
Net cash from ops
Cash from Investing
Disposal of property
5
5
Purchase of Fin. Assets
(6)
(6)
Proceeds Disp. Fin. Assets
9
9
Interest received
30
30
Acq. Of subsidiaries
(1)
(1)
Dis. Of Subsidiaries
(4)
(4)
Dis. Of JVs
0
0
Dis. Of Businesses
57
57
Purchase of PPE
(224)
(224)
Purchase of Intangibles
(7)
(7)
Net cash Investing
(141)
(141)
Cash from Financing
Proceeds from issuance of shares
3
3
Repurchase of shares
0
0
Inflow from borrowings
1
1
Repayment of borrowings
(14)
(14)
Repayment of capital
(3)
(3)
Shareholder Dividends
(104)
(104)
Minority Interest Dividends
(1)
(1)
Net Cash Financing
(118)
(118)
Net Increase/Decrease of Cash
Balance at Beginning
Effect of changes in FX rates
40
40
Net Increase/Decrease
Balance at End
Notes: Several assumptions were made in the production of these statements. Many costs were assumed to stay the same. The company was assumed to have reduced its cost of goods sold through improvement of receivables and inventory turnover. As a result of T&L's financial strength, it was assumed that they were going to limit growth in borrowings. Their current tax liability grew in accordance with their expected tax rate for next year. Amortization and depreciation occurred with some of the company's assets, and no new investments were assumed given the uncertain revenue environment posed by the global financial crisis.
2. i) The Black-Scholes model is used to price options. The formula for Black-Scholes is:
C = SN (d1) -- X (e-rt) N (d2)
In this case, S = 432, X = 235, r = 3.7%, t = 43 days.
D1 = 2.23, so N (d1) = .9871; D2 = 1.95, so N (d2) = .974. Therefore C =
432(.9871) -- 235 (.99559)(.974) = 189p
ii) a) The annualized volatility of Tate & Lyle is calculated by the square root of time rule. Thus = .8177(?250) = 12.92%
The continuously generated risk free rate is the logarithm of the nominal risk free rate. In this case, the continuously generated risk free rate is R= ln (1+3.7) = 3.6332%
b) There are two main reasons for the differences between the firm's observed equity volatility and the volatility of its underlying revenue generation. One is that stock prices are forward looking, while revenue generation is backward looking. Market sentiment towards the company can be impacted by its past performance, but the correlation between the two will always be imperfect.
Another key difference is that revenue generation does not translate evenly into equity for shareholders. The firm's capital structure, its operating costs, its taxation rates and a number of other variables all impact on the degree to which revenues flow through to shareholders. The market only measures the value of the equity, not the value of the entire firm.
c) To account for the effects of the dividend, the current share price must be reduced by the amount of the expected dividend. In this case, the expected dividend is 2.268p, so the price should be set to 420.73.
Thus, we have 420.73(.584683) - 423 (177.106)
The price of a call option therefore is 68.83p.
Using put-call parity, the price of a put would be calculated as follows:
You’re 81% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.