Question 1

According to the pro-forma balance sheet, there was $34.248 million of

receivables and $1.747 million of cash. Moreover, there was $16.887 million of
immediate payables and $7.132 million of short term debt. Assuming that the
company repays both of its short term obligation with its cash and receivables, it
would still have $11.976 million available (assuming the firm is able to cash its
receivables immediately).
According to the companys forecast, the companys revenue is projected to
grow at an average growth rate of 10% until 2015. These growths are mainly
from the personal injury business which is contingent in nature, meaning that the
firm would have to fund the case before receiving its fee towards the end of the
case. The remaining 25% of revenue would be timely invoiced based on
actuals and therefore require limited funding from the company.
Assuming that the $11.976 million is used to fund new businesses with
contingent revenue, then at a net working capital to revenue ratio of 30% (as
stipulated in note 4 of exhibit 8) then the firm is able to fund $39.92 million of
business in the personal injury category. The amount of business would be
considerably higher if the short term debt is assumed to be refinanced rather
than paid down.

Question 2a)
NPV with WACC of 11% and 6 months per period assumption:
WACC
11%

Months /
Period
6

NPV
$1,349.00

Question 2b)
NPV with WACC between 8% and 15% and case turnaround of 2 months per
period to 12 months per period:
WACC
11%
8%
8%
14%
14%

Months /
Period
6
2
12
2
12

NPV
$1,349.00
$2,660.00
$655.00
$2,336.00
-$565.00

Question 2c)
Breakeven win probability for NPV of 0:

WACC
11%
8%
8%
14%
14%

Months /
Period
6
2
12
2
12

Probability
87%
78%
93%
80%
108%

Question 3a)
Share price with organic growth assumption between 0% and 15% and WACC
between 8% and 14%:
Organic
Growth
10%
0%
15%
0%
15%

WACC
11%
8%
8%
14%
14%

Share Price
$ 1.35
$ 1.61
$ 3.37
$ 0.57
$ 0.97

Question 3b)
Based on the above sensitivity analysis, I would recommend Gloria to proceed
with the $2.5 million investment in Slater & Gordon. While the sensitivity analysis
above shows significant variability in the share price based on assumptions on
organic growth and WACC, the base case of 10% organic growth and 11% WACC
resulted in share price of $1.35 per share, which is $0.35 premium of the current
offer price per share. Moreover, the best case scenario of 15% growth and 8%
WACC is 3.37X the current offer price whilst the worst case scenario of 0%
growth and 14% WACC is 0.57X the current offer price, suggesting that there is
an asymmetry towards upside potential. Besides, the investment in Slater &
Gordon would reduce Glorias overall portfolio risk since the investment has no
correlation with the existing portfolio, thereby reducing the overall variability in
portfolio return.

Question 4a)
Assuming Gloria bought 2.5 million shares at $1, the closing price for Slater &
Gordon was $1.312 per share on day 1. Therefore, if all shares were sold at that
price, a profit of $0.78 million would have been made.
Share Value if
Sold on 1st Day

Profit from Sales

of 2.5 million
shares

$3,281,200.00

$781,200.00

Question 4b)
Assuming Gloria bough 2.5 million shares and held on till 30 June 2015, then she
would have bought an additional 886,662 shares from dividend payments
(assuming closing price on dividend payment dates). Her total holdings would
therefore be 3,386,662 shares on 30 June 2015, or $12,056,516.72 worth of
investment in Slater and Gordon at a closing price of $3.56 on 30 June 2015.
Key assumptions were:

Assumed that dividend proceeds equals dividend per share X shares held
Shares held are assumed to be sum of 2500000 shares at beginning and
shares purchased from previous dividend payment dates.
Assumed that share purchase is equal to dividend proceeds divided by
closing price

Total Shares
Bought from
Dividend Payment
886,662

Total
Shares
Bought
from IPO
2,500,000

Total
Shares Held
as at 30
June 2015
3,386,662

Total Portfolio
Value as at 30
June 2015
$12,056,516.72

Discussion:
It is evident that Slater & Gordon was a renowned law firm that has good brand
recognition in Australia, particularly in Melbourne. The company has done a great
job in promoting its brand and capturing a huge market by launching timely
promotion campaigns when it saw the timing opportunity to promote brand
awareness. It also differentiated itself from its competitors as a firm that
specialised in personal injury and non-personal injury cases through its
successes in high profile cases, thereby improving its brand recognition among
the general public. Therefore, from a marketing point of view, the timely effort by
the company has definitely created value for the firm through branding.
In terms of growth, Slater & Gordon has also steered in the right direction by
improving its brand reputation in its core business area while trying to diversify
its revenue sources into other business areas. For example, the firm also aimed
to develop its presence in the project litigation area as part of its effort to
diversify and grow its revenue. The strategy to generate sustainable organic
growth through diversification was realistic, given the firms reputation in high
profile cases. However, it was unclear whether the firm had the right human
resource to develop the new market in the project litigation area since law cases
in that area would be considerably different from the firms core business.
Moreover, revenue growth through acquisition isnt always the best approach
because consideration needs to be given to factors such as economies of scales,
potential synergy realisation and the actual funding for acquisition. An
acquisition for the sake of only revenue growth could sometimes destroy
shareholder values due to oversight of such trivial factors.
Slater & Gordon has also introduced the No Win No Fee model for some of its
clients. The introduction of this model can be seen as the firms commitment and
confidence in its ability to succeed in those cases for its clients. It also provides
incentives for clients to pursue their legal rights at essentially no cost since the
firm would be bearing all the costs and receive its fee upon successful ruling by
the court. Therefore, the benefit of the model was twofold and was effective in
attracting more clients for the firm. However, it was evident that the package
also caused some funding issues for the firm. The firm has to bear all the cost for
the cases on behalf of the client for the entire duration of the case and only
receive its fee upon succeeding. From a cash flow perspective, this means that
the firm would have to fund its obligations for the case, including salary, expert
witness expenses etc up front with a certain possibility of zero income. From a
financing standpoint, the firms performance would also be highly dependent on
the firms WACC. If WACC increases due to market forces, then the firm would be
likely to see profit erosion due its heavy funding requirement by this model.
There would also be a timing mismatch between reported profit and the actual
cash profit since the fee is only received towards the end of the case. Therefore,
investors might not be able to fully trust the reported profit by the company
since its revenue and profit recognition is subject to interpretation of likelihood of
winning a case. Moreover, there may be a possibility for profit to be derecognised if the actual outcome of a case was against the firm and therefore

prior profit recognition has to be reversed in subsequent period. Therefore, even

though the model was good in attractive new clients, the firm ultimately has to
bear the financing cost and profit variability from period to period.
As the firm grows bigger, it may be able to achieve economies of scales in
certain aspect of firm operation such as marketing and administration, but the
realised benefit would not be unlimited either. This is because the firm requires
certain staff levels to handle its growing portfolio of court cases and therefore
would increase the fixed cost of the firm. Once staff utilisation saturates at
optimal level, then the firm would be forced to recruit more law professionals.
They may also require larger office space and increase its presence in strategic
areas, all of which would increase its operating costs.
Category
Liquidity
Leverage
Profitability

Ratio
Current
Debt to Equity
Net Profit Margin

2006 Pro-Forma
3.50
0.89
11.52%

2014
3.17
1.12
14.60%

A quick analysis was also conducted to review the firms liquidity, leverage and
profitability. The most noticeable improvement is the firms profitability as
evident from its net profit margin. The 3% increase in profit margin from 2006 to
2014 means that the firm is generating more net profit from every recent
business that it makes. However, the improvement in profitability may be
partially attributable to the increase usage in debt since debt and equity mix has
changed significantly from 0.89 in 2006 to 1.12 in 2014. Through the usage of
debt, the firm may be able to capitalise on the recent low interest rate
environment, thereby improving profitability. The firms liquidity position has also
deteriorated since the proportion of current asset has decreased relative to
current liability. However, the deterioration does not warrant any concern given
that the ratio is above 3, meaning that in the event of financial distress the firm
should be able liquidate part of its current assets to meet its immediate
obligation.