Question 2

Anfield Albion is preparing for the next season of English Premier League, the most-watched sports league in the world, broadcast in 212 territories to 643 million homes and a potential TV audience of 4.7 billion people. As the league champion last season, the club received prize money of £100m.

“Players’ injury haunted me last season. I want to sell Z Bijk for £22m and buy T Kone for £100m for a 5-year contract. All buying and selling players are taking place in the players’ transfer market before the new season starts. Kone’s salary is £8m annually. At the end of the contract, Kone will receive additional lump sum of £4m. If I don’t sell Bijk, I cannot buy Kone, and Bijk will continue to be paid salary of £4m annually and also receive additional lump sum of £2m in 5 years’ time. 

If I manage to buy Kone, NoBrand will be happy and will put in more sponsorship by £25m in Year 1 and £13m in each year in Years 2 to 5. YangTube is also keen to show live matches by paying broadcasting right of £12m each year in Years 1 to 5. At the end of the contract, Kone is still valuable in the players’ transfer market. His estimated selling price will be around £10m at that time.”

J Palish, owner of the club, prepares his notes for the next season:

“The whole prize money is good enough to add more hospitality suites so that more fans can watch matches in a more relaxed environment in the stadium. I cannot start the work now because no one will be able to attend matches at the stadium due to Covid-19 pandemic. The work can only be started, completed  and paid in the next season (i.e., Year 1). When the work starts and while waiting for it to complete, the club will have to incur additional admin and storage costs of £18m. Once completed, and hopefully the pandemic is over by then, the hospitality suites will generate an additional £44m annual income in Years 2 to 5. The club may have different plan after 5 years but I couldn’t forecast what will happen thereafter.”

Required:

As a new finance intern at the club, the CFO shared the two notes and asked for your opinions. She reminded you that the club’s cost of capital is 10%. Write a memo to her outlining the following:

(a) The option that you would recommend: either N Koop or J Palish. The two options are mutually exclusive hence only one option to be selected.

(b) The practicality of managing the finance of a football club during Covid-19 pandemic.