Sonkrag Incorporation Case Study
Group work assignment
Sonkrag Inc. is an international solar components company, whose head office is located in Madrid, Spain. It manufactures and sells specialist solar panels and components to both consumers (retail) and industry (business).
Sonkrag Inc.’s retail customers are required to create an online account, to which they register their name, address and credit card details. The customers must also create a password, which they must use whenever they wish to log into their account in order to update their details or place an order.
Existing registered customers can swiftly place repeat orders due to their payment and personal details being already held on file. Sonkrag Inc.’s ‘Intelligent’ software monitors customer purchases and recommends other products by email. The success of the consumer business has been attributed to these features.
Many customers buy recommended products and the proportion is growing because Sonkrag Inc.’s ‘Intelligent’ software becomes increasingly accurate as more data is gathered.
Sonkrag Inc. has recently suffered a serious security breach which has affected an unknown, but significant, number of its retail customers. The IT department has indicated that it believes it has affected up to 5,000 of its customers.
The breach was caused by a laptop being stolen from the car of a contractor working in the IT department. The contractor was working as a data analyst covering sickness absence and was not familiar with security procedures. She had been asked to construct a sales analysis report for an important meeting on Monday morning and so therefore needed to work over the weekend (when the workplace premises were closed).
The contractor had copied customer details from the secure company server onto a memory stick which were then subsequently copied onto her personal laptop computer.
Over the course of the weekend the contractor’s car was broken into with the laptop and laptop bag being taken. The memory stick could also not be accounted for by the contractor.
The contractor came in very early on Monday morning to prepare the report and did not disclose the theft.
Over the next four weeks, Sonkrag Inc. received an unusual volume of orders followed by complaints from customers that payments were being charged to their credit cards without the account holders’ permission.
Sonkrag Inc.’s policy in these circumstances is to seek clarification from the account holder and suggest that the order could have been placed by a family member who knew the account password. The volume of complaints was very abnormally high and the contractor quickly realised that the complaints were from the customers whose files were on her laptop and memory stick.
When challenged by the head of the IT department she admitted the loss of the laptop and memory stick and her contract was immediately terminated.
Sonkrag Inc.’s customer services department wrote to all of those customers whose accounts had been compromised and offered to cancel any disputed charges on their accounts. Customers were advised to review the transactions on their credit card statements in case of unauthorised payments. A number of customers complained to a major news channel, which caused many customers to dispute payments made over several months. A large proportion of the complaints were from customers whose details had not been copied onto the laptop and memory stick.
Industry division – capital investment
Sonkrag Inc. is now considering undertaking a capital investment in the UK to manufacture industrial solar panels. The project would require immediate capital expenditure of £10m, plus £1m of working capital which would be recovered at the end of the project’s five year term.
It is estimated that annual revenue of £2m would be generated by the project, with annual operating costs of £1m. Capital allowances equivalent to straight-line depreciation over the term of the project are an allowable expense against company tax in the UK which is charged at a rate of 40%, payable at each year-end. The project can be assumed to have a zero scrap value.
Sonkrag plc plans to finance the project with a £9m four-year loan at 6% from the corporate finance market, plus £2m of retained earnings. The proposed financing scheme reflects the belief that the project would have a debt capacity of two-thirds of capital cost. Issue costs on the debt will be 3% and are tax deductible.
In the UK the industrial solar industry has an equity beta of 1.40 and an average debt: equity gearing ratio of 1:4. Debt capital can be assumed to be virtually risk-free. The current return on UK government stock is 9% and the excess market return is 9.17%.
Corporate tax in the UK is at 35% and can be assumed to be payable at each year-end without delay. Because of a double-taxation agreement, Sonkrag plc will not have to pay any US tax on the project. The company is expected to have a substantial US tax liability from other operations for the foreseeable future.
The current spot rate is £1 = $1.60 and the GBP (£) is expected to depreciate against the $ at an annual rate of 10%.
Write a report to Sonkrag Inc.’s senior management which Advises on the weaknesses in both the control environment and the internal controls that led to this loss of data.
In the report, you should:
- Recommend actions that Sonkrag Inc. should take to restore the confidence of its customers and to prevent similar problems occurring in the future
- Advise on the desirability of the capital investment in the UK
- Discuss the limitations and difficulties of using the Capital Asset Pricing Model to generate discount rates to appraise the capital investment project
Your report (for both scenarios) should be 1,500 words in total.
35%: subject matter understanding and judgment.
25%: critical analysis.
15%: evidence of wider reading
15%: synthesis of ideas into a logical, coherent report.
10%: presentation and English.
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