All liabilities categories have equal claim for repayment against the company's assets.
It is expected that Doric's cost of capital rate will decrease by 100 basis points following the management buy-out from the current rate.
The following additional information has been provided:Redundancy and other costs will be approximately $54 million if the whole company is closed,and pro rata for individual divisions that are closed.These costs have priority for payment before any other liabilities in case of closure.The taxation effects relating to this may be ignored.
Corporation tax on profits is 20% and losses cannot be carried forward for tax purposes.Assume that tax is payable in the year incurred.
All the non-current assets,including land and buildings,are eligible for tax allowable depreciation of 15% annually on the book values.The annual reinvestment needed to keep operations at their current levels is roughly equivalent to the tax allowable depreciation.The $50 million investment in the mobile refrigeration business is not eligible for any tax allowable depreciation.
Doric's current cost of capital is 12%.
Required:
Prepare a report for the Board of Directors,evaluating the financial and non-financial impact of all the three proposals to Doric Co's main stakeholder groups,that includes:
(i)An estimate of the return the debt holders and shareholders would receive in the event that Doric Co ceases trading and is closed down.(5 marks)
(ii)An estimate of the income position and the value of Doric Co in the event that the restructuring proposal is selected.State any assumptions made.(8 marks)
(iii)An estimate of the amount of additional finance needed and the value of Doric Co if the management buy-out proposal is selected.State any assumptions made.(8 marks)
(iv)A discussion of the impact of each proposal on the existing shareholders,the unsecured bond holders,and the executive directors and managers involved in the management buy-out.Suggest which proposal is likely to be selected.(12 marks)
Professional marks will be awarded in question 1 for the appropriateness and format of the report.(4 marks)
(55 marks)
2 Fubuki Co,an unlisted company based in Megaera,has been manufacturing electrical parts used in mobility vehicles for people with disabilities and the elderly,for many years.These parts are exported to various manufacturers worldwide but at present there are no local manufacturers of mobility vehicles in Megaera.Retailers in Megaera normally import mobility vehicles and sell them at an average price of $4,000 each.Fubuki Co wants to manufacture mobility vehicles locally and believes that it can sell vehicles of equivalent quality locally at a discount of 57.5% to the current average retail price.
Although this is a completely new venture for Fubuki Co,it will be in addition to the company's core business.Fubuki Co's directors expect to develop the project for a period of four years and then sell it for $16 million to a private equity firm.Megaera's government has been positive about the venture and has offered Fubuki Co a subsidised loan of up to 80% of the investment funds required,at a rate of 200 basis points below Fubuki Co's borrowing rate.Currently Fubuki Co can borrow at 500 basis points above the five-year government debt yield rate.
A feasibility study commissioned by the directors,at a cost of $250,000,has produced the following information.
1.Initial cost of acquiring suitable premises will be $11 million,and plant and machinery used in the manufacture will cost $5 million.Acquiring the premises and installing the machinery is a quick process and manufacturing can commence almost immediately.
2.It is expected that in the first year 1,500 units will be manufactured and sold.Unit sales will grow by 40% in each of the next two years before falling to an annual growth rate of 5% for the final year.After the first year the selling price per unit is expected to increase by 5% per year.
，我們將會及時處理。