Halden Plc is a listed company who manufacture brakes for the automotive industry. Halden are looking to invest 20 million into a new, more efficient machine that will improve the speed they are able to manufacture their brakes. They are currently reviewing a range of financing options and would like your advice to enable the company to make a suitable decision. You are the Finance Director of Halden Plc and have been asked to provide a report to the Board of Directors that evaluates each of the financing options and comes up with a series of recommendations. Financing options 1. To use retained profits this will mean that Halden will have to reduce the dividend payable to shareholders by 70% over the next three years. 2. To obtain a five-year bank loan at an interest rate of 8% per annum. 3. A rights issue - one new share for every two existing shares. Shares will be offered at 2 per share. Note: Halden's authorised bank overdraft is 120,000 this is up for renewal in three- months Halden has traditionally maintained a constant growth in dividends per year which has been consistently above the rate of inflation. This predictable dividend policy has contributed to a very stable share price over the last 5 years. The current market price of the shares is 2.50 Halden are also considering the working capital implications of the proposed investment and realise that working capital will need to be managed more effectively if they are to go ahead with the investment. They would like to be briefed on the findings from the literature that examines the effect of working capital management on firm profitability. Required: TASK 1 Provide a report to the Board of Directors that evaluates each of the financing options and provide a recommendation as to what would be the most appropriate financing option for Halden Plc to undertake. TASK 2 Discuss whether working capital management will improve the profitability of Halden Plc. (Recommended word count is 600 words) Halden Plc is a listed company who manufacture brakes for the automotive industry. Halden are looking to invest 20 million into a new, more efficient machine that will improve the speed they are able to manufacture their brakes. They are currently reviewing a range of financing options and would like your advice to enable the company to make a suitable decision. You are the Finance Director of Halden Plc and have been asked to provide a report to the Board of Directors that evaluates each of the financing options and comes up with a series of recommendations. Financing options 1. To use retained profits this will mean that Halden will have to reduce the dividend payable to shareholders by 70% over the next three years. 2. To obtain a five-year bank loan at an interest rate of 8% per annum. 3. A rights issue - one new share for every two existing shares. Shares will be offered at 2 per share. Note: Halden's authorised bank overdraft is 120,000 this is up for renewal in three- months Halden has traditionally maintained a constant growth in dividends per year which has been consistently above the rate of inflation. This predictable dividend policy has contributed to a very stable share price over the last 5 years. The current market price of the shares is 2.50 Halden are also considering the working capital implications of the proposed investment and realise that working capital will need to be managed more effectively if they are to go ahead with the investment. They would like to be briefed on the findings from the literature that examines the effect of working capital management on firm profitability. Required: TASK 1 Provide a report to the Board of Directors that evaluates each of the financing options and provide a recommendation as to what would be the most appropriate financing option for Halden Plc to undertake. TASK 2 Discuss whether working capital management will improve the profitability of Halden Plc. (Recommended word count is 600 words)
