Kendy Company is a well-established company that has operated in a sound but static market for many years where it has been the dominant supplier. Over the past three years it has diversified into three new product areas that are unrelated to each other and to the original business.

Kendy Company has organized the operation of its four activities on a divisional basis with four divisional general managers having overall responsibility for all aspects of running each business except for finance. All finance is provided centrally with routine accounting and cash management, including invoicing, debt collection and bill payments, being handled by the head office. Head office operating costs were $ 1 million in the year ending 31 December. The total capital employed at mid-year amounted to $ 50 million, of which $ 20 million was debt capital financed at an average annual interest rate of 10%. Head office assets comprise 50 % fixed assets and 50 % working capital. To date, the company has financed its expansion without raising additional equity capital, but it may soon require to do so if further expansion is undertaken. It has estimated that the cost of new equity capital would be 20 % per annum. No new investment was undertaken in during the year pending a review of the performance of each division.

The results for the divisions for the year to 31 December are as follows:

CoursHeroTranscribedText: A B C D $ million $ million $ million $ million Sales 110.0 31.0 18.0 13.0 Trading profit 2.0 1.1 1.2 0.5 Exchange gain(1) 2.0 Profit after currency movement 4.0 1.1 1.2 0.5 Exceptional charge (2) (1.8) Profit(loss) loss after exceptional charges 4.0 1.1 (0.6) 0.5 Group interest charge (3) (1.1) (0.3) (0.2) (0.1) Net divisional profit (loss) 2.9 0.8 (0.8) 0.4 Depreciation charged above 3.0 1.0 2.0 0.4 Net Assets (at year end) 23.5 9.5 4.0 1.8