subject Corporate finance

Question Laxter plc produces a range of outdoor and vacation products, including marquees. Currently it is going through problems related to quality control at its completely depreciated factory in East England. These problems pose a threat to its good name of manufacturing products of superb quality. Recently, the European Bank for Reconstruction and Development, acting on behalf of a marquee producer in Greece, approached the fimm to look for a UK-based business partner which will import and sell its marquees in the UK. This change will require closing the marquee production in the UK and changing it into a distribution centre to sell marquees produced by the Greek manufacturer. The restructuring costs is forecasted to be 10 million and it is tax exempted but would impose high constraints on the firm's cash flow. Importing marquees looks profitable as the purchase price (when converted to Sterling Pound) is less than the current manufacturing cost. Moreover, Laxter view that the Greek product would generate high level of sales, as the current distributors of the firm were impressed with the sample quality which they received. For a 5-year contract, it is predicted that the in-coming annual cash flow is around 4 million per year (pre-tax). However, the financing costs of the shut-down and restructuring require careful consideration of the choices of financing. Some directors proposed for a reduction in dividends as the firm's competitors have done it. On the other hand, other directors proposed a rights issue. In addition, the project could be financed by bond issuance at at a fixed rate of 10% The firm's current Balance Sheet possess 10 million of issued equity capital (nominal value 1), while the market price for each share is currently 6. A prominent security analyst has recently described Laxter's leverage ratio as "daring". After-tax profit in the current year ended was 30 million and dividends of 20 million were paid. The corporate tax rate is 30%, payable in one year. Laxter's year of reporting concurs with the calendar year and the manufacturing fim will shut down at year-end. The cost of shutting down would take place right before deliveries of the imported product starts, and adequate inventory will be ready to overcome any supply shortages. Laxter requires a return on investment (ROI) of 30% per year net of any taxes. Required (a) Is it worth shutting down Laxter's current factory in East England ? (6 marks) (b) Critically discuss the meaning of semi-strong for information efficiency in capital markets. If the equity market is really semi-strong form efficient and assuming financing options are not relevant, calculate the possible effect of acceptance and proclamation of the project particulars on Laster's, equity price. 9 marks) (c) Advise the board of Laxter with respect to the arguments for and against a rights issue in comparison to a reduction in dividends in financing the project. (10 marks) [Total : 25 Marks) Page 3 of 5