Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Sugar Baby Corp. ( SBC ) is considering whether to build a refinery in the U . S . state of Georgia to serve its
Sugar Baby Corp. SBC is considering whether to build a refinery in the US state of Georgia to serve its North American market. SBC is based in the UK and processes raw sugar into premium gourmet sugar. Currently, SBC exports kg of sugar per year to its North American customers and realizes a contribution margin of GBP per kg sold. SBC is certain that the new refinery in the US would meet all the current demand in North America and sales
volume would likely increase. SBC does not foresee it will be able to sell any of the amount currently exported to North America once the new refinery is operational.
SBC estimates that it could sell kg of sugar in North America during the first year of operations, and sales volume would grow at annually. SBC plans to price its product at USD per kg Total operating costs are expected to be USD per kg Both the sales price and operating costs are expected to keep pace with the US inflation rate forecast of
per annum for the next years. The UK inflation rate is estimated at per annum for the next years. The current USDGBP spot rate is SBC believes that Relative PPP is the best predictor of future exchange rates.
The expected initial cost of the refinery is USD million. SBC plans to finance this amount by a combination of debt and equity capital. The refinery will increase SBCs borrowing capacity by GBP million, and it plans to borrow only that amount. The State of Georgia will provide a concessionary loan of USD million for a period of years at an interest rate of Principal on the loan will be repaid in equal installments over the life of the loan. At
this point, SBC is uncertain whether to raise the remaining debt it requires through a domestic bond issue at or a Eurodollar bond issue at SBCs allequity cost of capital is
The US Internal Revenue Service will allow SBC to depreciate the new refinery over a year period on a straightline basis. After that, the refinery equipment is expected to have substantial market value. The UK and the US have the same corporate tax rate of There are no restricted funds available for SBC to offset the cost of the initial investment. SBC prefers to use Lessards APV model for capital budgeting analysis.
a Using the Fisher Effect, explain whether SBC should borrow the remaining GBP million through a domestic ie UK bond issue or a Eurodollar bond issue.
b With the bond you selected in question a compute the present value of the interest tax shields in GBP
c Compute the present value of the interest tax shields from the concessionary loan in GBP
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started