Netherby plc manufactures a range of camping and leisure equipment, including...

Question

Netherby plc manufactures a range of camping and leisure equipment, including tents.

^It

^is

^cur
^r
^ently

^experiencing

^seve
^r
^e

^quality

^cont
^r
^ol

^p
^r
^oblems

^at

^its

^existing

^fully

^dep
^r
^eci-

^ated

^factory

ⁱⁿ

^the

^south

^of

^England.

^These

^di
^f
^ficulties

^th
^r
^eaten

^to

^undermine

^its

^r
^eputa-

^tion

^for

^p
^r
^oducing

^high-quality

^p
^r
^oducts.

^It

^has

^r
^ecently

^been

^app
^r
^oached

^by

^the

^Eu
^r
^opean

^Bank

^for

^Reconst
^r
^uction

^and

^Development,

^on

^behalf

^of

^a

^tent

^manufactu
^r
^er

ⁱⁿ

^Hungar
^y
^,

^which

^is

^seeking

^a

^UK-based

^trading

^partner

^which

^will

^import

^and

^distrib-

^ute

^its

^tents.

^Such

^a

^switch

^would

^involve

^shutting

^down

^the

^existing

^tent

^manufactur-

^ing

^operation

ⁱⁿ

^the

^United

^Kingdom

^and

^converting

^it

^into

^a

^distribution

^depot.

^The

^estimated
^r
^est
^r
^ucturing

^costs

^of

^£5

^million

^would

^be

^{tax-allowable,}

^but

^would

^exert

^seri-

^{ous strains on cash flo}
^w
^.

^Importing,

^rather

^than

^{manufacturing,}

^tents

^appears

^inhe
^r
^ently

^p
^r
^ofitable,

^as

^the

^buying-in

^price,

^when

^converted

^into

^sterling,

^is

^less

^than

^the

^p
^r
^esent

^p
^r
^oduction

^cost.

^In

^addition,

^{Nether by}

^considers

^that

^the

^Hungarian

^p
^r
^oduct

^would

^r
^esult

ⁱⁿ

^inc
^r
^eased

^sales,

^as

^the

^existing

^r
^etail

^distributors

^seem

^imp
^r
^essed

^with

^the

^quality

^of

^the

^samples

^which

^they

^have

^been

^shown.

^It

^is

^estimated

^that

^for

^a

^five-year

^contract,

^the

^annual

^cash

^{flow benefit would be a}
^r
^ound

^£2

^{million p.a. befo}
^r
^{e tax.}

^Howeve
^r
^,

^the

^financing

^of

^the

^closu
^r
^e

^and

^r
^est
^r
^ucturing

^costs

^would

^involve

^ca
^r
^eful

^{consideration}

^of

^the

^financing

^options.

^Some

^di
^r
^ectors

^a
^r
^gue

^that

^dividends

^could

^be

^r
^educed,

^as

^several

^competing

^companies

^have

^al
^r
^eady

^done

^a

^similar

^thing,

^while

^other

^di
^r
^ectors

^a
^r
^gue

^for

^a

^rights

^issue.

^Alternativel
^y
^,

^the

^p
^r
^oject

^could

^be

^financed

^by

^an

^issue

^{of long-term loan stock at a fixed rate of 12 per cent.}

^The

^most

^r
^ecent

^Balance

^Sheet

^shows

^£5

^million

^of

^issued

^sha
^r
^e

^capital

^(par

^value

^50p),

^while

^the

^market

^price

^per

^sha
^r
^e

^is

^cur
^r
^ently

^{£3. A}

^leading

^security

^analyst

^has

^r
^e-

^cently

^described

^{Nether by’s}

^gearing

^ratio

^as

^‘adventu
^r
^ous’.

^P
^r
^ofit

^after

^tax

ⁱⁿ

^the

^year

^{just ended was}

^£15

^{million and dividends of}

^£10

^{million we}
^r
^{e paid.}

^Th
^e

^rat
^e

^o
^f

^Corporatio
ⁿ

^T
^a
^x

ⁱ
^s

³
³

^pe
^r

^cent
^,

^payabl
^e

^wit
^h

^a

^one-yea
^r

^dela
^y
^.

^{Nether by’}
^s
^r
^e-

^portin
^g

^yea
^r

^coincide
^s

^wit
^h

^th
^e

^calenda
^r

^yea
^r

^an
^d

^th
^e

^factor
^y

^wil
^l

^b
^e

^close
^d

^a
^t

^th
^e

^yea
^r

^end.

^Closu
^r
^e

^cost
^s

^woul
^d

^b
^e

^incur
^r
^e
^d

^shortl
^y

^befo
^r
^e

^deliverie
^s

^o
^f

^th
^e

^importe
^d

^p
^r
^oduc
^t

^began,

^an
^d

^su
^f
^ficien
^t

^stock
^s

^wil
^l

^b
^e

^o
ⁿ

^han
^d

^t
^o

^ove
^r
^com
^e

^an
^y

^initia
^l

^suppl
^y

^p
^r
^oblems
^.

^{Nether by}

^consider
^s

^tha
^t

ⁱ
^t

^shoul
^d

^ear
ⁿ

^a

^r
^etur
ⁿ

^o
ⁿ

^ne
^w

^investmen
^t

^o
^f

¹
⁵

^pe
^r

^cen
^t

^p.a
^.

^ne
^t

^o
^f

^al
^l

^taxes.

Required

(a)

Is the closure of the existing factory financially worthwhile for Nether by?

^(b)

^Explain

^what

^is

^meant

^when

^the

^capital

^market

^is

^said

^to

^be

^{information-e}
^f
^ficient

ⁱⁿ

^{a semi-st}
^r
^{ong form.}

^If

^the

^stock

^market

^is

^semi-st
^r
^ong

^e
^f
^ficient

^and

^without

^considering

^the

^method

^of

^finance,

^calculate

^the

^likely

^impact

^of

^acceptance

^and

^announcement

^of

^the

^details

^of

^{this p}
^r
^{oject to the market on Nether by’s sha}
^r
^{e price.}

^(c)

^Advise

^the

^{Nether by}

^boa
^r
^d

^as

^to

^the

^r
^elative

^merits

^of

^a

^rights

^issue

^rather

^than

^a

^cut

^{in dividends to finance this p}
^r
^oject.

(d

)

Explain why a rights issue generally results in a fall in the market price of shares. If a rights issue is undertaken, calculate the resulting theoretical ex-rights share price of issue prices of £1 per share and £2 per share, respectively. (You may ignore issue costs.)

(e)

Assuming the restructuring proposal meets expectations, assess the impact of the project on earnings per share if it is financed by a rights issue at an offer price of £2 per share, and loan stock, respectively. (Again, you may ignore issue costs.)

(f)

Briefly consider the main operating risks connected with the investment project, and how Nether by might at- tempt to allow for these.

Netherby plc manufactures a range of camping and leisure equipment, including tents. It is cur r ently experiencing seve r e quality cont r ol p r oblems at its existing fully dep r eci- ated factory...

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