Jasmine is a large company which manufactures children’s toys. It is a private UK limited company with a diversified shareholder base. The company has its headquarters in London, and as part of a group structure, wholly owns subsidiary companies in the UK, China and the US.
A new chief executive (CEO), Mr. Harold Jordan, was recently appointed by the Board to replace the retiring CEO, Mr. James Hannah, who led the company for the past twenty-five years. During this time, Jasmine has produced an extensive range of products within the children’s toy industry. Many of the toys manufactured are protected through patents and trademarks held by the company and the manufacturing business has a small innovation team which is tasked with improving or developing products for markets. Over the last few years, however, the company’s profitability has declined through a combination of factors including increasing competition and rising costs. Mr. Jordan has been tasked with reinvigorating the company, and providing growth in the business lines, ultimately impacting on profitability and the overall value of the company.
After undertaking a full review of the company’s operations, Mr. Jordan has announced a five-year strategic plan which he calls ‘Vision 2027’. Mr. Jordan has suggested that the company needs to restructure, reduce staffing, and crucially, focus on entering new markets in Europe. As part of Vision 2027, Mr. Jordan plans to introduce new environmentally friendly technology to provide drones and robots for the toy market; to develop a series of family orientated toys to encourage family bonding; and produce a new range of educational toys. Vision 2027 will require new manufacturing plants to be opened up, and because of Brexit, Mr. Jordan is thinking of moving the company’s headquarters to Paris. He has yet to discuss these plans with the Board, and although he knows he has been hired to provide a new direction for the company, he recognises that Vision 2027 will raise several concerns with his senior colleagues. He has assembled financial information and other documents for the Board, which appear as Appendices.
Question 1
Word count: up to 1000 words
In the context of ‘Vision 2027’, the new management is considering purchase of environmentally friendly equipment. Based on the information given in Appendix Q1.1, answer the following questions.
a.Using the information in Table 1, and your knowledge of relevant costs, calculate the increase/decrease in operating profit for the company if the fixed-wing drones were discontinued.
b.For each of the four fixed overheads, give a reason why you decided in (a) that the overhead is relevant or irrelevant.
c.Based on your analysis of relevant and non-relevant costs:
i.Amend the operating statement in Table 1 to provide the total profitability of the drones as well as the profitability of each drone.
ii.Explain the main reason for the change you propose in (c) (i) above.
d.Using the information in Table 2, and your knowledge of relevant costs, calculate the difference in profit over the next five years between keeping and replacing the old machine.
e.Evaluate the response of the managing director to the proposed new machine.
Question 2
Evaluate another proposal to move the manufacturing facility from China to Vietnam (Appendix Q2.1 and Q2.2), using NPV analysis. The evaluation should include a review of the assumptions made that need to be factored into the decision-making process. Note: round the values to the nearest million dollars.
Question 3
Word count: up to 1000 words
a.The new management is also considering an entirely new investment project, which involves building a new factory in South Korea. The Korean subsidiary will require an initial investment of 157,474m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Appendix Q3.1 offers information about the borrowing costs in different currencies and an estimation of the future value of foreign exchange. Discuss the foreign exchange risk associated with this expansion plan and advise which is the best way to finance the Korean factory.
b.What are the risks related to a potential relocation of the Chinese factory to South Korea?
c.The research department of a large financial institution provided inflation expectations for the next five years. According to the forecasts, the UK will have 1.5% more inflation than France and 3% higher inflation than South Korea. On the basis of this new evidence, would you reconsider your proposal with regard to financing the Korean factory? Explain your answer.
Question 4
Word count: up to 1000 words
Jasmine has well established export markets but if the board approves Vision 2027, it will begin to enter new markets abroad.
a.If Jasmine wants to borrow long-term funds to support its new foreign operations, what options does it have available to it?
b.What finance methods might Jasmine adopt to satisfy itself that it will be paid for shipping goods to new importers?
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