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留学生Corporate Finance MSc & MA Programmes论文定制:

Corporate Finance 2009/10 MSc & MA Programmes

SUMMATIVE ASSIGNMENT 2009/10

Background

Riverside Electronics Plc (RE) has been facing increasing competition on the international markets. To improve its competitive position, RE is considering two 留学生论文网alternative strategies. The first one is to embark upon an expansion project, which has the potential of increasing sales by about 30% per year over the next 5 years. The additional capital needed to finance the project has been estimated at £500 million. The alternative to this internal organic growth is to conduct a takeover.

Recent events in both the stock market and product markets have severely depressed RE’s value and there are no signs that the downward pressure on the share price is easing. The main shareholders have been asking for the company to take measures to improve its value, otherwise the slide in its stock price could make it a potential takeover target.

John Smith, the CEO of RE is evaluating the following alternative decisions:

a) Whether, he should recommend investing in the expansion project and, if so, burden the firm with fixed rate debt or issue common stock to raise the needed funds.

b) He should recommend a dividend cut and partly finance the project with internal funds.

c) He should give in to the shareholders’ pressure and consider implementing an aggressive takeover to boost the value of the company.

He had presented these alternatives at last week’s board meeting, but having had no luck with getting the Board of Directors to make a decision, John calls on Susan Campbell, his Chief Financial Officer, to shed some light on the matter. Susan had joined the company about two years ago from another publicly traded manufacturing company. She holds an MSc in Finance and an MBA from a prestigious Business School, and had recently completed her Chartered Financial Analysts’ certification. http://ukthesiss.com/dissertation_writing/Finance/Susan knew that she was in for a challenging task. She felt however that this was a good opportunity to prove her worth to the board. John reminds her that two of the non-executive directors are top professors of finance from High Goals University and are always very critical of decisions not reflecting the latest academic thinking.

Financing the Expansion Project

John still remembers how uneasy he had felt 10 years ago about the company’s debt burden and the 14% per year rate of interest that the bank had been charging him. He remembers distinctly how relieved he had been after paying off the loan one year earlier than its five-year term, and the surprised look on the bank manager’s face.

Business had been good over the years and sales had doubled about every 4 years. As sales began to escalate with the booming economy and thriving stock market, the firm had needed additional capital. Initially, John had managed to grow the business by using internal funds. However, about 5 years ago, when the need for financing was overwhelming, John decided to take the company public via an initial public offering (IPO) in the over-the-counter market. The issue was very successful and oversubscribed, mainly due to the superb publicity and marketing efforts of the investment underwriting company that John had excellent relations with. The company sold 50 million shares at £30 per share. The stock price had grown considerably over the first two years. Then, the stock market downturn had hit and, although RE’s stock had done reasonably well in relation to the sector, it was currently trading at its book value of £45 per share.



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