ACCA/CAT

The following additional information has been provided:

Redundancy and other costs will be approximately $54 million if the whole company is closed,and pro rata for individual divisions that are closed.These costs have priority for payment before any other liabilities in case of closure.The taxation effects relating to this may be ignored.

Corporation tax on profits is 20% and losses cannot be carried forward for tax purposes.Assume that tax is payable in the year incurred.

All the non-current assets,including land and buildings,are eligible for tax allowable depreciation of 15% annually on the book values.The annual reinvestment needed to keep operations at their current levels is roughly equivalent to the tax allowable depreciation.The $50 million investment in the mobile refrigeration business is not eligible for any tax allowable depreciation.

Doric's current cost of capital is 12%.

Required:

Prepare a report for the Board of Directors,evaluating the financial and non-financial impact of all the three proposals to Doric Co's main stakeholder groups,that includes:

(i)An estimate of the return the debt holders and shareholders would receive in the event that Doric Co ceases trading and is closed down.(3 marks)

(ii)An estimate of the income position and the value of Doric Co in the event that the restructuring proposal is selected.State any assumptions made.(8 marks)

(iii)An estimate of the amount of additional finance needed and the value of Doric Co if the management buy-out proposal is selected.State any assumptions made.(8 marks)

(iv)A discussion of the impact of each proposal on the existing shareholders,the unsecured bond holders,and the executive directors and managers involved in the management buy-out.Suggest which proposal is likely to be selected.(12 marks)

Professional marks will be awarded in question 1 for the appropriateness and format of the report.(4 marks)

(35 marks)

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