Dorchester Ltd mini case solution

Topics: United Kingdom, United States dollar, United States Pages: 2 (520 words) Published: November 17, 2013
Dorchester Ltd Mini Case

Dorchester Ltd is a famous high-quality chocolate maker based in the United Kingdom. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Western Europe and North America (United States and Canada). Dorchester has been struggling with supplying the United States with their demand of 390,000 pounds (with 5% annual growth rate) of candies. Due to limited production capacity, only 65,000 pounds per year of candies are supplied throughout that region. The company deems that an additional manufacturing facility situated in the U.S would easily supply Dorchester’s product throughout the entire U.S. market and Canada. The current spot exchange rate is US$1.50/GBP, while the U.S is predicting a 3% inflation rate and 5% for the U.K.

Dorchester’s expansion possibility to the United States will cost them US$7,000,000 to build a factory. This would allow Dorchester to fulfill all 390,000 pounds expected demand and its profit per pound would increase from US$4.305 to US4.400. The factory has planned to operate for seven years, at that time, the United States Internal Revenue Service considers the factory fully depreciated with straight-line depreciation, but Dorchester’s management suggests that the remaining equipment can be sold for US$2,000,000.

Should Dorchester choose to invest in the new U.S factory, they plan to pay it off with a combination of equity capital and debt. The company would borrow at most £2,000,000 (US$3,000,000): the Unites States local community would be able to provide US$1,500,000 debt at 7.75% coupon rate annually; or they can issue a bond for Pounds Sterling at 10.75% annually coupon rate, or 9.5% Eurodollar bond for USD at 9.5% annually coupon rate. To optimize the borrowing cost, they should borrow $1,500,000 from the local community, and raise $1,500,000 with Pound Sterling bond issue.

Should Dorchester go ahead with the project or not? Here are the solutions...
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