Case Study – Halden Plc

Case Study – Halden Plc Halden plc is a listed company which makes manufactures brakes for automobiles. The Marketing Director is proposing a new investment in a specialist brake system that has excellent performance in icy conditions. This would require an initial outlay of £30 million on 1 May 2016. The Finance Director favours using debt to finance the investment and is currently deciding upon how to finance the investment and whether to issue redeemable bonds, convertible bonds or a bank loan. The Managing Director, is concerned about issuing new debt, due to the added financial risk on top of the extra business and operational risks incurred as a result of the investment. He favours a rights issue to raise the required finance. The current gearing ratio for Halden plc is 60%. The Managing Director is keen to know whether it really matters whether Halden Plc uses debt or equity finance as he has been told that it is irrelevant! Halden has maintained a constant growth in dividends of 5% per year which has been consistently above the rate of inflation. This predictable dividend policy has contributed to a very stable share price over the last 5 years. The Managing Director wants to reduce the amount paid as a dividend over the next few years so that some of the profits can instead be retained in the business to help finance the proposed investment. The Finance Director is concerned as they argue this could damage their share price. Halden is having difficulty collecting receivables with their customers taking an average of 90 days to settle invoices with 2% of invoices irrecoverable. They are considering an alternative policy which will involve offering a discount of 3% if customers settle outstanding invoices within 15 days rather than the current average of 90 days. Task 1 Write a note to the directors, advising them on the following: a) The most appropriate method of financing the investment. (Ensure that you fully justify your arguments and discuss the theories of gearing in your answer.) b) The extent to which the company’s dividend policy will affect the market value of its shares. (Ensure that you include a discussion of the theories of dividend policy in your answer.) (Approximately 900 words should be allocated to task 1) Task 2 Explain, with reference to the efficient market hypothesis, the impact of the release of the news of the new proposed investment on Halden plc’s share price on the London Stock Exchange. (Approximately 250 words should be allocated to task 2) Task 3 a) Advise the Finance Director on whether the new policy of giving discounts for prompt payment of receivables is expected to be beneficial to Halden. (Use calculations to support your answer making use of the information provided in appendix 1). b) Evaluate one other policy that Halden could use to reduce the level of irrecoverable debt.