NSU School of Business FIN444: International Financial Management Assignment I

Dorchester, Ltd. is an old-line confectioner specializing in high-quality chocolates. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Europe, U.S. and anada. !ith its current manufacturing facilities, Dorchester has "een una"le to supply the U.S. mar#et $ith more than %%&,''' pounds of candy per year. (anagement "elie)es that a separate manufacturing facility located in the United States $ould allo$ it to supply the entire U.S. mar#et and anada *$hich presently accounts for +&,''' pounds per year,. Dorchester currently estimates initial demand in the -orth .merican mar#et at /0',''' pounds, $ith gro$th at a &1 annual rate. . separate manufacturing facility $ould, o")iously, free up the amount currently shipped to the United States and anada. 2ut Dorchester "elie)es that this is only a short-run pro"lem. They "elie)e the economic de)elopment ta#ing place in Eastern Europe $ill allo$ it to sell there the full amount presently shipped to -orth .merica $ithin a period of fi)e years. Dorchester presently realizes 3/.'' per pound on its -orth .merican e4ports. 5nce the U.S. manufacturing facility is operating, Dorchester e4pects that it $ill "e a"le to initially price its product at 67.7' per pound. This price $ould represent an operating profit of 68.8' per pound. 2oth sales price and operating costs are e4pected to #eep trac# $ith the U.S. price le)el9 U.S. inflation is forecast at a rate of /1 for the ne4t se)eral years. :n the U.K., long-run inflation is e4pected to "e in the 8-&1 range, depending on $hich economic ser)ice one follo$s. The current spot e4change rate is 6;.&'<3;.''. Dorchester e4plicitly "elie)es in === as the "est means to forecast future e4change rates. The manufacturing facility is e4pected to cost 67,''','''. Dorchester plans to finance this amount "y a com"ination of equity capital and de"t. The plant $ill increase Dorchester>s "orro$ing capacity "y 3%,''',''', and it plans to "orro$ only that amount. The local community in $hich Dorchester has decided to "uild $ill pro)ide 6;,&'',''' of de"t financing for a period of se)en years at 7.7&1. The principal is to "e repaid in equal installments o)er the life of the loan. .t this point, Dorchester is uncertain $hether to raise the remaining de"t it desires through a domestic "ond issue or a Eurodollar "ond issue. :t "elie)es it can "orro$ pounds sterling at ;'.7&1 and dollars at 0.&1. Dorchester estimates its all-equity cost of capital to "e ;&1. The U.S. :nternal ?e)enue Ser)ice $ill allo$ Dorchester to depreciate the ne$ facility o)er a se)en-year period. .fter that time the confectionery equipment, $hich accounts for the "ul# of the in)estment, is e4pected to ha)e su"stantial mar#et )alue. The corporate ta4 rates in the t$o countries are the same@/&1 in the U.K. and in the U.S.

Should Dorchester "uild the ne$ manufacturing plant in the United StatesA !hat should "e the financing strategyA DirectionsB -o page limit. Ceel free to pro)ide assumptions to Dustify your ans$er, $here rele)ant. Use standard font type and size, at E;.& lineF spacing. Deadline: 27 Novem er 2!""# Good luck!