Dorchester, Ltd.
Dorchester, Ltd. Is an old-line confectioner specializing in high-quality chocolates. Through it facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Western Europe and North American (United States and Canada). With its current manufacturing facilities, Dorchester has been unable to supply the U.S. market with more than 225,000 pounds of candy per year. This supply has allowed its sales affiliate, located in Boston, MA to be able to penetrate the U.S. market no father west than St. Louis, MO and only as far south as Atlanta, GA. Dorchester believes that a separate manufacturing facility located in the U.S. would allow it to supply the entire U.S. market and Canada (which presently accounts for 65,000 pounds per year). Dorchester currently estimates initial demand in the North American market at 390,000 pounds, with growth at a 5% annual rate. A separate manufacturing facility would, obviously free up the amount currently shipped to the U.S. and Canada. However, Dorchester believes that this is only a short-run problem. They believe the economic development-taking place in Eastern Europe will allow it to sell there the full amount presently shipped to North America within a period of five years.
Dorchester presently realizes £3.00 per pound on its North American exports. Once the U.S. manufacturing facility is operating, Dorchester expects that it will be able to initially price its product at $7.70 per pound. This price would represent an operating profit of $4.40 per pound. Both sales price and operating costs are expected to keep track with the U.S. price level; U.S. inflation is forecast at a rate of 3% for the next several years. In the U.K. long-run inflation is expected to be in the 4 to 5% range, depending on which economic service one follows. The current spot exchange rate is $1.50/£1.00. Dorchester explicitly believes in PPP as the best means to forecast future exchange rates.
The manufacturing facility is expected to cost $7,000,000. Dorchester plans to finance this amount by a combination of equity capital and debt. The facility will increase Dorchester's borrowing capacity by £2,000,000, and it plans to borrow only that amount. The local community in which Dorchester has decided to build will provide $1,500,000 of debt financing for a period of seven years at 7.75%. The principal is to be repaid in equal installments over the life of the loan. At this point, Dorchester is uncertain whether to raise the remaining debt it desires through a domestic bond issue or a Eurodollar bond issue. It believes it can borrow pounds sterling at 10.75% per annum and dollars at 9.5%. Dorchester estimates its all-equity cost of capital to be 15%.
The U.S. Internal Revenue Service (IRS) will allow Dorchester to depreciate the new facility over a seven-year period. After that time the confectionery equipment, which accounts for the bulk of the investments, is expected to have substantial market value.
Dorchester does not expect to receive any special tax concessions. Further, because the corporate tax rates in the two countries are the same – 35% in the U.K and the U.S.) transfer pricing strategies are ruled out.
(1) Carefully select the three countries you will chose to analyze.
(2) Research three potential takeover targets that are based in three different countries and have substantial operations overseas.
(3) Provide a three to five page economic assessment to Dorchester, Inc. management regarding the pros and cons of buying a company that is based in each of the three countries. Use non-course materials to support your contentions and supporting documentation as necessary.
(4) In addition to the requirements above, your paper:
• Must be double-spaced and Time Roman 12 point font
• Must be formatted according to 6th edition APA style