Question

Power Pro, Inc., is a large manufacturer of marine engines. In recent years, Power Pro, like other engine manufacturers, has purchased a controlling interest in independent boat builders. The intent of the acquisitions is to control the engine choice of the boat builder. By including the outboard engine in the boat package, it is not necessary to sell to and finance many small dealers.
Power Pro purchased an 80% interest in Swift-Craft during the last year. Swift-Crafts are built in California and are sold only in western states. Power Pro wants to build the boats in the Midwest as well, so as to expand sales without paying major shipping costs from the West. A new plant will cost $1,000,000 to build and another $1,500,000 to equip for production.
Currently, Swift-Craft has $800,000 in long-term debt. It has 11% annual interest bonds outstanding in the hands of local investors. Current investors have no interest in lending any more funds. The interest rate Swift-Craft pays is high due to its size and credit rating.
Power Pro has ready access to the bond market and borrows at 7.5% annual interest. Power Pro also has expertise in constructing and equipping new facilities since it has built many new plants. Power Pro also has a sophisticated fixed asset accounting system. Power Pro would prefer to build the new plant and turn it over to Swift-Craft when it is complete. It is considering either selling the building to Swift-Craft and taking back the mortgage or leasing the asset to Swift-Craft under a long-term capital lease.
Power Pro would like you to cover the options it has in using its borrowing ability and asset management experience in assisting Swift-Craft. There is a concern as to existing debt and with respect to funds needed to finance the new plant. Your discussion should consider the impact of alternatives on the consolidation process and on NCI shareholders.


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  • CreatedApril 13, 2015
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