a) Financial Company A borrows heavily to take over start-up chemical Company B, considering that its stock
Question:
a) Financial Company A borrows heavily to take over start-up chemical Company B, considering that its stock is undervalued and B can be sold quickly at a large profit once it is in operation. However, B experiences serious problems in bringing its new process on stream. Start-up is delayed by a year, and to meet quality standards the plant can only be run at 90% of design rate of 10,000 tonnes/year, which is still enough to cover fixed plus variable costs and give a small profit. Market demand and price are as planned. Assume that raw material price and site costs (labour, maintenance, etc.) are unchanged. On the diagrams included (page 2), draw lines to show how this affects the breakeven chart (8 marks) and cash flow chart. (8 marks). Explain briefly why the economic effects are significant. b) Explain why and how these effects together with A's leveraged position can affect safety risk. (8 marks) (24 marks total)
Managerial Decision Modeling With Spreadsheets
ISBN: 9780136115830
3rd Edition
Authors: Nagraj Balakrishnan, Barry Render, Jr. Ralph M. Stair