Strategic Financial Management

2 McTee plc is a Scottish manufacturer of golf clubs. The company has decided to purchase an existing golf club
manufacturer in the State of Florida, USA. The purchase will cost an agreed $72 million for fixed assets and
equipment, and in addition $8 million of working capital will be needed. No additional external funding for the
proposed US subsidiary is expected to be needed for at least five years, and sales from the subsidiary would be
exclusively to the US market. McTee has no other foreign subsidiaries, and the company’s managers are considering
how to finance the US investment. McTee’s bank has advised that, taking into account McTee’s credit rating, the
following alternatives might be possible, with finance available up to the amount shown:
(i) A one for four rights issue, at a price of 280 pence per share. Underwriting and other costs are expected to be
5% of the gross amount raised.
(ii) Five year Sterling 7% fixed rate secured bank term loan of up to £50 million, initial arrangement fee 1%.
(iii) $15 million one year commercial paper, issued at $US LIBOR plus 1·5%. This could be renewed on an annual
basis. An additional 0·5% per year would be payable to a US bank for a back-up line of credit.
(iv) 80 million Swiss Franc five year fixed rate secured bank loan at 2·5%. This may be swapped into fixed rate $ at
an additional annual interest rate of 2·3%. An upfront fee of 3·0% is also payable.
(v) £42 million 10-year Sterling Eurobond issue at 6·85%. This may be swapped into $ at an annual interest rate
of 4·95%. Eurobond issue costs of 2%, and upfront swap costs of 1·7% would also be payable.
(vi) $40 million floating rate six year secured term loan from a US bank, at $US LIBOR plus 3%.
No currency swaps are available other than those shown. Currency swaps would involve swapping the principal at
the current spot exchange rate, with the reversal of the swap at the same rate at the swap maturity date.
$US LIBOR is currently 3%.
Exchange rates:
Spot One year forward
$/£ 1·7985 – 1·8008 1·7726 – 1·7746
SF/£ 2·256 – 2·298 2·189 – 2·205
McTee’s current balance sheet is summarised below.
£m
Fixed assets 117·8
Investments 8·1
Current assets 98·1
Creditors: amounts falling due within one year
Loans and other borrowings (38·0)
Other creditors (48·6)
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137·4
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Creditors: amounts falling due after more than one year
Medium and long-term bank loans 30·0
8% Bond 2009 (par value £100) 18·0
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48·0
Capital and reserves
Ordinary shares (25 pence par value) 20·0
Reserves 69·4
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137·4
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A covenant exists that prevents the book value of McTee’s debt finance from exceeding 50% of total assets. McTee’s
current dividend per share is 22·2 pence and dividend growth is approximately 4% per year. The company’s current
share price is 302 pence.
Interest payments on debt financing may be assumed to be made annually at the end of the year. Corporate tax in
the UK, USA and Switzerland is at a rate of 30%. Issue costs and fees such as swap fees are not tax allowable.
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