The directors of Ribs Co, a listed company, are reviewing the company’s current strategic position. The firm makes high quality garden tools which it sells in its domestic market but not abroad. Over the last few years, the share price has risen significantly as a firm has expanded organically within its domestic market. Unfortunately, in the last 12 months, the influx of cheaper, foreign tools has adversely impacted the firm’s profitability. Consequently, the share price has dropped sharply in recent weeks and the shareholders expressed their displeasure at the recent AGM. The directors are evaluating two alternative investment projects which they hope will arrest the decline in profitability. Project 1: This would involve closing the firm’s domestic factory and switching production to a foreign country where labor rates are a quarter of those in the domestic market. Sales would continue to be targeted exclusively at the domestic market. Project 2: This would involve a new investment in machinery at the domestic factory to allow production to be increased by 50%. The extra tools would be exported and sold as high-quality tools in foreign market places. Both projects have a positive Net Present Value (NPV) when discounted at the firm’s current cost of capital. Required: Discuss four strategic/finance issues that this case presents.
The directors of Ribs Co, a listed company, are reviewing the company’s current strategic position. The firm makes high quality garden tools which it sells in its domestic market but not abroad.
Over the last few years, the share price has risen significantly as a firm has expanded organically within its domestic market. Unfortunately, in the last 12 months, the influx of cheaper, foreign tools has adversely impacted the firm’s profitability. Consequently, the share price has dropped sharply in recent weeks and the shareholders expressed their displeasure at the recent AGM.
The directors are evaluating two alternative investment projects which they hope will arrest the decline in profitability.
Project 1: This would involve closing the firm’s domestic factory and switching production to a foreign country where labor rates are a quarter of those in the domestic market. Sales would continue to be targeted exclusively at the domestic market.
Project 2: This would involve a new investment in machinery at the domestic factory to allow production to be increased by 50%. The extra tools would be exported and sold as high-quality tools in foreign market places.
Both projects have a positive
Required:
Discuss four strategic/finance issues that this case presents.
Step by step
Solved in 2 steps
