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Orchard Mill Development

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Orchard Mill Development is a regional development Corporation that has as main activity preparing land parcels for residential or commercial constructions in favorable locations that were previously undeveloped. In fact, the OMD earned profit through reselling the developed estate to builders at a greater price. The company has been very successful in its operations, since it was able to engage in projects with high returns and low risk (an ideal situation), a thing that allowed the company to earn increasing returns and to make equity holders delighted due to the steady increase in earnings. During this period of high growth, the company has achieved a higher financial performance than the industry average. However, periods of high growth do not last forever; OMD is now confronted to a normal and steady growth. Therefore, the company should take into account only the projects that will add value to the company. The firm needs to restructure its debt and equity percentages to be able to finance the totality of these projects. This is due to the fact they are all considered vital for the company and they must all be undertaken to maintain its competitive position in the market. The company should find a way of raising capital with a cost that will allow the acceptance of all these projects. ...read more.


Since these projects are all judged as strategic for the company, then Susan should review its decisions on all the projects. Project E will have a positive NPV only if the cost of capital is less than 8 % 2. Therefore, if OMD prefers to undertake all these projects, then it must find a capital structure that causes the cost of capital to equal 8% or less. Under these conditions, Shue must review its strategic decisions on the capital structure that she wants to choose and also the projects that the company wants to undertake. Shue must then undertake only the project that will add value to the firm, making shareholders happy. In addition, it must maintain the same level of performance as before. Indeed, the forecasts have ensured that the firm will have a steady growth rate in future years, and the firms intends to make shareholders benefit from that through allocating dividends that would grow at the same rate. Given that the capital structure surely affects the return and the raising of external funds, which is an important part of strategic decisions, then, any capital budgeting process should include the strategic considerations chosen their effects on returns. So, do they add value to the firm? ...read more.


The macroeconomic environment could also affect the restructuring because the prevailing interest rate in the market might increase to cause the cost of capital for the company to increase also. Indeed, the state of the economy can also affect the restructuring operation since in case of recessions when capital is hard to obtain, the company would incur a greater cost of capital in order to collect sufficient funds. In addition, inflation will also affect the WACC because the cost of equity and cost of debt will both increase, causing the cost of capital of the company to increase also. As a final point, Susan Shue is conscious of external information that the shareholders are not aware of. This market imperfection causes shareholders to interpret the restructuring in a different way. In fact, shareholders could either interpret it as a financial distress that the company faces or as an investment opportunity that might increase value for the firm. These interpretations have each different outcome that will result in opposite effects on the price of the stock. Hence, to reestablish market stability, Shue needs to disclose information about ODM in the aim of making all shareholders benefit from symmetric information and inform them of the expected modest steady growth rate in earnings. 1 See Appendix for the MCC & IOS before and after restructuring. 2 See Appendix the NPV for the projects. 1 ...read more.

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