Reference no: EM132901696

Question - Heavy Keele Ltd. (HK) has a long-standing reputation as a manufacturer of quality sailboats. HK currently produces two different models of sailboat from a single production facility - the HK41 and the HK49. The past several years have seen a 25% decline in demand for HK's sailboats and a significant increase in interest within the boating community for motor vessels. Given this shift in attitudes, HK is now considering a proposal to introduce a motor vessel into its product line - the HKMV55. If the proposal is accepted, senior management has decided to restructure the firm into two separate divisions for operational purposes - the Sailboat division and the Motor Vessel division. Under the proposal, all current personnel will remain with the Sailboat division and the senior management team will remain unchanged. For accounting purposes, however, the $2 million annual cost of the senior management team will be allocated equally between the two divisions. HK will then seek an entire new management team to oversee the Motor Vessel division. Management has also decided that the new division should operate out of its own production facility. It can be built on the block of land adjacent to the current facility that HK already owns. Senior management has decided that the appropriate planning horizon for the proposed new Motor Vessel division is 10 years. You work in the controller's office of HK and have been asked to perform a series of analyses on this proposal. To facilitate your analysis, you have been provided with the Motor Vessel division's projected income statements over the next 10 years, as well as the following information.

Required - If a market is informationally efficient, should it respond to an announcement of HK's intention to expand into the motor vessel market, and if so, how should it respond?