Lamri Co (Lamri),a listed company,is expecting sales revenue to grow to $80 million next year,which is an increase of 20% from the current year.The operating profit margin for next year is forecast to be the same as this year at 30% of sales revenue.In addition to these profits,Lamri receives 75% of the after-tax profits from one of its wholly owned foreign subsidiaries–Magnolia Co (Magnolia),as dividends.However,its second wholly owned foreign subsidiary–Strymon Co(Strymon)does not pay dividends.Lamri is due to pay dividends of $7.5 million shortly and has maintained a steady 8% annual growth rate in dividends over the past few years.The company has grown rapidly in the last few years as a result of investment in key projects and this is likely to continue.For the coming year it is expected that Lamri will require the following capital investment.1.An investment equivalent to the amount of depreciation to keep its non-current asset base at the present productive capacity.Lamri charges depreciation of 25% on a straight-line basis on its non-current assets of $15 million.This charge has been included when calculating the operating profit amount.2.A 25% investment in additional non-current assets for every $1 increase in sales revenue.3.$4.5 million additional investment in non-current assets for a new project.Lamri also requires a 15% investment in working capital for every $1 increase in sales revenue.Strymon produces specialist components solely for Magnolia to assemble into finished goods.Strymon will produce 300，000 specialist components at $12 variable cost per unit and will incur fixed costs of $2.1 million for the coming year.It will then transfer the components to Magnolia at full cost price,where they will be assembled at a cost of $8 per unit and sold for $50 per unit.Magnolia will incur additional fixed costs of $1.5 million in the assembly process.Tax-Ethic (TE)is a charitable organisation devoted to reducing tax avoidance schemes by companies operating in poor countries around the world.TE has petitioned Lamri’s Board of Directors to reconsider Strymon’s policy of transferring goods at full cost.TE suggests that the policy could be changed to cost plus 40% mark-up.If Lamri changes Strymon’s policy,it is expected that Strymon would be asked to remit 75% of its after-tax profits as dividends to Lamri.Other Information1.Lamri’s outstanding non-current liabilities of $35 million,on which it pays interest of 8% per year,and its 30 million $1 issued equity capital will not change for the coming year.2.Lamric’s,Magnolia’s and Strymon’s profits are taxed at 28%,22% and 42% respectively.A withholding tax of 10% is deducted from any dividends remitted from Strymon.3.The tax authorities where Lamri is based charge tax on profits made by subsidiary companies but give full credit for tax already paid by overseas subsidiaries.4.All costs and revenues are in $ equivalent amounts and exchange rate fluctuations can be ignored.Required:
(b)Comment on the impact of implementing TE’s proposal and suggest possible actions Lamri may take as a result.(6 marks)