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Attempt Any Four
Case Study
CASE – 1 Your Job and Your Passion—You Can Pursue
Both!
The 21st century offers many challenges to every one of us. As more
firms go global, as more economies interconnect, and as the Web blasts away
boundaries to communication, we become more informed citizens. This
interconnectedness means that the organizations you work for will require you
to develop both general and specialized knowledge—such as speaking multiple
languages, using various software applications, or understanding details of
financial transactions. You will have to develop general management skills to
foster your ability to be self-reliant and thrive in a changing market-place.
And here’s the exciting part: As you build both types of knowledge, you may be
able to integrate your growing expertise with the causes or activities you care
most about. Or, your career adventure may lead you to a new passion.
Former presidents George H. W. Bush and Bill
Clinton are well known for combining their management skills—running a
country—with their passion for helping people around the world. Together they
have raised funds to assist disaster victims, those with HIV/AIDS, and others
in need. Jake Burton turned his love of snow sports into an entire industry
when he founded Burton Snowboards. Annie Withey poured her business and
marketing knowledge into her two famous business ventures: Smartfood and
Annie’s Homegrown. Both products were the result of her passion for healthful
foods made from organic ingredients.
As you enter the workforce, you may have no
idea where your career path will lead. You may be asking yourself, “How will I
fit in?” “Where will I live?” “How much will I earn?” “Where will my business
and personal careers evolve as the world continuous to change at such a fast
pace?” If you are feeling nervous because you don’t know the answers to these
questions yet, relax. A career is a journey, not a single destination. You may
have one type of career or several. It is likely you will work for several
organisations, or you may run one or more businesses of your own.
As you ask yourself what you want to do and
where you want to be, take a few minutes to review the chapter and its main
topics. Think about your personality, what you like and dislike, what you know
and what you want to learn, what you fear and what you dream. Then try the
following exercise.
Questions
1.
Create a
three-column chart in which the first column lists nonmanagement skills you
have. Are you good at travel? Do you know how to build furniture? Are you a
whiz at sports statistics? Are you an innovative cook? Do you play video games
for hours? In the second column, list the causes or activities about which you
are passionate. These may dovetail with the first list, but they might not.
2.
Once you
have you two columns complete, draw lines between entries that seem compatible.
If you are good at building furniture, you might have also listed a concern
about families who are homeless. Remember that not all entries will find a
match—the idea is to begin finding some connections.
3.
In the
third column, generate a list of firms or organizations you know about that
reflect your interests. If you are good at building furniture, you might be
interested working for the Habitat for Humanity organization, or you might find
yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You
can do further research on organizations via Internet or business
publications.
CASE – 2 Biyani – Pioneering a Retailing Revolution
in India
“I use people as hands and
legs. I prefer to do thinking around here.”
─ Kishore Biyani, CEO & MD,
Pantaloon Retail (India) Ltd.
Kishore Biyani (Biyani), CEO& MD of Pantaloon Retail (India) Ltd.,
planned to have 30 Food Bazaar outlets, 22 outlets in Big Bazaar, 21 Pantaloons
outlets, and four seamless malls under the Central logo, by the end of 2005. He
also planned to launch at least three businesses every year and had already
selected music, footwear and car accessories as his next areas of investments.
He was already the top retailer in India followed by Raghu Pillai of RPG. As of
2004, Biyani headed a company that had a turnover of Rs 6,500 million and
operated 13 Pantaloon apparel stores, 9 Big Bazaars, 13 Food Bazaars, and 3
seamless malls (Central), one each located in Bangalore, Hyderabad, and Pune.
Biyani’s journey from a person who looked after his family business to
India’s top retailer in 1987, when he launched Manz Wear Pvt. Ltd. The company
launched one of the first readymade trousers brands – ‘Pantaloon’ – in the
country. The company also launched its first jeans brand called ‘Bare’ in 1989.
On September 20, 1991, Manz Wear Pvt. Ltd. went public and on September 25,
1992, it changed its name to Pantaloon Fashions (India) Limited (PFIL). ‘John
Miller’ was the first formal shirt brand from PFIL.
The company opened its first apparel stores,
called ‘Pantaloons’ at Kolkata in August 1997. The stores generated Rs 70
million. Biyani then realized the potential of the Indian market and started to
aggressively tap it. Accordingly, Biyani decided to expand into other segments
of retailing besides apparel. To reflect this change in focus, the company
changed its name to Pantaloon Retail (India) Limited (PRIL) in July 1999 and
set itself a target of achieving Rs 10 billion in sales by June 2005. In course
of time he launched three other retail formats -- Big Bazaar, Food Bazaar, and
Central.
Biyani didn’t believe in copying ideas from
western retailers. He was critical of his peers who felt just copied ideas form
the west without making any effort to mold them to Indian conditions. He
ensured that his store formats such as Big Bazaar, Food Bazaar, and Pantaloons
were all suited to the purchasing style of Indian consumers.
Biyani was a huge risk taker and his planning
was always different from the conventional way of doing business. This was also
one of the factors that had prompted Biyani to move away from his father’s
conventional way of doing business. During the initial stages of his success,
his risk-taking attitude sometimes had the effect of turning away financiers.
The biggest risk that Biyani took was in opening Big Bazaar in Mumbai in 2001.
The company needed money to expand Big Bazaar’s operations. However, it had
profits of only Rs 40 million with a low share price at eighteen rupees.
Therefore, Biyani could not raise money through equity. In light of this
situation, Biyani took a loan of Rs 1,200 million from ICICI for launching the
operations of Big Bazaar, which increased his debt exposure. However, Big
Bazaar proved to be a resounding success with 100,000 customer visits in its
first week of operations. According to analysts, if Big Bazaar had failed,
Biyani would have landed in a severe debt crisis. The success of Big Bazaar not
only increased the company profits, it also changed the perception of
investors.
Many people criticized Biyani for not
delegating authority and Biyani himself accepted the criticism. He said, “I use
people as hands and legs. I prefer to do the thinking around here.” He
preferred taking individual decision on activities like strategic planning,
ideas for other ventures, and other important issues. It was because of this
that managers like Kush Medhora of Westside were initially apprehensive about
joining Biyani’s business. However, Biyani changed his attitude gradually with
the launch of Big Bazaar, Food Bazaar, and Central and appointed different
people for managing different business units.
Biyani believed in leading a simple life and
in being simply dressed. His vision came from his diverse reading connected to
retailing and other areas. He made it a point to visit each of his stores
across the country. He aimed to spend at least seven hours a week at the
stores. In the stores, he would stand at a corner and observe people. He also
walked on streets, met common people, and talked to local leaders to plan and
put up new products in his stores. Each of his stores was set with a weekly
target, which was reviewed every Monday. Whenever a new store was opened, the
details of its operations during the first 45 days were to be sent to him.
Sometimes, he suggested remedies to some problems. Biyani believed in extensive
advertising to make more people know about the product. His decision making was
quick and devoid of unnecessary delays. Biyani was also a good learner and
learned quickly from his mistakes. He planned to improve inventory management
through responding effectively to the demands of the customers rather than
forecasting them, as he felt that forecasting would pile up the inventory in this
dynamic market.
Questions
1.
The
tremendous success of the ‘Pantaloons’, ‘Big Bazaar’ and ‘Food Bazaar’
retailing formats, easily made PRIL the number one retailer in India by early
2004, in terms of turnover and retail area occupied by its outlets. Explain how
Biyani is further planning to consolidate his businesses.
2.
“Our
striving toward looking at the Indian market differently and strategizing with
the evolving customer helped us perform better.” What other qualities of
Kishore Biyani do you think were instrumental in making him top retailer of
India?
CASE – 3 The New Frontier for Fresh Foods
Supermarkets
Fresh Foods Supermarket is a grocery store chain that was established
in the Southeast 20 years ago. The company is now beginning to expand to other
regions of the United States. First, the firm opened new stores along the
eastern seaboard, gradually working its way up through Maryland and Washington,
DC, then through New York and New jersey, and on into Connecticut and Massachusetts.
It has yet to reach the northern New England states, but executives have
decided to turn their attention to the Southwest, particularly because of the
growth of population there.
Vivian Noble, the manager of one of the
chain’s most successful stores in the Atlanta area, has been asked to relocate
to Phoenix, Arizona, to open and run a new Fresh Foods Supermarket. She has
decided to accept the job, but she knows it will be a challenge. As an African
American woman, she has faced some prejudice during her career, but she refuses
to be stopped by a glass ceiling or any other barrier. She understands that she
will be living and working in an area where several cultures combine and
collide, and she will be hiring and managing a diverse workforce. Noble has the
support of top management at Fresh Foods, which wants the store to reflect the
surrounding community—in both staff makeup and product selection. So she will
be looking to hire employees with Hispanic and Native American roots, as well
as older workers who can relate to the many retired residents in the area. And
she will be seeking their inputs on the selection of certain food products,
including ethnic brands, so that customers know they can buy what they need and
want a Fresh Foods.
In addition, Noble wants to make sure that
Fresh Foods provides services above and beyond those of a standard supermarket
to attract local consumers. For instance, she wants the store to offer free
delivery of groceries to home-bound customers who are either senior citizens or
physically disabled. She wants to be sure that the store has enough bilingual
employees to translate for and otherwise assist customers who speak little or
no English. Noble believes that she is a pioneer of sorts, guiding Fresh Foods
Supermarkets into a new frontier. “The sky is almost blue here,” she says of
her new home state. “And there’s no glass ceiling between me and the sky.”
Questions
1.
What
steps can Vivian Noble take to recruit and develop her new workforce?
2.
What
other ways can Noble help her company reach out to the community?
3.
How will
Fresh Foods Supermarkets as whole benefit from successfully moving into this
new region of the country?
CASE – 4 The Law Offices of Jeter, Jackson, Guidry,
and Boyer
THE EVOLUTION OF THE FIRM
David Jeter and Nate Jackson started a small general law practice in
1992 near Sacramento, California. Prior to that, the two had spent five years
in the district attorney’s office after completing their formal schooling. What
began as a small partnership—just the two attorneys and a
paralegal/assistant—had now grown into a practice that employed more than 27
people in three separated towns. The current staff included 18 attorneys (three
of whom have become partners), three paralegals, and six secretaries.
For the first time in the firm’s existence,
the partners felt that they were losing control of their overall operation. The
firm’s current caseload, number of employees, number of clients, travel
requirements, and facilities management needs had grown far beyond anything
that the original partners had ever imagined.
Attorney Jeter called a meeting of the
partners to discuss the matter. Before the meeting, opinions about the pressing
problems of the day and proposed solutions were sought from the entire staff.
The meeting resulted in a formal decision to create a new position, general
manager of operations. The partners proceeded to compose a job description and
job announcement for recruiting purposes.
Highlights and responsibilities of the job
description include:
· Supervising day-to-day office personnel and
operations (phones, meetings, word processing, mail, billings, payroll, general
overhead, and maintenance).
· Improving customer relations (more
expeditious processing of cases and clients).
· Expanding the customer base.
· Enhancing relations with the local
communities.
· Managing the annual budget and related
incentive programs.
· Maintaining annual growth in sales of 10
percent while maintaining or exceeding the current profit margin.
The general manager will provide an annual executive summary to the
partners, along with specific action plans for improvement and change. A search
committee was formed, and two months later the new position was offered to Brad
Howser, a longtime administrator from the insurance industry seeking a final
career change and a return to his California roots. Howser made it clear that
he was willing to make a five-year commitment to the position and would then
likely retire.
Things got off to a quiet and uneventful
start as Howser spent few months just getting to know the staff, observing
day-today operations; and reviewing and analyzing assorted client and attorney
data and history, financial spreadsheets, and so on.
About six months into the position, Howser
became more outspoken and assertive with the staff and established several new
operational rules and procedures. He began by changing the regular working
hours. The firm previously had a flex schedule in place that allowed employees
to begin and end the workday at their choosing within given parameters. Howser
did not care for such a “loose schedule” and now required that all office
personnel work from 9:00 to 5:00 each day. A few staff member were unhappy
about this and complained to Howser, who matter-of-factly informed them that “this
is the new rule that everyone is expected to follow, and anyone who could or
would not comply should probably look for another job.” Sylvia Bronson, an
administrative assistant who had been with the firm for several years, was
particularly unhappy about this change. She arranged for a private meeting with
Howser to discuss her child care circumstances and the difficulty that the new
schedule presented. Howser seemed to listen half-heartedly and at one point
told Bronson that “assistance are essentially a-dime-a-dozen and are readily
available.” Bronson was seen leaving the office in tears that day.
Howser was not happy with the average length
of time that it took to receive payments for services rendered to the firm’s
clients (accounts receivable). A closer look showed that 30 percent of the
clients paid their bills in 30 days or less, 60 percent paid in 30 to 60 days,
and the remaining 10 percent stretched it out to as many as 120 days. Howser composed a letter
that was sent to all clients whose outstanding invoices exceeded 30 days. The
strongly worded letter demanded immediate payment in full and went on to
indicate that legal action might be taken against anyone who did not respond in
timely fashion. While a small number of “late” payments were received soon
after the mailing, the firm received an even larger number of letters and phone
calls from angry clients, some of whom had been with the firm since its
inception.
Howser was given an advertising and promotion
budget for purposes of expanding the client base. One of the paralegals
suggested that those expenditures should be carefully planned and that the firm
had several attorneys who knew the local markets quite well and could probably
offer some insights and ideas on the subject. Howser thought about this briefly
and then decided to go it alone, reasoning that most attorneys know little or
nothing about marketing.
In an attempt to “bring all of the people
together to form a team,” Howser established weekly staff meetings. These
mandatory, hour-long sessions were run by Howser, who presented a series of
overhead slides, handouts, and lectures about “some of the proven management
techniques that were successful in the insurance industry.” The meetings
typically ran past the allotted time frame and rarely if ever covered all of
the agenda items.
Howser spent some of his time “enhancing
community relations.” He was very generous with many local groups such as the
historical society, the garden clubs, the recreational sports programs, the
middle-and high-school band programs, and others. In less than six months he
had written checks and authorized donations totaling more than $25,000. He was
delighted about all this and was certain that such gestures of goodwill would
pay off handsomely in the future.
As for the budget, Howser carefully reviewed
each line item in search of ways to increase revenues and cut expenses. He then
proceeded to increase the expected base or quota for attorney’s monthly
billable hours, thus directly affecting their profit sharing and bonus program.
On the other side, he significantly reduced the attorneys’ annual budget for
travel, meals, and entertainment. He considered these to be frivolous and
unnecessary. Howser decided that one of the two full-time administrative
assistant positions in each office should be reduced to part-time with no
benefits. He saw no reason why the current workload could not be completed
within this model. Howser wrapped up his initial financial review and action
plan by posting notices throughout each office with new rules regarding the use
of copy machines, phones, and supplies.
Howser completed the first year of his tenure
with the required executive summary report to the partners that included his
analysis of the current status of each department and his action plan. The
partners were initially impressed with both Howser’s approach to the new job
and with the changes that he made. They all seemed to make sense and were
directly in line with the key components of his job description. At the same
time, “the office rumor mill and grape vine” had “heated up” considerably.
Company morale, which had been quite high, was now clearly waning. The water
coolers and hallways became the frequent meeting places of disgruntled
employees.
As for the marketplace, while the partner did
not expect to see an immediate influx of new clients, they certainly did not
expect to see shrinkage in their existing client base. A number of individual
and corporate clients took their business elsewhere, still fuming over the
letter they had received.
The partners met with Howser to discuss the
situation. Howser urged them to “sit tight and ride out the storm.” He had seen
this happen before and had no doubt that in the long run the firm would achieve
all of its goals. Howser pointed out that people in general are resistant to
change. The partners met for drinks later that day and looked at each other
with a great sense of uncertainty. Should they ride out the storm as Howser
suggested? Had they done the right thing in creating the position and hiring
Howser? What had started as a seemingly, wise, logical, and smooth sequence of
events had now become a crisis.
Questions
1.
Do you
agree with Howser’s suggestion to “sit tight and ride out the storm,” or should
the partners take some action immediately? If so, what actions specifically?
2.
Assume
that the creation of the GM—Operation position was a good decision. What
leadership style and type of individual would you try to place in this
position?
3.
Consider
your own leadership style. What types of positions and situations should you
seek? What types of positions and situation should you seek to avoid? Why?
CASE – 5 The Grizzly Bear Lodge
Diane and Rudy Conrad own a small lodge outside Yellowstone National
Park. Their lodge has 15 rooms that can accommodate up to 40 guests, with some
rooms set up for families. Diane and Rudy serve a continental breakfast on
weekdays and a full breakfast on weekends, included in the room they charge.
Their busy season runs from May through September, but they remain open until
Thanksgiving and reopen in April for a short spring season. They currently
employ one cook and two waitpersons for the breakfasts on weekends, handling
the other breakfasts themselves. They also have several housekeeping staff
members, a groundkeeper, and a front-desk employee. The Conrads take pride in
the efficiency of their operation, including the loyalty of their employees,
which they attribute to their own form of clan control. If a guest needs
something—whether it’s a breakfast catered to a special diet or an extra set of
towels—Grizzly Bear workers are empowered to supply it.
The Conrads are considering expanding their
business. They have been offered the opportunity to buy the property next door,
which would give them the space to build an annex containing an additional 20
rooms. Currently, their annual sales total $300,000. With expenses running
$230,000—including mortgage, payroll, maintenance, and so forth—the Conrads’
annual income is $70,000. They want to expand and make improvements without
cutting back on the personal service they offer to their guests. In fact, in
addition to hiring more staff to handle the larger facility, they are
considering collaborating with more local business to offer guided rafting,
fishing, hiking, and horseback riding trips. They also want to expand their
food service to include dinner during the high season, which means renovating
the restaurant area of the lodge and hiring more kitchen and wait staff.
Ultimately, the Conrads would like the lodge to open year-round, offering
guests opportunities to cross-country ski, ride snow-mobiles, or hike in
winter. They hope to offer holiday packages for Thanksgiving, Christmas, and
New Year’s celebrations in the great outdoors. The Conrads report that their
employees are enthusiastic about their plans and want to stay with them through
the expansion process. “This is our dream business,” says Rudy. “We’re only at
the beginning.”
Questions
1.
Discuss
how Rudy and Diane can use feedforward, concurrent, and feedback controls both
now and in future at the Grizzly Bear Lodge to ensure their guests’
satisfaction.
2.
What
might be some of the fundamental budgetary considerations the Conrads would
have as they plan the expansion of their logic?
3.
Describe
how the Conrads could use market controls plans and implement their
expansion.
Attempt Any Four Case Study
Case 1: Zip Zap Zoom Car Company
Zip
Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc)
segment. It was set up 15 years back and
since its establishment it has seen a phenomenal growth in both its market and
profitability. Its financial statements
are shown in Exhibits 1 and 2 respectively.
The company enjoys the confidence of
its shareholders who have been rewarded with growing dividends year after
year. Last year, the company had
announced 20 per cent dividend, which was the highest in the automobile
sector. The company has never defaulted
on its loan payments and enjoys a favorable face with its lenders, which
include financial institutions, commercial banks and debenture holders.
The competition in the car industry
has increased in the past few years and the company foresees further
intensification of competition with the entry of several foreign car
manufactures many of them being market leaders in their respective countries. The small car segment especially, will
witness entry of foreign majors in the near future, with latest technology
being offered to the Indian customer.
The Zip Zap Zoom’s senior management realizes the need for large scale
investment in up gradation of technology and improvement of manufacturing
facilities to pre-empt competition.
Whereas on the one hand, the
competition in the car industry has been intensifying, on the other hand, there
has been a slowdown in the Indian economy, which has not only reduced the
demand for cars, but has also led to adoption of price cutting strategies by
various car manufactures. The industry
indicators predict that the economy is gradually slipping into recession.
Exhibit 1 Balance sheet as at March 31,200
x
(Amount in Rs. Crore)
Source of
Funds
Share capital 350
Reserves
and surplus 250 600
Loans
:
Debentures
(@ 14%) 50
Institutional
borrowing (@ 10%) 100
Commercial
loans (@ 12%) 250
Total
debt 400
Current
liabilities 200
1,200
Application
of Funds
Fixed
Assets
Gross
block 1,000
Less
: Depreciation 250
Net
block 750
Capital
WIP 190
Total
Fixed Assets 940
Current
assets :
Inventory
200
Sundry
debtors 40
Cash
and bank balance 10
Other
current assets 10
Total
current assets 260
-1200
Exhibit 2 Profit and
Loss Account for the year ended March 31, 200x
(Amount in Rs. Crore)
Sales
revenue (80,000 units x Rs. 2,50,000) 2,000.0
Operating
expenditure :
Variable
cost :
Raw
material and manufacturing expenses 1,300.0
Variable
overheads 100.0
Total 1,400.0
Fixed cost
:
R
& D 20.0
Marketing
and advertising 25.0
Depreciation
250.0
Personnel 70.0
Total 365.0
Total operating expenditure 1,765.0
Operating
profits (EBIT) 235.0
Financial expense :
Interest on
debentures 7.7
Interest on
institutional borrowings 11.0
Interest on
commercial loan 33.0 51.7
Earnings before tax (EBT) 183.3
Tax (@ 35%) 64.2
Earnings after tax (EAT) 119.1
Dividends 70.0
Debt redemption (sinking fund obligation)** 40.0
Contribution to reserves and surplus 9.1
* Includes the
cost of inventory and work in process (W.P) which is dependent on demand
(sales).
** The loans have
to be retired in the next ten years and the firm redeems Rs. 40 crore every
year.
The company
is faced with the problem of deciding how much to invest in up
gradation of its plans and technology. Capital investment up to a maximum of Rs. 100
crore is
required. The problem areas are
three-fold.
- The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
- The company does not want to issue new equity shares and its retained earning are not enough for such a large investment. Thus, the only option is raising debt.
- The company wants to limit its additional debt to a level that it can service without taking undue risks. With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.
Mr. Shortsighted, the company’s Finance Manager, is given the task of
determining the additional debt that the firm can raise. He thinks that the firm can raise Rs. 100
crore worth debt and service it even in years of recession. The company can raise debt at 15 per cent
from a financial institution. While
working out the debt capacity. Mr.
Shortsighted takes the following assumptions for the recession years.
a)
A maximum of 10 percent reduction in sales volume will
take place.
b)
A maximum of 6 percent reduction in sales price of cars
will take place.
Mr. Shorsighted prepares a projected income statement which is
representative of the recession years.
While doing so, he determines what he thinks are the “irreducible
minimum” expenditures under
recessionary
conditions. For him, risk of insolvency
is the main concern while designing the capital structure. To support his view, he presents the income
statement as shown in Exhibit 3.
Exhibit 3
projected Profit and Loss account
(Amount in Rs. Crore)
Sales
revenue (72,000 units x Rs. 2,35,000) 1,692.0
Operating
expenditure
Variable
cost :
Raw
material and manufacturing expenses 1,170.0
Variable
overheads 90.0
Total 1,260.0
Fixed cost
:
R
& D ---
Marketing
and advertising 15.0
Depreciation
187.5
Personnel
70.0
Total 272.5
Total
operating expenditure 1,532.5
EBIT 159.5
Financial expenses :
Interest on existing
Debentures 7.0
Interest on existing
institutional borrowings 10.0
Interest on commercial
loan 30.0
Interest on additional
debt 15.0 62.0
EBT 97.5
Tax (@ 35%) 34.1
EAT 63.4
Dividends --
Debt redemption (sinking fund
obligation) 50.0*
Contribution to reserves and surplus
13.4
 |
* Rs. 40
crore (existing debt) + Rs. 10 crore (additional debt)
Assumptions of Mr. Shorsighted
- R & D expenditure can be done away with till the economy picks up.
- Marketing and advertising expenditure can be reduced by 40 per cent.
- Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.
He goes with his worked out statement to the Director Finance, Mr.
Arthashatra, and advocates raising Rs. 100 crore of debt to finance the
intended capital investment. Mr.
Arthashatra does not feel comfortable
with the statements and calls for the company’s financial analyst, Mr.
Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and
points out that insolvency should not be the sole criterion while determining
the debt capacity of the firm. He points
out the following :
- Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
- Certain management policies like those relating to dividend payout, send out important signals to the investors. The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm. The firm should pay at least 10 per cent dividend in the recession years.
- Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations. This does not give the true picture. Net cash inflows should be used to determine the amount available for servicing the debt.
- Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession. It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on. Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed. From this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution). This will give a true picture of how the company’s cash flows will behave in recession conditions.
The management recognizes that the alternative suggested by Mr.
Longsighted rests on data, which are complex and require expenditure of time
and effort to obtain and interpret.
Considering the importance of capital structure design, the Finance
Director asks Mr. Longsighted to carry out his analysis. Information on the behaviour of cash flows
during the recession periods is taken into account.
The methodology
undertaken is as follows :
(a)
Important factors that affect cash flows (especially
contraction of cash flows), like sales volume, sales price, raw materials
expenditure, and so on, are identified and the analysis is carried out in terms
of cash receipts and cash expenditures.
(b)
Each factor’s behaviour (variation behaviour) in
adverse conditions in the past is studied and future expectations are combined
with past data, to describe limits (maximum favourable), most probable and
maximum adverse) for all the factors.
(c)
Once this information is generated for all the factors
affecting the cash flows, Mr. Longsighted comes up with a range of estimates of
the cash flow in future recession periods based on all possible combinations of
the several factors. He also estimates
the probability of occurrence of each estimate of cash flow.
Assuming
a normal distribution of the expected behaviour, the mean expected
value of net
cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard
deviation of Rs. 110 crore.
Keeping in mind the looming
recession and the uncertainty of the recession behaviour, Mr. Arthashastra
feels that the firm should factor a risk of cash inadequacy of around 5 per
cent even in the most adverse industry conditions. Thus, the firm should take up only that
amount of additional debt that it can service 95 per cent of the times, while
maintaining cash adequacy.
To maintain an annual dividend of 10
per cent, an additional Rs. 35 crore has to be kept aside. Hence, the expected available net cash inflow
is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Question:
Analyse the debt
capacity of the company.
CASE – 2 GREAVES LIMITED
Started as trading firm in
1922, Greaves Limited has diversified into manufacturing and marketing of high
technology engineering products and systems. The company’s mission is
“manufacture and market a wide range of high quality products, services and
systems of world class technology to the total satisfaction of customers in
domestic and overseas market.”
Over the years Greaves has brought to India state of the
art technologies in various engineering fields by setting up manufacturing
units and subsidiary and associate companies. The sales of Greaves Limited has
increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of
Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in
1997. Profits before interest and tax (PBIT) of the company increased from Rs
15 crore to Rs 83 crore in 1997. The market price of the company’s share has
shown ups and downs during 1990 to 1997. How has the company performed? The
following question need answer to fully understand the performance of the
company:
Exhibit 1
|
GREAVES LTD.
Profit and
Loss Account ending on 31 March
(Rupees in crore)
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
Sales
Raw Material and Stores
Wages and Salaries
Power and fuel
Other Mfg. Expenses
Other Expenses
Depreciation
Marketing and Distribution
Change in stock
|
214.38
170.67
13.54
0.52
0.61
11.85
1.85
4.86
1.18
|
253.10
202.84
15.60
0.70
0.49
15.48
1.72
5.67
3.10
|
287.81
230.81
18.03
1.11
0.88
16.35
1.52
5.14
4.93
|
311.14
213.79
37.04
3.80
2.37
25.54
4.62
5.17
0.48
|
354.25
245.63
37.96
4.43
2.36
31.60
5.99
9.67
- 1.13
|
521.56
379.83
48.24
6.66
3.57
41.40
8.53
10.81
5.63
|
728.15
543.56
60.48
7.70
4.84
45.74
9.30
12.44
11.86
|
801.11
564.35
69.66
9.23
5.49
48.64
11.53
16.98
- 5.87
|
|
Total Op Expenses
|
202.72
|
239.40
|
268.91
|
291.85
|
338.77
|
493.41
|
672.20
|
731.75
|
|
Operating Profit
Other Income
Non-recurring Income
|
11.61
2.14
1.30
|
13.70
3.69
2.28
|
18.90
4.97
0.10
|
19.29
4.24
10.98
|
15.48
7.72
16.44
|
28.15
14.35
0.46
|
55.95
11.35
0.52
|
69.36
13.08
1.75
|
|
PBIT
|
15.10
|
19.67
|
23.97
|
34.51
|
39.64
|
42.98
|
65.67
|
82.64
|
|
Interest
|
5.56
|
6.77
|
11.92
|
19.62
|
17.17
|
21.48
|
28.25
|
27.54
|
|
PBT
|
9.54
|
12.90
|
12.05
|
14.89
|
22.47
|
21.50
|
37.42
|
55.10
|
|
Tax
PAT
Dividend
Retained Earnings
|
3.00
6.54
1.80
4.74
|
3.60
9.30
2.00
7.30
|
4.90
7.15
2.30
4.85
|
0.00
14.89
4.06
10.83
|
4.00
18.47
7.29
11.18
|
7.00
14.50
8.58
5.92
|
8.60
28.82
12.85
15.97
|
15.80
39.30
14.18
25.12
|
Exhibit 2
|
GREAVES LTD.
Balance Sheet (Rupees in
crore)
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
ASSETS
Land and Building
Plant and Machinery
Other Fixed Assets
Capital WIP
Gross Fixed Assets
Less: Accu. Depreciation
Net Tangible Fixed Assets
Intangible Fixed Assets
|
3.88
11.98
3.64
0.09
19.59
12.91
6.68
0.21
|
4.22
12.68
4.14
0.26
21.30
14.56
6.74
0.19
|
4.96
12.98
4.38
10.25
23.57
15.79
7.78
0.05
|
21.70
33.49
5.18
11.27
71.64
19.84
51.80
4.40
|
30.82
50.78
6.95
34.84
123.39
25.74
97.65
22.03
|
39.71
75.34
8.53
14.37
137.95
33.90
104.05
22.45
|
42.34
92.49
8.87
13.92
157.62
42.56
115.06
20.04
|
43.07
104.45
10.35
14.36
172.23
53.87
118.86
21.11
|
|
Net Fixed Assets
|
6.89
|
6.93
|
7.83
|
56.20
|
119.68
|
126.50
|
135.10
|
139.97
|
|
Raw Materials
Finished Goods
Inventory
Accounts Receivable
Other Receivable
Investments
Cash and Bank Balance
Current Assets
Total Assets
LIABILITIES AND CAPITAL
Equity Capital
Preference Capital
Reserves and Surplus
|
5.26
29.37
34.63
38.16
32.62
3.55
8.36
117.32
124.21
9.86
0.20
27.60
|
6.91
33.72
40.63
53.24
40.47
14.95
8.91
158.20
165.13
9.86
0.20
32.57
|
7.26
38.65
45.91
67.97
49.19
15.15
12.71
190.93
198.76
9.86
0.20
37.42
|
21.05
53.39
74.44
93.30
24.54
27.58
13.29
233.15
289.35
18.84
0.20
100.35
|
28.13
52.26
80.39
122.20
59.12
73.50
18.38
353.59
473.27
29.37
0.20
171.03
|
44.03
58.09
102.12
133.45
64.32
75.01
30.08
404.98
531.48
29.44
0.20
176.88
|
53.62
69.97
123.59
141.82
76.57
75.07
33.46
450.51
585.61
44.20
0.20
175.41
|
50.94
64.09
115.03
179.92
107.31
76.45
48.18
526.89
666.86
44.20
0.20
198.79
|
|
Net Worth
|
37.66
|
42.63
|
47.48
|
119.39
|
200.60
|
206.52
|
219.81
|
243.19
|
|
Bank Borrowings
Institutional Borrowings
Debentures
Fixed Deposits
Commercial Paper
Other Borrowings
Current Portion of LT Debt
|
14.81
4.13
4.77
12.31
0.00
2.33
0.00
|
19.45
3.43
16.57
14.45
0.00
3.22
0.00
|
26.51
9.17
19.99
15.03
0.00
3.10
0.08
|
24.82
38.09
4.56
14.08
0.00
3.18
0.12
|
55.12
38.76
4.37
15.57
15.00
17.08
15.08
|
64.97
69.69
4.37
17.75
0.00
1.97
0.02
|
70.08
89.26
2.92
20.81
0.00
2.36
1.49
|
118.28
63.60
1.49
19.29
0.00
2.57
1.57
|
|
Borrowings
|
38.35
|
57.12
|
73.72
|
84.61
|
130.82
|
158.73
|
183.94
|
203.66
|
|
Sundry Creditors
Other Liabilities
Provision for tax, etc.
Proposed Dividends
Current Portion of LT Dept
|
37.52
5.70
3.18
1.80
0.00
|
49.40
10.16
3.82
2.00
0.00
|
59.34
10.70
5.14
2.30
0.08
|
77.27
3.59
0.31
4.06
0.12
|
113.66
1.42
4.40
7.29
15.08
|
148.13
1.99
7.70
8.58
0.02
|
153.63
1.70
12.19
12.85
1.49
|
179.79
3.04
21.43
14.18
1.57
|
|
Current Liabilities
|
48.20
|
65.38
|
77.56
|
85.35
|
141.85
|
166.42
|
181.86
|
220.01
|
|
TOTAL LIABILITIES
Additional information:
Share premium reserve
Revaluation reserve
Bonus equity capital
|
124.21
8.51
|
165.13
8.51
|
198.76
8.51
|
289.35
47.69
8.91
8.51
|
473.27
107.40
8.70
8.51
|
531.67
107.91
8.50
8.51
|
585.61
93.35
8.31
23.25
|
666.86
93.35
8.15
23.25
|
Exhibit 3
|
GREAVES LTD.
Share Price Data
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
Closing share price (Rs)
Yearly high share price (Rs)
Yearly low share price (Rs)
Market capitalization (Rs crore
EPS (Rs)
Book value (Rs)
|
27.19
29.25
26.78
65.06
4.79
35.64
|
34.74
45.28
21.61
67.77
6.82
37.22
|
121.27
121.27
34.36
236.56
9.73
42.54
|
66.67
126.33
48.34
274.84
1.93
57.75
|
78.34
90.00
42.67
346.35
2.66
40.61
|
71.67
100.01
68.34
316.87
7.16
64.98
|
47.5
90.00
45.00
210.02
5.03
45.35
|
48.25
85.00
43.75
213.34
9.01
50.73
|
Questions
- How profitable are its operations? What are the trends in it? How
has growth affected the profitability of the company?
- What factors have contributed to the operating performance of
Greaves Limited? What is the role of profitability margin, asset
utilisation, and non-operating income?
- How has Greaves performed in terms of return on equity? What is the
contribution of return on investment, the way of the business has been
financed over the period?
CASE – 3 CHOOSING BETWEEN
PROJECTS IN ABC COMPANY
ABC Company, has three projects to
choose from. The Finance Manager, the operations manager are discussing and
they are not able to come to a proper decision. Then they are meeting a
consultant to get proper advice. As a consultant, what advice you will give?
The cash flows are as follows. All amounts
are in lakhs of Rupees.
Project 1:
Duration 5 Years
Beginning cash outflow = Rs. 100
Cash inflows (at the end of the
year)
Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3
– Rs 30; Yr.4 – 10; Yr.5 – 10
Project 2:
Duration 5 Years
Beginning Cash outflow Rs. 3763
Cash inflows (at the end of the
year)
Yr. 1 – 200; Yr. 2 – 600; Yr. 3 –
1000; Yr. 4 – 1000; Yr. 5 – 2000.
Project 3:
Duration 15 Years
Beginning Cash Outflow – Rs. 100
Cash Inflows (at the end of the
year)
Yrs. 1 to 10 – Rs. 20 (for 10
continuous years)
Yrs. 11 to 15 – Rs. 10 (For the
next 5 years)
Question:
If the cost of capital is 8%, which
of the 3 projects should the ABC Company accept?
CASE – 4 STAR ENGINEERING COMPANY
Star Engineering Company
(SEC) produces electrical accessories like meters, transformers, switchgears,
and automobile accessories like taximeters and speedometers.
SEC buys the electrical components, but manufactures all
mechanical parts within its factory which is divided into four production
departments Machining, Fabrication, Assembly, and Painting—and three service
departments—Stores, Maintenance, and Works Office.
Though the company prepared annual budgets and monthly
financial statements, it had no formal cost accounting system. Prices were
fixed on the basis of what the market can bear. Inventory of finished stocks
was valued at 90 per cent of the market price assuming a profit margin of 10
per cent.
In March, the company received a trial order from a
government department for a sample transformer on a cost-plus-fixed-fee basis.
They took up the job (numbered by the company as Job No 879) in early April and
completed all manufacturing operations before the end of the month.
Since Job No 879 was very different from the type of
transformers they had manufactured in the past, the company did not have a
comparable market price for the product. The purchasing officer of the
government department asked SEC to submit a detailed cost sheet for the job
giving as much details as possible regarding material, labour and overhead
costs.
SEC, as part of its routine financial accounting system,
had collected the actual expenses for the month of April, by 5th of May. Some
of the relevant data are given in Exhibit A.
The
company tried to assign directly, as many expenses as possible to the
production departments. However, It was not possible in all cases. In many
cases, an overhead cost, which was common to all departments had to be
allocated to the various departments using some rational basis. Some of the
possible bases were collected by SEC’s accountant. These are presented in
Exhibit B.
He also designed a format to allocate the overhead to all
the production and service departments. It was realized that the expenses of
the service departments on some rational basis. The accountant thought of
distributing the service departments’ costs on the following basis:
a. Works office costs on the basis of direct
labour hours.
b. Maintenance costs on the basis of book value
of plant and machinery.
c. Stores department costs on the basis of
direct and indirect materials used.
The accountant who had to visit the company’s banker,
passed on the papers to you for the required analysis and cost computations.
REQUIRED
Based on the data given in Exhibits A and B, you are
required to:
- Complete the attached “overhead cost distribution sheet” (Exhibit
C).
Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis. - Calculate the overhead cost (per direct labour hour) for each of the
four producing departments. This should include share of the service
departments’ costs.
- Do you agree with:
a. The procedure adopted by the company for the distribution of overhead costs?
b. The choice of the base for overhead absorption, i.e. labour-hour rate?
Exhibit A
|
STAR ENGINEERING COMPANY
Actual Expenses(Manufacturing Overheads)
for April
|
|||||||||||
|
|
RS
|
RS
|
|||||||||
|
Indirect Labour
and Supervisions:
Machining
Fabrication
Assembly
Painting
Stores
Maintenance
Indirect Materials
and Supplies
Machining
Fabrication
Assembly
Painting
Maintenance
Others
Factory Rent
Depreciation of
Plant and Machinery
Building Rates and
Taxes
Welfare Expenses
(At 2 per cent of
direct labour wages and Indirect labour and supervision)
Power
(Maintenance—Rs
366; Works Office Rs 2,200, Balance to Producing Departments)
Works Office
Salaries and Expenses
Miscellaneous
Stores Department Expenses
 |
33,000
22,000
11,000
7,000
44,000
32,700
2,200
1,100
3,300
3,400
 2,800
1,68,000
44,000
2,400
19,400
68,586
1,30,260
1,190
 |
1,49,700
12,800
4,33,930
5,96,930
 |
|||||||||
Exhibit B
|
STAR ENGINEERING COMPANY
Projected Operation Data for the Year
|
||||||
|
Department
|
Area
(sq.m)
|
Original Book of Plant & Machinery
Rs
|
Direct Materials
Budget
Rs
|
Horse
Power
Rating
|
Direct
Labour
Hours
|
Direct
Labour
Budget
Rs
|
|
Machining
Fabrication
Assembly
Painting
Stores
Maintenance
Works Office
Total
|
13,000
11,000
8,800
6,400
4,400
2,200
2,200
48,000
|
26,40,000
13,20,000
6,60,000
2,64,000
1,32,000
1,98,000
68,000
52,80,000
|
62,40,000
21,60,000
10,80,000
94,80,000
|
20,000
10,000
1,000
2,000
33,000
|
14,40,000
5,28,000
7,20,000
3,30,000
30,18,000
|
52,80,000
25,40,000
13,20,000
6,60,000
99,00,000
|
Note
The estimates given
in this exhibit are for the budgeted year January to December where as the
actuals in Exhibit A are just one month—April of the budgeted year.
|
Exhibit C
STAR ENGINEERING COMPANY
Actual Overhead Distribution Sheet for
April
|
|||||||||||
|
Departments
Overhead Costs
|
Production Departments
|
Service Departments
|
Total Amount Actuals for April (Rs)
|
Basis for Distribution
|
|||||||
|
|
|
|
|
|
|
|
|||||
|
A. Allocation of
Overhead to all departments
A.1 Indirect Labour and Supervision
|
|
|
|
|
|
|
|
1,49,700
|
|
||
|
A.2 Indirect materials and supplies
|
|
|
|
|
|
|
|
12,800
|
|
||
|
A.3 Factory Rent
|
|
|
|
|
|
|
|
1,68,000
|
|
||
|
A.4 Depreciation of Plant and Machinery
|
|
|
|
|
|
|
|
44,000
|
|
||
|
A.5 Building Rates and Taxes
|
|
|
|
|
|
|
|
2,400
|
|
||
|
A.6 Welfare Expenses
|
|
|
|
|
|
|
|
19,494
|
|
||
|
A.7 Power
|
|
|
|
|
|
|
|
68,586
|
|
||
|
A.8 Works Office Salaries and Expenses
|
|
|
|
|
|
|
|
1,30,260
|
|
||
|
A.9 Miscellaneous Stores Expenses
|
|
|
|
|
|
|
|
1,190
|
|
||
|
A. Total (A.1 to A.9)
|
|
|
|
|
|
|
|
5,96,430
|
|
||
|
B. Reallocation of Service Departments
Costs to Production Departments
|
|
|
|
|
|
|
|
|
|
||
|
B.1 Distribution of Works Office Costs
|
|
|
|
|
|
|
|
|
|
||
|
B.2 Distribution of Maintenance
Department’s Costs
|
|
|
|
|
|
|
|
|
|
||
|
B.3 Distribution of Stores Department’s
Costs
|
|
|
|
|
|
|
|
|
|
||
|
Total Charged to Producing
C. Departments (A+B)
|
|
|
|
|
|
|
|
5,96,430
|
|
||
|
D. Labour Hours Actuals for April
|
1,20,000
|
44,000
|
60,000
|
27,500
|
|
|
|
|
|
||
|
E. Overhead Rate/Per Hour (D)
|
|
|
|
|
|
|
|
|
|
||
Case 5: EASTERN MACHINES COMPANY
Raj,
who was in charge production felt that there are many problems to be attended
to. But Quality Control was the main problem, he thought, as he found there
were more complaints and litigations as compared to last year. With the demand
increasing, he does not want to take any chances.
So he went down
to assembly line, but was greeted by an unfamiliar face. He introduced himself.
Raj: I am
in charge of checking the components, which we use, when we assemble the
machines for customers. For most of the components, suppliers are very reliable
and we assume that there will not be any problem. When we generally test the
end product, we don’t have failures.
Namdeo: I
am Namdeo. I was in another dept. and has been transferred recently to this
dept.
Raj: Recently we have been having
problems, and there has been some complaint or other about the machines we have
supplied. I am worried and would like to check the components used. I would
like to avoid lot of expensive rework.
Namdeo:
But it would be very expensive to test every one of them. It will take at least
half an hour for each machine. I neither have the staff nor the time. It will
be rather pointless as majority of them will pass the test.
Raj:
There has been more demand than supply for these machines in last 2 years. We
have been buying many components from many suppliers. We have been producing
more with extra shifts. We are trying to capture the market and increase our
market share.
Namdeo:
We order for components from different places, and sometimes we do not have
time to check all. There is a time lag between order and supply of components,
and we cannot wait as production will stop. We use whatever comes soon as we
want to complete our orders.
Raj: Oh!
Obviously we need some kind of checking. Some sampling technique to check the
quality of the components. We need to get a sample from each shipment from our
component suppliers. But I do not know how many we should test.
Namdeo:
We should ask somebody from our statistics dept. to attend to this problem.
As a
Statistician, advice what kind of Sampling schemes can we consider, and what
factors will influence choice of scheme. What are the questions we should ask
Mr. Namdeo, who works in the assembly line?
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