Finance Case studies

Case studies on Finance

1. Charitha, after acquiring a degree in Hotel Management and Business Administration, took over her family food processing company of manufacturing pickles, jams and squashes. The business had been established by her great grandmother and was doing reasonably well. However, the fixed operating costs of the business were high and the cash flow position was weak. She wanted to undertake modernization of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a finance consultant, who told her that approximately ? 50 lakhs would be required for undertaking the modernization and expansion programme. He also informed her that the stock market was going through a bullish phase. Keeping the above considerations in mind, name the source of finance charitha should not choose for financing the modernization and expansion of her food processing business. Give one reason in support of your answer. Case Study - 1

2. Charitha should not choose debt capital for financing the modernization and expansion of her food processing business because the fixed operating cost of the company is high. It cannot take the additional burden of fixed commitments in terms of payment of interest and repayment of capital by issuing debt. Answer

3. ‘Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organization and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken loan of 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement . The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company. Quoting the lines from the above discussion identify and explain any four such factors. Case Study - 2

4. 1. ‘It has been consistently earning good profits for many years’. It relates to the stability of earnings of the company as a company having stable income is always in a better position to pay higher dividend. Companies having inconsistent and unstable earnings prefer not to declare a high rate of dividend . 2.   ‘There is availability of enough cash in the company’. The above line reflects the cash flow position of the business which is another major factor influencing the dividend decision. In order to declare higher rate of dividend, the company should have enough cash. A company remaining short of cash finds it difficult to pay dividend. Answer

5. 3. ‘It has many shareholders who prefer to receive a regular income from their investments ’. Shareholder’s preference is highlighted in the above statement. The management of the company should keep in mind the preferences of shareholders while they declare dividend. Some shareholders prefer to receive a regular income in the from of dividend. 4.   ‘It has taken a loan of 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend’. The above statement highlights contractual constraints due to which the company is bound by certain restrictions on the payment of dividend. If a company has taken loan, the lender may impose few restrictions on the declaration of dividend in future. The dividend policy of the firm should not violate the terms and conditions of the loan agreement. Answer

6. Storage Solution Ltd. is a large warehousing network company operating. through a chain of warehouses at 40 different locations across India. The company now intends to undertake computerization of its owned ware houses as it seeks to provide better value added and cost effective solutions for scientific storage and preservation services to the market participants dealing in agricultural products including farmers, traders, etc. In context of the above case: 1. How is the decision to undertake computerization of owned warehouses likely to affect the fixed capital requirements of its business? 2. Name any two sources that company may use to finance the implementation of this plan. Case Study - 3

7. 1. The decision to undertake computerization of owned warehouses will increase the fixed capital requirements of its business both in present and future as after sometime, the technology being used will become obsolete and need up gradation. 2. The company may use retained earnings and take loans from financial institutions to implement this plan. Answer

8. Wireworks Ltd. is a company manufacturing different kinds of wires. Despite fierce competition in the industry, it has been able to maintain stability in its earnings and as a policy, uses 30% of its profits to distribute dividends. The small investors are very happy with the company as it has been declaring high and stable dividend over past five years. In context of the above case: 1. State any one reason because of which the company has been able to declare high dividend. 2. Why do you think small investors are happy with the company for declaring stable dividend? Case Study - 4

9. 1. Stability in earnings: The company has been able to declare high dividend because its earnings are stable. 2. The small investors are happy with the company for declaring stable dividend as they enjoy a regular income on their investment. Answer

10. 1. Ravi wants to open a restaurant and is looking for a proper place to open it. He is also thinking of the amount of funds which will be required for some of the set ups like food making and storing machineries .

11. Investment decision

12. 2. Ravindra is running a toy manufacturing company. He thinks of expanding his business. He meets his uncle and asks him for a sum of Rs. 2 crores. His uncle asks for a high interest rate. He agrees to it and promises to pay the money back within 2 years.

13. Financing decision

14. 3 . A leading marketing company has decided to raise money through the stock market. It issued IPO in the market last year. The company knows there are going to be sizeable floatation costs involved in it.

15. Financing decision

16. 4. A company which has 10 branches in the city has decided to open its 11th branch. The company has taken this branch on rent. In this way the company has saved money which it would otherwise have invested in purchasing it.

17. Investment decision

18. 5 . A company has decided to plough back the money in the form of retained earnings. This decision will save the company at least ‘50 crores. These funds can be used for the long term growth of the business.

19. Dividend decision

20. 6. ‘Rakesh Iron Works’ has been doing a great job in the area of manufacturing iron. Within two years the company has reached among the top 3 performers of the industry. The company has made a lot of profit and decided to distribute its profits to the shareholders who stood with it during the hard times.

21. Dividend decision

22. 7 . Raj an Powerlooms, a leading company in its industry has decided not to issue equity shares this year as they want to keep the management control in their own hands. The company’s management already has only 60% shares in the company. So it would avoid any further dilution of its stake in the company. Company would prefer taking loan.

23. Financing decision

24. 8. A company has decided to issue debentures as it knows that it will not lead to any additional costs. These debentures will be carrying a very low rate of return for the debenture holders but will be a surety for them to get their money back. Investors who want financial safety would like to go for this option as there will be an assured definite return.

25. Financing decision

26. 9 . Shuddhi Steel Manufacturers has been a brand but due to some HR related issues it came into limelight for bad reasons. The issue was related with non-payment of salaries of the employees but now the company wants to sort this issue out. The company has decided to pay the salary of all the employees which were not paid their emoluments since last six months. The company has done so to avoid any image spoiling to take place.

27. Investment decision

28. 10. A soft drink company has decided to run an advertisement campaign. It will hire many famous Bollywood celebrities for this purpose. The advertisement campaign could involve more than ‘150 crores. Every major newspaper is mentioning about it.

29. Investment decision