Case let 1
This case
provides the opportunity to match financing alternatives with the needs of
different companies.
It allows the
reader to demonstrate a familiarity with different types of securities. George
Thomas was
finishing some
weekend reports on a Friday afternoon in the downtown office of Wishart and
Associates,
an investment-banking firm.
Meenda, a partner in the firm, had not been in the New York office since
Monday. He was
on a trip through Pennsylvania, visiting five potential clients, who were
considering the
flotation of
securities with the assistance of Wishart and Associates. Meenda had called the
office on
Wednesday and
told George’s secretary that he would cable his recommendations on Friday
afternoon.
George was
waiting for the cable. George knew that Meenda would be recommending different
types of
securities for
each of the five clients to meet their individual needs. He also knew Meenda
wanted him to
call each of the
clients to consider the recommendations over the weekend. George was prepared
to make
these calls as
soon as the cable arrived. At 4:00 p.m. a secretary handed George the following
telegram.
George Thomas,
Wishart and Associates STOP Taking advantage of offer to go skiing in Poconos
STOP
Recommendations
as follows: (1) common stock, (2) preferred stock, (3) debt with warrants, (4)
convertible
bonds, (5) callable debentures STOP. See you Wednesday STOP Meenda. As George
picked
up the phone to
make the first call, he suddenly realized that the potential clients were not
matched with
the investment
alternatives. In Meenda’s office, George found folders on each of the five
firms seeking
financing. In
the front of each folder were some handwritten notes that Meenda had made on
Monday
before he left.
George read each of the notes in turn. APT, Inc needs $8 million now and $4
million in
four years.
Packaging firm with high growth rate in tri-state area. Common stock trades
over the counter.
Stock is
depressed but should rise in year to 18 months. Willing to accept any type of
security. Good
management.
Expects moderate growth. New machinery should increase profits substantially.
Recently
retired $7
million in debt. Has virtually no debt remaining except short-term obligations.
Sandford
Enterprises
Needs $16
million. Crusty management. Stock price depressed but expected to improve.
Excellent growth
and profits
forecast in the next two year. Low debt-equity ratio, as the firm has record of
retiring debt
prior to
maturity. Retains bulk of earnings and pays low dividends. Management not interested
in
surrendering
voting control to outsiders. Money to be used to finance machinery for plumbing
supplies.
Sharma
Brothers., Inc.
Needs $20
million to expand cabinet and woodworking business. Started as family business
but now has
1200 employees,
$50 million in sales, and is traded over the counter. Seeks additional
shareholder but not
willing to stock
at discount. Cannot raise more than $12 million with straight debt. Fair
management.
Good growth
prospects. Very good earnings. Should spark investor’s interest. Banks could be
willing to
lend money for
long-term needs.
Sacheetee Energy
Systems
The firm is well
respected by liberal investing community near Boston area. Sound growth
company.
Stock selling
for $16 per share. Management would like to sell common stock at $21 or more
willing to
Examination Paper
Semester I: Financial Management
IIBM Institute of
Business Management
use debt to
raise $ 28 million, but this is second choice. Financing gimmicks and chance to
turn quick
profit on
investment would appeal to those likely to invest in this company.
Ranbaxy Industry
Needs $25
million. Manufactures boat canvas covers and needs funds to expand operations.
Needs longterm
money. Closely
held ownership reluctant surrender control. Cannot issue debt without
permission of
bondholders and
First National Bank of Philadelphia. Relatively low debt-equity ratio.
Relatively high
profits. Good
prospects for growth Strong management with minor weaknesses in sales and
promotion
areas. As George
was looking over the folders, Meenda’s secretary entered the office. George
said, “Did
Meenda leave any
other material here on Monday except for these notes?” She responded, “No,
that’s it,
but I think
those notes should be useful. Meenda called early this morning and said that he
verified the
facts in the
folders. He also said that he learned nothing new on the trip and he sort of
indicated that, he
had wasted his
week, except of course, that he was invited to go skiing at the company lodge
up there”.
George pondered
over the situation. He could always wait until next week, when he could be sure
that he
had the right
recommendations and some of the considerations that outlined each client’s
needs and
situation. If he
could determine which firm matched each recommendation, he could still call the
firms by
6:00 P.M. and
meet the original deadline. George decided to return to his office and match
each firm with
the appropriate
financing.
Question:
1. Which type of
financing is appropriate to each firm?
2. What types of
securities must be issued by a firm which is on the growing stage in order to
meet
the financial
requirements?
Case let 2
This case has
been framed in order to test the skills in evaluating a credit request and
reaching a correct
decision.
Perluence International is large manufacturer of petroleum and rubber-based
products used in a
variety of
commercial applications in the fields of transportation, electronics, and heavy
manufacturing.
In the
northwestern United States, many of the Perluence products are marketed by a
wholly-owned
subsidiary,
Bajaj Electronics Company. Operating from a headquarters and warehouse facility
in San
Antonio, Strand
Electronics has 950 employees and handles a volume of $85 million in sales
annually.
About $6 million
of the sales represents items manufactured by Perluence. Gupta is the credit
manager at
Bajaj
electronics. He supervises five employees who handle credit application and
collections on 4,600
accounts. The
accounts range in size from $120 to $85,000. The firm sells on varied terms,
with 2/10, net
30 mostly. Sales
fluctuate seasonally and the average collection period tends to run 40 days.
Bad-debt
losses are less
than 0.6 per cent of sales. Gupta is evaluating a credit application from Booth
Plastics, Inc.,
a wholesale
supply dealer serving the oil industry. The company was founded in 1977 by Neck
A. Booth
and has grown
steadily since that time. Bajaj Electronics is not selling any products to
Booth Plastics and
had no previous
contact with Neck Booth. Bajaj Electronics purchased goods from Perluence
International
under the same terms and conditions as Perluence used when it sold to
independent
customers.
Although Bajaj Electronics generally followed Perluence in setting its prices,
the subsidiary
operated
independently and could adjust price levels to meet its own marketing
strategies. The Perluence’s
cost-accounting
department estimated a 24 per cent markup as the average for items sold to
Pucca
Electronics.
Bajaj Electronics, in turn, resold the items to yield a 17 per cent markup. It
appeared that
these
percentages would hold on any sales to Booth Plastics. Bajaj Electronics
incurred out-of pocket
expenses that
were not considered in calculating the 17 per cent markup on its items. For
example, the
contact with
Booth Plastics had been made by James, the salesman who handled the Glaveston
area.
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Semester I: Financial Management
IIBM Institute of
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James would
receive a 3 per cent commission on all sales made Booth Plastics, a commission
that would
be paid whether
or not the receivable was collected. James would, of course, be willing to
assist in
collecting any
accounts that he had sold. In addition to the sales commission, the company
would incur
variable costs
as a result of handling the merchandise for the new account. As a general
guideline,
warehousing and
other administrative variable costs would run 3 per cent sales. Gupta Holmstead
approached all
credit decisions in basically the same manner. First of all, he considered the
potential
profit from the
account. James had estimated first-year sales to Booth Plastics of $65,000.
Assuming that
Neck Booth took
the, 3 per cent discount. Bajaj Electronics would realize a 17 per cent markup
on these
sales since the
average markup was calculated on the basis of the customer taking the discount.
If Neck
Booth did not
take the discount, the markup would be slightly higher, as would the cost of
financing the
receivable for
the additional period of time. In addition to the potential profit from the
account, Gupta was
concerned about
his company’s exposure. He knew that weak customers could become bad debts at
any
time and
therefore, required a vigorous collection effort whenever their accounts were
overdue. His
department
probably spent three times as much money and effort managing a marginal account
as
compared to a
strong account. He also figured that overdue and uncollected funds had to be
financed by
Bajaj
Electronics at a rate of 18 per cent. All in all, slow -paying or marginal
accounts were very costly to
Bajaj
Electronics. With these considerations in mind, Gupta began to review the
credit application for
Booth Plastics.
Question:
1. How would you
judge the potential profit of Bajaj Electronics on the first year of sales to
Booth
Plastics and
give your views to increase the profit.
2. Suggestion
regarding Credit limit. Should it be approved or not, what should be the amount
of
credit limit
that electronics give to Booth Plastics.
·Detailed
information should form the part of your answer (Word limit 200-250 words).
1. Honey Well
Company is contemplating to liberalize its collection effort. Its present sales
are Rs.
10 lakh, its
average collection period is 30 days, its expected variable cost to sales ratio
is 85 per
cent and its bad
debt ratio is 5 per cent. The Company’s cost of capital is 10 per cent and tax
are
is 40 per cent.
He proposed liberalization in collection effort increase sales to Rs. 12 lakh
increases
average collection period by 15 days, and increases the bad debt ratio to 7
percent.
Determine the
change in net profit.
Case
let 3
Trust them with
knee-jerk reactions,” said Vikram Koshy, CEO, Delta Software India, as he
looked at the
quarterly report of
Top Line Securities, a well-known equity research firm. The firm had announced
a
downgrade of Delta, a
company listed both on Indian bourses and the NASDAQ. The reason? “One out
of every six
development engineers in the company is likely to be benched during the remaining
part of
the year.” Three
analysts from Top Line had spent some time at Delta three weeks ago. Koshy and
his
team had explained
how benching was no different from the problems of excess inventory, idle time,
and
surplus capacity that
firms in the manufacturing sector face on a regular basis, “Delta has
witnessed a
scorching pace of 30
per cent growth during the last five years in a row,” Koshy had said,
“What is
happening is a
corrective phase.” But, evidently, the analysts were unconvinced.
Why
Bench?
Clients suddenly
decide to cut back on IT spends Project mix gets skewed, affecting work
allocation
Employee productivity
is set to fall, creating slack working conditions. High degree of job
specialization
leads to redundancy
What
are the options?
Quickly cut costs in
areas which are non-core look for learning’s from the manufacturing sector
Focus on
alternative markets
like Europe and Japan Move into products, where margins are better. Of course,
the
Top Line report went
on to cite several other “signals,” as it said: the rate of annual
hike in salaries at
Delta would come down
to 5 per cent (from between 20 and 30 per cent last year); the entry-level
intake
of engineers from
campuses in June 2001, would decline to 5 per cent (unlike the traditional 30
per cent
addition to manpower
every year); and earnings for the next two years could dip by between 10 and 12
per cent. And the
loftiest of them all: “The meltdown at Nasdaq is unlikely to reverse in
the near future.”
“Some of the
signals are no doubt valid. And ominous,” said Koshy, addressing his
A-Team, which had
assembled for the
routine morning meeting. “But, clearly, everyone is reading too much into
this business
of benching. In fact,
benching is one of the many options that our principals in the US have been
pursuing
as part of cutting
costs right since September, 2000. They are also expanding the share of
off-shore jobs.
Five of our
principals have confirmed that they would outsource more from Delta in
India-which is likely
to hike their
billings by about 30 per cent. At one level, this is an opportunity for us. At
another, of
course, I am not sure
if we should be jubilant, because they have asked for a 25-30 per cent cut in
billing
rates. Our margins
will take a hit, unless we cut costs and improve productivity.”
“Productivity is clearly a
matter of priority
now,” said Vivek Varadan, Vice-President (Operations). “If you
consider benching as a
non-earning mode, we
do have large patches of it at Delta. As you are aware, it has not been easy to
secure 70 per cent
utilization of our manpower, even in normal times. I think we need to look at
why we
have 30 per cent
bench before examining how to turn it into an asset.” “There are
several reasons,”
remarked Achyut
Patwardhan, Vice-President (HR). “And a lot of it has to do with the
nature of our
business, which is
more project-driven than product-driven. When you are managing a number of
overseas and domestic
projects simultaneously, as we do at Delta, people tend to go on the bench.
They
wait, as they
complete one project, and are assigned the next. There are problems of
coordination between
projects, related to
the logistics of moving people and resources from one customer to another. In
fact, I
am fine-tuning our
monthly manpower utilization report to provide a breakup of bench costs into
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Semester I: Human Resource Management
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Management
specifics-leave
period, training programmes, travel time, buffers, acclimatization period et
al.” “It would
be worthwhile
following the business model used by US principal Techno Inc,” said Aveek
Mohanty,
Director (Finance).
“The company has a pipeline of projects, but it does not manage project by
project.
What it does is to
slice each project into what it calls ‘activities’. For example, communication
networking; user
interface development; scheduling of processes are activities common to all
projects.
People move from one
project to another. It is somewhat like the Activity Based Costing. It throws
up the
bench time
straightaway, which helps us control costs and revenue better.” “I
also think we should reduce
our dependence on
projects and move into products,” said Praveen Kumar, Director
(Marketing). “That is
where the opportunity
for brand building lies. In fact, now is the time to get our technology guys
involved
in marketing.
Multiskilling helps reduce the bench time.” “Benching has an analogy
in the manufacturing
sector,” said
Girish Shahane, Vice-President (Services). “We could look for learning’s
there. Many firms
have adopted Just-In-Time
(JIT) inventory as part of eliminating idle time. It would be worthwhile
exploring the
possibility of JIT. But the real learning lies in standardization of work. It
is linked to what
Mohanty said about
managing by activities.” “At a broader level, I see several other
opportunities,” said
Koshy, “We can
fill in the space vacated by US firms and move up the value chain. But before
we do so,
Delta should
consolidate its position as the premier outsourcing centre. Since there are
only two ways in
which we can generate
revenue-sell expertise or sell products-we should move towards a mix of both.
Tie-ups with global
majors will help. Now is the time to look beyond the US and strike alliances
with
firms in Europe- and
also Japan-as part of developing new products for global markets.”
Questions
1. Should benching be
a matter of concern at Delta?
2. What are the risks
involved in moving from a project-centric mode to a mix of projects and
products?
Case
let 4
The contexts in which
human resources are managed in today’s organizations are constantly, changing.
No longer do firms
utilize one set of manufacturing processes, employ a homogeneous group of loyal
employees for long
periods of time or develop one set way of structuring how work is done and
supervisory
responsibility is assigned. Continuous changes in who organizations employ and
what these
employees do require
HR practices and systems that are well conceived and effectively implemented to
ensure high
performance and continued success.
1. Automated technologies
nowadays require more technically trained employees possessing multifarious
skills to repair,
adjust or improve existing processes. The firms can’t expect these employees
(Gen X
employees, possessing
superior technical knowledge and skills, whose attitudes and perceptions toward
work are
significantly different from those of their predecessor organizations: like
greater self control,
less interest in job
security; no expectations of long term employment; greater participation urge
in work
activities, demanding
opportunities for personal growth and creativity) to stay on without attractive
compensation packages
and novel reward schemes.
2. Technology driven
companies are led by project teams, possessing diverse skills, experience and
expertise. Flexible
and dynamic organizational structures are needed to take care of the
expectations of
managers, technicians
and analysts who combine their skills, expertise and experience to meet
changing
customer needs and
competitive pressures.
3. Cost cutting efforts
have led to the decimation of unwanted layers in organizational hierarchy in
recent
times. This, in turn,
has brought in the problem of managing plateau employees whose careers seem to
have been hit by the
delivering process. Organizations are, therefore, made to find alternative
career paths
for such employees.
Examination Paper
Semester I: Human Resource Management
IIBM Institute of Business
Management
4. Both young and old
workers, these days, have values and attitudes that stress less loyalty to the
company and more
loyalty to oneself and one’s career than those shown by employees in the past,
Organizations,
therefore, have to devise appropriate HR policies and strategies so as to
prevent the flight
of talented employees
Question
1. Discuss
that technological breakthrough has brought a radical changes in HRM.
Case let 5
The war on drugs is an expensive
battle, as a great deal of resources go into catching those who buy or
sell illegal drugs on the black
market, prosecuting them in court, and housing them in jail. These costs
seem particularly exorbitant when
dealing with the drug marijuana, as it is widely used, and is likely no
more harmful than currently legal
drugs such as tobacco and alcohol. There’s another cost to the war on
drugs, however, which is the
revenue lost by governments who cannot collect taxes on illegal drugs. In a
recent study for the Fraser
Institute, Canada, Economist Stephen T. Easton attempted to calculate how
much tax revenue the government
of the country could gain by legalizing marijuana. The study estimates
that the average price of 0.5
grams (a unit) of marijuana sold for $8.60 on the street, while its cost of
production was only $1.70. In a
free market, a $6.90 profit for a unit of marijuana would not last for long.
Entrepreneurs noticing the great
profits to be made in the marijuana market would start their own grow
operations, increasing the supply
of marijuana on the street, which would cause the street price of the
drug to fall to a level much
closer to the cost of production. Of course, this doesn’t happen because the
product is illegal; the prospect
of jail time deters many entrepreneurs and the occasional drug bust ensures
that the supply stays relatively
low. We can consider much of this $6.90 per unit of marijuana profit a
risk-premium for participating in
the underground economy. Unfortunately, this risk premium is making a
lot of criminals, many of whom
have ties to organized crime, very wealthy. Stephen T. Easton argues that
if marijuana was legalized, we
could transfer these excess profits caused by the risk premium from these
grow operations to the
government: If we substitute a tax on marijuana cigarettes equal to the
difference
between the local production cost
and the street price people currently pay – that is, transfer the revenue
from the current producers and
marketers (many of whom work with organized crime) to the government,
leaving all other marketing and
transportation issues aside we would have revenue of (say) $7 per [unit].
If you could collect on every
cigarette and ignore the transportation, marketing, and advertising costs, this
comes to over $2 billion on
Canadian sales and substantially more from an export tax, and you forego the
costs of enforcement and deploy
your policing assets elsewhere. One interesting thing to note from such a
scheme is that the street price
of marijuana stays exactly the same, so the quantity demanded should
remain the same as the price is
unchanged. However, it’s quite likely that the demand for marijuana would
change from legalization. We saw
that there was a risk in selling marijuana, but since drug laws often
target both the buyer and the
seller, there is also a risk (albeit smaller) to the consumer interested in
buying marijuana. Legalization
would eliminate this risk, causing the demand to rise. This is a mixed bag
from a public policy standpoint:
Increased marijuana use can have ill effects on the health of the
population but the increased
sales bring in more revenue for the government. However, if legalized,
governments can control how much
marijuana is consumed by increasing or decreasing the taxes on the
product. There is a limit to
this, however, as setting taxes too high will cause marijuana growers to sell
on
the black market to avoid
excessive taxation. When considering legalizing marijuana, there are many
economic, health, and social
issues we must analyze. One economic study will not be the basis of
Canada’s public policy decisions,
but Easton’s research does conclusively show that there are economic
benefits in the legalization of
marijuana. With governments scrambling to find new sources of revenue to
pay for important social
objectives such as health care and education expect to see the idea raised in
Parliament sooner rather than
later.
Examination Paper Semester I: Managerial
Economics
IIBM Institute of Business Management
Questions
1. Plot the demand schedule and
draw the demand curve for the data given for Marijuana in the case
above.
2. On the basis of the analysis
of the case above, what is your opinion about legalizing marijuana in
Canada?
Case let 6
Companies that attend to
productivity and growth simultaneously manage cost reductions very differently
from companies that focus on cost
cutting alone and they drive growth very differently from companies
that are obsessed with growth
alone. It is the ability to cook sweet and sour that under grids the
remarkable performance of
companies likes Intel, GE, ABB and Canon. In the slow growth electrotechnical
business, ABB has doubled its
revenues from $17 billion to $35 billion, largely by exploiting
new opportunities in emerging
markets. For example, it has built up a 46,000 employee organization in
the Asia Pacific region, almost
from scratch. But it has also reduced employment in North America and
Western Europe by 54,000 people.
It is the hard squeeze in the north and the west that generated the
resources to support ABB’s
massive investments in the east and the south. Everyone knows about the
staggering ambition of the
Ambanis, which has fuelled Reliance’s evolution into the largest private
company in India. Reliance has
built its spectacular rise on a similar ability to cook sweet and sour. What
people may not be equally
familiar with is the relentless focus on cost reduction and productivity growth
that pervades the company.
Reliance’s employee cost is 4 per cent of revenues, against 15-20 per cent of
its competitors. Its sales and
distribution cost, at 3 per cent of revenues, is about a third of global
standards. It has continuously
pushed down its cost for energy and utilities to 3 per cent of revenues,
largely through 100 per cent
captive power generation that costs the company 4.5 cents per kilowatt-hour;
well below Indian utility costs,
and about 30 per cent lower than the global average. Similarly, its capital
cost is 25-30 per cent lower than
its international peers due to its legendary speed in plant commissioning
and its relentless focus on
reducing the weighted average cost of capital (WACC) that, at 13 per cent, is
the lowest of any major Indian
firm.
A Bias for
Growth
Comparing major Indian companies
in key industries with their global competitors shows that Indian
companies are running a major
risk. They suffer from a profound bias for growth. There is nothing wrong
with this bias, as Reliance has shown.
The problem is most look more like Essar than Reliance. While
they love the sweet of growth,
they are unwilling to face the sour of productivity improvement.
Nowhere is this more amply borne
out than in the consumer goods industry where the Indian giant
Hindustan Lever has consolidated
to grow at over 50 per cent while its labour productivity declined by
around 6 per cent per annum in
the same period. Its strongest competitor, Nirma, also grew at over 25 per
cent per annum in revenues but
maintained its labour productivity relatively stable. Unfortunately,
however, its return on capital
employed (ROCE) suffered by over 17 per cent. In contrast, Coca Cola,
worldwide, grew at around 7 per
cent, improved its labour productivity by 20 per cent and its return on
capital employed by 6.7 per cent.
The story is very similar in the information technology sector where
Infosys, NIIT and HCL achieve
rates of growth of over 50 per cent which compares favorably with the
world’s best companies that grew
at around 30 per cent between 1994-95. NIIT, for example, strongly
believes that growth is an
impetus in itself. Its focus on growth has helped it double revenues every two
years. Sustaining profitability
in the face of such expansion is an extremely challenging task. For now,
this is a challenge Indian
InfoTech companies seem to be losing. The ROCE for three Indian majors fell
by 7 per cent annually over
1994-96. At the same time IBM Microsoft and SAP managed to improve this
ratio by 17 per cent. There are
some exceptions, however. The cement industry, which has focused on
productivity rather than on
growth, has done very well in this dimension when compared to their global
Examination Paper Semester I: Managerial
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IIBM Institute of Business Management
counterparts. While Mexico’s
Cemex has grown about three times fast as India’s ACC, Indian cement
companies have consistently
delivered better results, not only on absolute profitability ratios, but also
on
absolute profitability growth.
They show a growth of 24 per cent in return on capital employed while
international players show only
8.4 per cent. Labour productivity, which actually fell for most industries
over 1994-96, has improved at 2.5
per cent per annum for cement.
The engineering industry also
matches up to the performance standards of the best in the world.
Companies like Cummins India have
always pushed for growth as is evidenced by its 27 per cent rate of
growth, but not at the cost of
present and future profitability. The company shows a healthy excess of
almost 30 per cent over WACC,
displaying great future promise. BHEL, the public sector giant, has seen
similar success and the share
price rose by 25 per cent despite an indecisive sensex. The only note of
caution: Indian engineering
companies have not been able to improve labour productivity over time,
while international engineering
companies like ABB, Siemens and Cummins Engines have achieved
about 13.5 per cent growth in
labour productivity, on an average, in the same period. The pharmaceuticals
industry is where the problems
seem to be the worst, with growth emphasized at the cost of all other
performance. They have been
growing at over 22 per cent, while their ROCE fell at 15.9 per cent per
annum and labour productivity at
7 per cent. Compare this with some of the best pharmaceutical
companies of the world – Glaxo
Wellcome, SmithKline Beecham and Pfizer –who have consistently
achieved growth of 15-20 per
cent, while improving returns on capital employed at about
25 per cent and labour
productivity at 8 per cent. Ranbaxy is not an exception; the bias for growth at
the
cost of labour and capital
productivity is also manifest in the performance of other Indian Pharma
companies. What makes this even
worse is the Indian companies barely manage to cover their cost of
capital, while their competitors
worldwide such as Glaxo and Pfizer earn an average ROCE of 65 per
cent. In the Indian textile
industry, Arvind Mills was once the shining star. Like Reliance, it had learnt
to
cook sweet and sour. Between 1994
and 1996, it grew at an average of 30 per cent per annum to become
the world’s largest denim
producer. At the same time, it also operated a tight ship, improving labour
productivity by 20 per cent.
Despite the excellent performance in the past, there are warning signals for
Arvind’s future. The excess over
the WACC is only 1.5 per cent, implying it barely manages to satisfy its
investor’s expectations of return
and does not really have a surplus to re-invest in the business.
Apparently, investors also think
so, for Arvind’s stock price has been falling since Q4 1994 despite such
excellent results a
