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case studies, Financial Management
•?Detailed information should form the part of your answer (Word limit 150 to 200 words).
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.
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.
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.
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.
Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
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
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.
Posted Date: 9/25/2012 3:53:14 PM | Location : United States
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