Strategic Advantage of the Competitors Strategies for Dealing with Risk - Case Study Example

Summary of 10 cases

Case 1: Air Canada

The airline industry is a challenging industry driven by the terrorist attacks of September 2001, the cost of operating an airline going higher as well as the fact that new airport terminals have come up driving the costs of terminals. Presently, Air Canada deals with risk by making use of derivative financial instruments also as a way in which to actively generate profit especially because the price of fuel makes up the large majority of expenses in the industry. Air Canada’s competitors do not have a large challenge with foreign exchange since they have strived to ensure that their revenue come in Canadian dollars. In addition, the airline’s competitors that had more assets dealt with their financial risk by hedging up to about 86 per cent of the needs for jet fuel for the next one year(Wood & Dunbar 2010, p. 1).

Wood and Dunbar (2010, p. 5) argue that the competitors strategies for dealing with risk provide them with a strategic advantage. This is because they provide the chance for these companies to save on their resources and redirect them to areas where they are most needed. In this regard, it would therefore be helpful for the company’s board to ensure that the incoming revenue was in American dollars as a way in which to deal with foreign currency fluctuations.

Case 2: American Greetings

Considering the past performance as well as the performance that is expected, we believe that the 3.5 EBIDA multiple is a justified one. The firm has been going through challenges with regard to increasing on its sales and even when it has been gaining some form of success, it is often because the company has had to expand spending on marketing as well as moving into new products therefore eroding on the profits of the company(Schill, 2013, p. 3).

Best case scenario in a Bullish market: Within a bullish market, the sales for the company would grow to a long term high of 3% and the operating margin would remain at 9%. Having a discount rate of 8.49%, the value of the company would therefore be $ 1222 and the stock price would be at $ 25.64((Schill, 2013, p. 4).

Average Scenario Cash Flows:In a market that is average, the growth sales for the company would remain at 1.5% and operating margin would be at 8%. With a discount rate of 8.49%, the value of the company is $ 1041 and a stock price of $ 20.94(Schill, 2013, p. 5).

The core drivers of value within the models we used are the free cash flow forecasts, weighted cost of capital as well as the terminal value. This enabled us to find out the value of the company and the amount of debt as well as equity (Schill, 2013, p. 6).

After carrying out the analysis of the best and average scenarios, we are of the opinion that American Greetings should enter the market with $ 75 million to repurchase shares since our analysis sets out that the share value is present undervalued.

Case Study 3: Classic Fixtures & Hardware

Kester and Stephenson (2015, p. 2) argue that in making the financial statements, Watkins and his team made the assumption that the level production helped to reduce on the stress that occurred in production facilities and did not take into account the fact that the company did not have a wide amount of success to the capital markets and would therefore have to rely more heavily on the company’s loan facility. In addition, the team assumed that the pattern that had been established with regard to creation of inventory during the winter and the spring would always ensure that the company was in a position to efficiently pay off its loan facility during the year’s fourth quarter.

Classic’s seasonal loan balance was greater than forecasted was as a result of overruns in cost within the expansion of the plant as well as the company’s program for modernization. The company might not be able to pay off the loan since the company is actually making use of short term bank credit for projects that need capital in the long term(Kester & Stephenson, 2015, p. 2). The company’s problem could be a permanent one considering that sales during the months of May and April had been lower than forecast and May’s were also far below expectation. The company had continued to increase on its borrowings. The company had also changed the manner in which it was carrying out its funding therefore management could benefit from having a much clearer understanding of the home improvement and housing construction industries(Kester & Stephenson, 2015, p.3 ).

Case 4: Eric Weston

There were aspects of the business that Eric had not fully taken responsible for such as the plans for pension and benefit. Additionally, Eric made the decision to expand much faster by acquiring Shaw even though he did not have the financial resources that would be need to buy the company. In addition, he sold the Cord building in a time when the economic climate made it difficult for buyers to be found and the sale led him to owe the bank well over $ 420, 000. His attempt to consolidate the two companies was a right move however the fact that he was unable to maintain a constant flow of cash was a negative aspect(Roberts & Sharpe, 2012, p. 4).

Roberts and Shaw (2012, p. 6) also point out that one of the challenges faced by Eric include the fact that the deal that he had made with the old owner of Shaw meant that a number of the options available to him were restricted. Another challenge is that he had made personal guarantees to the bank regarding loan repayments to the old owner. Another challenge is that the cash flow situation of the company is getting worse. In order to effectively deal with this problem, Eric could consider putting stock that is identified as surplus on sale which will help in the liquidation of inventory.

• Case 5: Financial Policy At Apple 2013
• Apple had well over $ 137 billion of cash by the end of 2012. Over the span of between 2000 and 2008, the company had achieved a large amount of success from the launch of the iPhone 3G and the iPad. The Company had also enjoyed high levels of profitability and was therefore able to ensure that its costs were kept at a minimum. The gross margin on the iPhone was between 49% and 58% as of October 2010 to March 201 2 while the gross margin on the iPad was at between 23% and 32% within a similar period. The capital structure for Apple did not include any debt and there was therefore no outflow of cash for making interest on payments (Desai & Meyer, 2014, p. 2).

Desai & Meyer, (2014, p. 6) also point out that increased competition within the phone as well as tablet industries as a result of the entry of devices that are powered on Android. Shareholders are also growing increasingly concerned regarding the large amount of cash that Apple was hoarding and not returning to the shareholders. The overall agreement among the investors was that Apple did not have any new innovative projects that they wanted to launch which could have led to the discount in the share price that was also seen in the low PE multiple.

Apple could afford to give out a dividend of $ 11.52 billion every year even if the business does go through a major slowdown from 2012. If we base the assumption that Apple will use all of its excess cash for share repurchases, dividends and iPref, it would make it easier for the company to hold on to its existing cash hoard. In this regard, Cook and Openheimer should consider taking on iPrefs since it would allow the company to carry out acquisitions, keep any cash that it wishes overseas and also to make dividends or purchase buybacks (Desai & Meyer, 2014, p. 10).

Case 6: Hill Country Snack Foods

When considering how much financial risk the company would face at each of the alternative we found that the return on equity is 12% with no debt having been found in 2011. In this regard the WACC is 12% with no debt. Following the equation Re=Ru+(Ru-Rd)*(D/E)*(1-Tc), in 20% debt, 40% and 60% debt are 13.48%, 15.26% and 16.16% with the RD at 2.85%, 4.4% and 7.7% concurrently. The company without any debt has no risk financially. In this regard, the financial risks are 1.48%, 3.268% and 4.16 %( Kester & Stephenson, 2012, p. 2).

The value that the company could create for its shareholders is an increase in price and dividends per each share. It can be seen that the dividends per share are $ 0.96, $ 0.99 and $ 0.93 respectively. In addition, the stock price increases from $ 41.67 to $ 47.92 at 20% debt $ 50 at 40% debt and $ 52.09 at 60% debt. This increase in the stock price is the benefit that is generated for the company’s shareholders (Kester & Stephenson, 2012, p. 3).

We recommend that 40% of the total asset is the most advantageous since it maximises on the value of shareholders. From 20% debt to 40% debt, the price of the stock increased $ 2.08. From 40% to 60% debt, the price of stock increased $ 2.09 however the dividends per each share reach their peak at 40% debt which is at $ 0.99. Hill Country could adapt a more aggressive capital structure by increasing leverage and therefore taking advantage of the lower interest rates. To persuade Keener, the argument could be put forward that putting in more debt to the company’s capital structure could be helpful in the reduction of financing costs and at the same time create tax shields (Kester & Stephenson, 2012, p. 6).

• Case 7: Kraft Foods & Cadbury Parts A & B
• Mandron (2016, p. 1) points out that before the acquisition of Cadbury, Kraft Foods engaged in the production as well as marketing of packaged goods such as snacks, beverages and convenient meals and also cheese and grocery products. It also owned over 168 manufacturing facilities spread out in North America, Canada, European Union and Asia Pacific. In North America, the company’s operations distributions included both direct store as well as warehouse delivery.
• In offering to acquire and pay for a premium, one of the most rational motives was the fact that Cadbury shareholders would be able to gain a larger share of the offer in cash since the premium was well over 28 times the value of Cadbury’s diluted underlying earnings per share. Kraft Foods expected cost savings of at least $ 625 million are plausible since both of these companies have been engaged in active rationalisation of their cost bases over the last several years (Mandron, 2016, p. 2).
• Part B:
• An analysis of the revenue and operating costs after the merger shows a distinct increase over the subsequent years after the buyout of Cadbury by Kraft Foods. The performance of Cadbury appears to be positive and on track to meet its expected objectives. In terms of economic cycle the decision by Kraft Foods to acquire Cadbury shows that the company is at a period of expansion where the company went on a search in an effort to widen its reach in the confectionery industry. On the other hand, Cadbury was at a recession and needed the resources of Kraft Foods to be strong within the market again (Mandron, 2016, p. 16).
• Case 8: JC Penney
• The company’s liquidity ratios are on a decline as are the leverage ratios showing that the company does not have the requisite cash available that would enable it to efficiently cover its daily operating expenses. Some of the ways in which management at J.C. Penney was able to manage its working capital was by putting in place new initiatives for growth as well as making improvements across their merchandise and redefining the online experience and also ensuring that efficiencies were achieved across the entire company (Glazer, 2014, p. 5). There was a chance in which to gain more cash from stretching payables and ensuing that inventories were reduced as these components were important determinants of cash flow for the large majority of retailers (Glazer, 2014, p. 6).
• An equity issuance woud be more beneficial for JC Penney since while the company has a large amount of cash together with the extra liquidity that comes with lines of credit and potential secured lending, the danger is that the more than the company raises this type of debt, the worse that the operating results will be since the burden of interest will become too high (Glazer, 2014, p.8).
• Case 9: Restructuring JAL
• In this particular case, one of the conflicts of interest was the extent to which a government agency could interfere in ensuring that businesses had the support they needed to be able to rehabilitate themselves when faced with a financial crisis(Baker et al, 2013, p. 2). Consider as an example how Seto realised that a simple process of restructuring could help to solve the challenges facing JAL but he knew that withholding government funding was a far more effective process (Baker et al, 2013, p. 3).
• As a result of the fact that financing often comes from the government, there is often a conflict in terms of balancing the interests of the government and ensuring that the needs of the shareholders, customers and suppliers are effectively met. There was also the challenge of the fact that many companies often resist filing for bankruptcy based on the perception that doing so leads to an eventual liquidation of the company and subsequently a loss in jobs (Baker et al, 2013, p. 6). As a result of the fact that bankruptcy filings often impact negatively on the morale of employees as was seen in the case example of Swissair, the decision over whether to replace the previous management an resetting the capital structure heavily impacts on the manner in which a company in the end achieves success(Baker et al, 2013, p. 7).

Case 10: ASAHI Indian Glass

The company has always focused on putting in place a capital structure that was highly leveraged in order to ensure that the company’s return on equity was enhanced. The company therefore ensured that it aggressively invested in expansion of capacity as a way in which to effectively position itself as one of the biggest players in the industry. As a result of the fact that the company had not made any type of equity infusions after it went public, the whole capital expenditure was funded from earnings and borrowings that were retained (Dhamija & Sharp, 2015, p. 1).

The company began with an aggressive debt to equity ratio as a way in which to fund itself and the major proportion of the loans used in the company were secured using the assets of the company as collateral. Additionally, the lenders also placed significant restrictions on the company requiring it to share information on a regular basis (Dhamija & Sharp, 2015, p. 2).

For the company, high leveraging was positive in the sense that the company could get loans that were interest free while on the other hand even though the interest rates on loans given in foreign currency were often lower than the interest rate in rupee loans(Dhamija & Sharp, 2015, p. 3). The rights issue was used to reduce the debt level since it provided the important equity infusion and this meant that the company had the necessary funds to repay certain loans and also to repay trade creditors whose payment was overdue. However, management now has the challenge of ensuring the company was financed at a cost that was lower and that had little risk especially considering the company’s industry was rapidly growing. In order to do this, the company’s management needs to actively generate more cash flow and reduce on the expenses of the company (Dhamija & Sharp, 2015, p. 5).