Wood, D., & Dunbar, C. (2010). Air Canada – Risk management. Ivey Publishing. Assess the general business environment, current corporate strategy, and possible future challenges.Identify the most
Running Head: Case Study Assignment 1 0
Case Study Assignment 1
Name
2019081614
Corporate Finance
Professor
Date
Define the Problem
According to the case study, the firm was having trouble marketing in order to increase net working capital and pay off obligations before the loan term expired. As a consequence, the firm's liquidity ratio falls, suggesting that it will be unable to pay its short-term loans while retaining its margin of safety. Another difficulty to overcome is the protracted cash conversion cycle, as illustrated in the case of C.R. Plastics. Product is kept for much too long before being sold, and buyers must wait far too long before being paid. Contrary to popular belief, they are prompt in paying payments to their suppliers. As a result, there are financial concerns to consider.
2: Formulate Alternative Solutions and Evaluate Each Alternative
Alternative Solutions
The BBC should use its financial resources to shorten the liquidity problem by making targeted investments.
CR Plastics has to do a thorough market study to reduce its risk of pricing variations, currency rates, and interest rate changes that might threaten its capacity to receive quick cash.
Air Canada needs to manage and prioritize payments in order to avoid future financial issues.
Evaluation of Alternatives
The first alternative is advised in order to optimize the capital structure of the organization. As a result, the company's reliance on short-term liabilities will be lessened, so lowering the risk to its financial stability.
Market risks that might endanger the company's revenue streams are avoided by using the second alternative. The use of this strategy may help to reduce the likelihood of financial conflicts.
It is anticipated that the third alternative will aid the organization in planning for any unexpected payments that may arise in the future. This technique is especially advantageous in this situation since the firm has to make the best use of its funds possible.
3: Recommend and Justify an Effective Solution
A negative liquidity ratio has emerged as a consequence of the BBC's "borrowing money" policy, as shown in the case study. Investing in corporate bonds and stocks may aid in the expansion of a company's net working capital position.
The debt-to-equity ratio of C.R. Plastics mandates the purchase of more energy-efficient machinery and machinery. Because the firm now has more liabilities than assets, the financial losses of the corporation will be decreased as a consequence of this.
In order to mitigate the risks associated with its investments, Air Canada should use market hedging strategies such as derivatives. Hedging may be able to help a company lessen the risk and volatility associated with the market.
4: Conclusion and Circumvention of Potential Problems
As shown in the case study, insufficient net working capital management is the core cause of BBC's liquidity and debt-to-equity ratio difficulties, as well as other financial problems. This puts the BBC's financial stability in the marketing industry in jeopardy, since the organization has more liabilities than assets as a result of the situation.
In the case study, C.R Plastics has a serious difficulty with the manufacturing of goods, which has a detrimental influence on the company's overall operational efficiency and productivity. Because of the market interference caused by internal factors such as price fluctuations, currency rates, and interest rates, the company's ability to get short-term capital was hampered. \
According to the case study, Air Canada's financial viability is threatened by high taxes and fluctuating seasonal demand. This had a negative impact on the company's revenue streams since these vulnerabilities were not thoroughly researched and evaluated.
1. Based on the information in the case, assess the performance of C. R. Plastics.
According to the study, sales climbed steadily between 2006 and 2009. However, sales, general, and administrative expenses increased dramatically between 2007 and 2009. Operating expenses have increased faster than revenues since 2006, and this trend is expected to continue in the near future. They are confident in their capacity to meet their short-term obligations in the future, as shown by the current ratio. Banks, for their part, are wary of lending to C.R. Plastics due to the company's large debt burden on its financial sheet. Another difficulty with the firm is its slow cash conversion cycle. Product is kept for much too long before being sold, and buyers must wait far too long before being paid. Contrary to popular belief, they are prompt in paying payments to their suppliers. As a result, there are financial concerns to consider.
Analysis for Return on Assets and Return on Owner's Equity
Asset returns are expected to fall from 2009 to 2011. In the 0.11 to 0.005 range, or 0.11 to 0.005. In this instance, the company's overall profitability might suffer. Its ability to generate revenue from its resources has dwindled over time. In addition, its return on investment (ROI) has declined (from 0.96 decreased to 0.01). This fall in profit margin is the result of a lower profit margin. Prospective investors are less likely to invest in a company with a low return on equity because they are aware that they would get a poor return on their investment.
How much additional financing will Jamie Bailey need under both production alternatives?
Jamie Bailey will need an extra $228,000 in equipment finance to complete the buy under both production scenarios. If the bank agrees to extend an additional $500,000 credit line, an additional $441,335 becomes available in addition to the credit limit. As a result, $1,181,917 is required to finish the project. Option 2 (level loading) would be less expensive than Option 1, costing just $1,088,565 and being less expensive than Option 1. This choice is much superior since it will not only cost less money, but it will also create a larger net income of $990,793 compared to the first option's net income of $628,194, demonstrating that it is a better option to choose and invest in.
3. If you were Jamie Bailey, how much money would you request from the venture capitalists? How much equity would you be willing to give up?
As Jamie Bailey, I would seek $1,500,000 from venture capitalists in return for a 30% interest in my business in exchange for a 30% stake in my company. To arrive at the final amount, the desired sum was multiplied by the current value of the company's assets. This sum would easily cover Option 2 (level loading) as well as any additional costs that may arise. If I had this much money, I could properly finance and operate my company. With an extra 3% ownership position in the business, I would bargain with venture investors for more help, such as a skilled financial advisor and an operations manager, to enable me to better control how my company is financed and run it more efficiently. As a result, the company will be less exposed to present challenges, and venture capitalists will see a return on their investment.
