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R M FurnitureKraft Pvt. Ltd. (A): Capital Structure Conundrum

CASELET, FINANCIAL MANAGEMENT
ET Cases, 3 pages

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R M FurnitureKraft Pvt. Ltd. (A): Capital Structure Conundrum

 

R M FurnitureKraft Pvt. Ltd. has been a successful furniture manufacture firm in India all these years. However, as the top line growth was declining of late, the company was mulling over the possible ways to improve the sales figures. Rahul Mehrotra (Rahul) had recently joined the family-owned business as Managing Director (MD) and the responsibility to regain the lustre and bring back the past glory, fell on his shoulders. Rahul felt that making the necessary captial investment would impove the business scenario. However, he was unsure which form of capital structure would be suitable for his company. As his decision to make the right financial decision involved changing the capital structure of the company, Rahul was in a fix whether his decision to bring in the debt component into an equitybased firm would actually boost up the profits. Rahul was in a predicament as he was unable to envisage the consequences of his decision................


Teaching Note Preview

R M FurnitureKraft Pvt. Ltd. (A): Capital Structure Conundrum


Synopsis

The caselet series is meant to introduce the participants/students to the concept of capital structure and their theories to show their relationship with the value of the firm. Rahul Mehrotra, a B.Tech graduate and the Managing Director at his family business, R M FurnitureKraft Pvt. Ltd., was witnessing a declining top line growth in the recent past. Rahul tried to analyze the business scenario and understood that the company has to make capital expenditure to design furniture as per the ongoing trends and choices of the customers. As his company was an equity-based firm, he was mulling over the options to meet his capital expenditure requirements. He was finding it difficult to to analyze the consequences of incorporating debt component into the company’s capital structure.

Case Positioning and Setting

The caselet series can be used in either of the following courses in an MBA Program:

  • • Financial Management – To understand the concept of capital structure management and the effect of their theories on the firm’s value
  • • Corporate Finance – To understand how the changes in the debt-equity proportions would affect a firm’s capital structure.

 

Assignment Questions

  • I. What do you understand by capital structure? Why is it important for any firm’s sustainable growth? How can a firm aim to achieve an optimal capital structure?
  • II. Analyze the three capital structure theories – Net Income (NI), Net Operating Income (NOI) and Traditional approaches – with their implications on R M FurnitureKraft Pvt. Ltd.’s value.
  • III. ..............

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Product code: FIN-2-0019 (a), FIN-2-0019 (a)A

Abstract


Three of the capital structure theories - Net Income (NI) approach, Net Operating Income (NOI) approach and Traditional approach - can be analyzed and discussed using this caselet. Capital structure policy typically underlines the trade-off between risk and return. The optimal capital structure is the one that strikes a balance between risk and return, to achieve the goal of maximizing the value of the firm. The caselet through the dilemmas of the protagonist Rahul Mehrotra (Rahul) analyzes which form of capital structure will help increase the value of his firm. As the business was witnessing declining top line growth, Rahul had to take some quick and  challenging decisions to revive the company from the turbulent times, which involved a huge capital expenditure in the near future. Though the company functioned as an all-equity firm for the past several years, Rahul wanted to ascertain if the debt way of financing could actually increase the value of the firm.



Pedagogical Objectives

  • To evaluate how a company’s capital structure influences its investment decisions
  • To discuss and analyze the relationship between capital structure, cost of capital and the value of a firm
  • To analyze various capital structure theories such as Net Income approach, Net Operating Income approach and Traditional approach to understand the implications of each of them on a firm’s value
  • To analyze various financing options and arrive at the preferred way of financing based on each of the above mentioned theories

Case Positioning and Setting
This caselet can be used in either of the following courses in an MBA Program:

  • Financial Management - To understand the concept of capital structure management and the effect of their theories on the firm’s value
  • Corporate Finance - To understand how the changes in the debt-equity proportions would affect a firm’s capital structure




This Case Pack Includes:
- Abstract
- Caselet
- Teaching Note
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