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