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

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................

R M FurnitureKraft Pvt. Ltd.

Rahul, a B.Tech (Mechanical) graduate from a reputed institution in India, had been an active participant in all the academic as well as cultural activities of the college. During the final year of the course, he was appointed as the President of the Student Welfare Association as well. Though he secured multiple sales related placement offers, he was keen on joining a manufacturing facility as his family owned a furniture manufacturing business known as R M FurnitureKraft Pvt. Ltd., which was managed by his father, Roshan Mehrotra (Roshan) and his brother, Rakesh Mehrotra (Rakesh)...............

Capital Structure Dilemmas

Though the firm was running successfully past several years, lately, the business had been witnessing falling sales figures. Rakesh’s efforts to improve the sales were going in vain and the firm’s top line growth had been declining year after year. Sales revenues showed a sharp declining trend as the revenues which were INR 410 crore in 2013 dropped to INR 340 crore in 2014 and further witnessed a sharp decline of INR 172 crore in 2015..........

Assignment Questions

I. What do you understand by capital structure? Discuss its importance in 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. .................

Exhibits

Exhibit I: Income Statement (for the Year ending March 31^st 2015)

Exhibit II: Balance Sheet (as on March 31^st 2015)

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. ..............