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R M FurnitureKraft Pvt. Ltd. (B): Hoping on MM Hypothesis

CASELET, FINANCIAL MANAGEMENT
ET Cases, 2 pages

Case Preview

R M FurnitureKraft Pvt. Ltd. (B): Hoping on MM Hypothesis

 

On June 30th 2015, after examining the excel sheet and the corresponding notes that Varun had mailed the previous night, Rahul’s confusion only confounded. After discussions with his brother Rakesh, Rahul shared his new dilemma with Varun.

Rahul: Varun, thank you for sending in those detailed workings and notes.
Varun: But why do you sound distraught?
Rahul: After going through your workings and notes, I am even more confused as it is inconclusive and appears very unfeasible as all the workings are under idealistic situations.

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Teaching Note Preview

R M FurnitureKraft Pvt. Ltd. (B): Hoping on MM Hypothesis

 

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 are the various propositions and assumptions of MM theory?
  • II. Based on the underlying premise of MM Hypothesis as analyzed above, what do you think should be
  • Varun’s suggestion to Rahul?
  • III. ...............

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

Abstract


This caselet is meant to introduce the students/participants to the workings of Miller and Modigliani (MM) Hypothesis in capital structure decisions. The caselet through the dilemmas of its protagonist Rahul Mehrotra (Rahul) analyzes the MM theory of capital structure which propounds various propositions under both no-tax and with-tax scenarios. This caselet addresses Rahul’s capital structure dilemma by offering him a financially viable capital structure option that would help maximize the value of his firm.



Pedagogical Objectives

  • To evaluate how capital structure theories work under no-tax and tax scenarios
  • To discuss the importance of MM theory and its propositions in both perfect and imperfect markets
  • To analyze how the MM theory would help in resolving the capital structure dilemma and maximizing the value of the firm

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

  • Financial Management - To understand the capital structure theories such as MM Hypothesis 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 (**ONLY for Academicians)
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