Corporate Finance

Case Assignment #1

2011230016 이건희

1. Net sales for Massey-Ferguson actually increased between 1979 and 1980. Despite this, net income and income from continuing operations both dropped sharply in 1980. Which item on the income statement was most responsible for this drop in income?

A. According to the consolidated statements of income for Massey-Ferguson throughout 1978 and 1980, it is apparent that the net sales increased steadily while the net income and income from continuing operations both dropped at a steep rate.

In order to distinguish which item is most responsible for this drop in income, we have to consider
the two major factors that compose income – net sales and cost / expenses.

Firstly, it is apparent that net sales have increased steadily throughout 1978 and 1980. As such, it can be said that items related to cost and expenses acted as the catalysts for the drop in income.

Consequently, if we take a look at the individual items within cost and expenses, we can determine which item on the income statement was most responsible for the drop in income by calculating / comparing their increase rates in size and proportion through 1979 to 1980.

Among the individual items within cost and expenses, other interest expense increased from 128.8 million USD to 229.9 million USD throughout 1979 to 1980. While this increase is only approximate 100 million USD in size, the increase in terms of proportion is approximate 78% which is the largest compared with other items such as COGS (7.8%) or marketing, general and administrative costs (15%).

As such, it can be concluded that other interest expense (which is also further explained as one of the reasons for Massey’s continuing problems) is the most responsible item for the drop in income throughout 1979 to 1980.

2. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?

A. According to the information given throughout the case, the Canadian government seems to have two main motives in helping Massey-Ferguson refinance its debt – economic and political.

Firstly, the Canadian government (especially in the province of Ontario) had to be concerned with the economic presence that Massey-Ferguson exerted. As mentioned in the case, Massey-Ferguson had numerous facilities existing in Canada and, in turn, a handful of domestic jobs (6,700 in Ontario) were dependent on Massey-Ferguson. Consequently, it is natural that the Canadian government had an incentive to engage in a massive bail-out plan for Massey-Ferguson as the economic implications would prove to be too great.

Secondly, the Canadian government also had an incentive to help Massey-Ferguson in relevance with the political aspects. As mentioned in the case, the timeframe of deciding whether to help Massey-Ferguson or not was adjacent to the then-upcoming Ontario provincial election. In turn, the Ontario government (which was more Conservative than other provinces) needed the Massey-Ferguson jobs and the support of Conrad Black, the chairman of the board of Massey-Ferguson and Conservative supporter, in order to secure their victory in the upcoming election.