Transcript of Copy of KOTA FIBRES, LTD.

WACC
WHAT ACTUALLY WE HAVE TO DO?
To revise capital structure by decreasing shareholders payments and increasing bank loans
To enhance the cash flow, but reduce cash
CONCLUSIONS AND PROPOSALS
KOTA FIBERS LTD. ISSUES
RE-ASSESSMENT
CASE ANALYSIS KOTA FIBRES, LTD.
Anna Kalaeva,HULT EMBA,Marlowe,2014
INTRODUCTION
KOTA FIBERS LTD. BUSINESS LOGISTICS
1. Kota Fibres LTD. was founded in 1962
2. Industry specialization: textile (nylon fiber)
3. Managing director & principal owner: Ms. Pundir
4. One plant in Kota, India (100 km from New Dehli)
5. Using technology & domestic raw materials, the firm had developed steady franchise among
dozen of small local,textile weavers
SUPPLIERS
KOTA FIBERS LTD.
TEXTILE-WEAVING MILLS
TEXTILE AND SARI MERCHANTS
COMPANY PERFORMANCE
1. CONSISTENTLY PROFITABLE
2. SALES HAD GROWN AT 18% IN THE YEAR 2000
3. NET PROFIT REACHED INR 2,6 MILLION IN 2000
4. GROSS SALES WERE PROJECTED TO REACH
INR 90,9 MILLION BY END OF FISCAL YEAR 31/12/2001
LIQUIDITY
15% excise tax on sales has to be paid in cash before any of the distributors trucks leave the
company
repayment of loans: it had overdrawn from All-India bank account for three times in a row
Payment periods
COMPANY CAPITAL STRUCTURE
Not paying creditors on time or in the correct amounts this is creating a huge financial strain on
the organization
Paying high dividends to the stakeholders
Asset turnover rates: in 2000 inventory turnover of 8.4 and projected an increase of up to 12.1 by
2001
Weighted average cost of capital (WACC) is based on the average of the return required by
shareholders (rE)

and the after-tax return demanded by creditors (rD), weighted by the respective portions of
equity and debt in a firm W stands for weight. So, wE is the proportion of equity on a firms
capital structure (E / D+E) while wD is the proportion of debt or D / D+E. T stands for tax rate.
The cost of capital is the minimum rate of return on a companys investments that can satisfy
both shareholders (cost of equity) and debtholders (cost of debt). The cost of capital is thus the
companys total cost of financing.
RESULT IS LIKE THIS
ABOUT KOTA FIBRES LTD.
1. COGS should run at 73,7%
2. Operating expenses should be about 6% of sales
3. Addition of quality control department
4. Two new sales agents
5. Dividends per quarter to 11 shareholders should be INR 500,000
Inventory turnover = COGS/average inventory=
53,865,911 / 1,249,185 = 43,12
Inventory conversion period (in days)
365/43.12 = 9 days approx.
RECEIVABLES TURNOVER RATIO
CASH RATIOS
NET SALES/Average accounts receivable
= 64,487,385 / 2,672,729 = 24.12
Receivables collection period (in days)
= 365/24.12 = 16 days (approx)
Payable turnover ratio
= 41,727,114/759,535 =55
Payable turnover
= 365/55 = 6 days approx
Financial Analysis of the company
Dividends to be paid quarterly = INR 500,000
Total annual dividend paid = INR 2,000,000
Net profit in 2000 = INR 2,550,837
Cash left for next year =INR (2,550,837-2,000,000) = INR 550,837
Desired Cash Balance = INR 750,000
New loan required = INR 199,163
QUICK FINANCIAL RATIOS
Current ratio of 2000= 4,684,237/1,443,637 = 3.244
Quick ratio = 1
Forecasted current ratio for 2001 = 6,690,525/4,440,345 = 1.506 (< 2.0,not acceptable)
Forecasted quick ratio = 1

INVENTORY TURNOVER RATIO

1. Reducing purchase lead times from 60 to 30 days improves Net Income by $300K due to
reduced interest expense on note payable due to lower inventories. Note Payable is reduced by
$735K and inventories are reduced by $400K.
2. Reduce dividends paid in 2001 from $500K/qtr to $200K/quarter. This reduction in payback to
shareholders will improve its position with the bank. In addition the cash on hand requirement
should be loosened for 2001 from $750K to $500K. CapEx should be reduced by $400K for
2001.
3. Hibachi JIT Inventory
By reducing 35% of the purchases from 30 days to JIT, the inventories are further reduced at
year end by $256K and the note payable is an additional $200K lower. The interest expense is
further reduced by $300K due to the significantly lower average monthly note payable balance of
$2.14 Million at 14.5%
3. KOTA should accept Pondicherrys proposal but not first without attempting to negotiate a
shorter day span for repayment.These sales are incremental and the costs associated with this
pick up are variable and included above the line in purchases, labor and thus Cost of Goods Sold.
The operating expenses however should be fixed regardless of whether or not we take on this
client (assumption that there are no variable costs in these operating costs). As such the Net
Income would increase by $270K after the tax effect and there would be more cash on hand at
year end.
4. KOTA must monitor its production to ensure there are adequate inventories to cover sales. Due
to the nature of the cash flow being based on formulas, KOTA should periodically review its
position and actual results against the forecast for discrepancies (specifically around inventory
balances, sales, receipts and loan payments).
Cash cycle = operating cycle days payable outstanding
Operating cycle = 60 days
60- 12 = 48 days
KOTA should expect to see Net Profit return to its 1999 levels.
Accounts Receivable will be stretched but due to the new purchasing policies, inventories should
be much more manageable.
The Company should be able to repay its notes payable to All-India bank and be in a more stable
and secure financial position. The Company should also request that the note payable be repaid
in December of the fiscal year, not October. This allows KOTA time to collect its outstanding
receivables from its peak selling season.
EXPECTED RESULTS
HOW IT IS POSSIBLE TO DO?