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Case Study on
Crown Corporation
PREPARED FOR
Dr. Shaikh A. Hamid
FIN 680.1
PREPARED BY
Abdullah Resalat Rahman 0930477060
Md. Towhidul Hoq 0930393060
Md. Sabbir Alam 0930391060
Md. Nafiz Enam 0930404060
Debabrata Bhowmik 1020071090
Company Background
Crown Corporation started as mining company, but a series of acquisitions and divestitures
during the 1960s had totally transformed Crown Corporation from mining company to a
manufacturer of superalloy castings for aircraft and industrial uses and aluminum products for
the building, packaging and aircraft industries. Sales were evenly divided between castings and
aluminum products.
Crown’s castings were for the most part designed for operation in the “hot part” of the gas
turbine engine. Crown’s constant emphasis on quality and technical excellence had established
a high level of confidence among its customers. The other half of crown’s sales comprised
aluminum products, including a broad product line for the building and construction industry. To
assure a steady and economical source, Crown Corporation participated with American Metal
climax, Inc. in a project in 1966 known as Intalco, which made them a producer of primary
aluminum. Crown’s share of Intalco’s output was 130 million pounds. Crown decided to build a
second aluminum ingot plant in 1967, named Eastalco, which provide Crown with additional
primary aluminum capacity of 85 million pounds a year and increased net income of $3-4
million. A planned addition of 85 million pounds in 1972 would raise Eastalco’s capacity to 170
million pounds and would meet the company’s objective to be a fully integrated producer.
Crown’s sales performance was good initially, it’s sales had risen sharply from $60 million in
1958 to $230 million in 1968 on the strength of 23 acquisitions, strong internal growth and a
firming of aluminum prices. But after some time it faces some bad turns, after reaching a peak
of $1.13 in 1959, earnings per share fell to $0.34 in 1963 as overcapacity developed in the
aluminum business. During that time domestic industry capacity roses and growth potential in
the industry encouraged new producers to enter into the market. So overcapacity developed
and therefore, price falls down. Producers sold their product in low rate to grab the market. But
demand-supply conditions in the industry improved in the early 1960s. with this improvement
higher earnings came for Crown and other aluminum producers in the industry. But some
producers were still maintaining lower prices to obtain business for their idle machine. When
producers started getting consumers and order from them they rose the prices slowly, and soon
the industry price situation improved after 1968, whereas process of fabricated products
remained weak until 1965.
Problem Definition
In February 1969 Mr. Walter Bennet, treasurer of Crown Corporation was considering several
financing alternatives. Crown’s decision to integrate backwards into the production of primary
aluminum ingot had resulted in very heavy capital expenditures. Its need for funds for working
capital and for completion of Eastalco now outstripped the company’s internal cash generation
and it would be necessary to raise $30 million within the next 6 months to cover capital needs
for 1969.
Expected Growth and Estimated Capital Expenditures
Mr. Walter Bennett, treasurer of Crown Corporation expected that sales would increase at 6-8%
annually, exclusive of acquisitions, over the foreseeable future. Sales of aluminum products
were expected to rise by 15-20% annually as the company broadened its penetration of major
aluminum consuming markets. Total capital expenditures, including the Eastalco project, were
forecast at $39 million in 1969, $32 million in 1970, $7 million in 1971 and $50 million in 1972.
The heavy capital spending would require that Crown raise $30 million in 1969, $22 million in
1970 and $30 million in 1972.
Financing Alternatives
Several alternatives were open to Crown to meet its financing need. Mr. Bennett were
considering those alternatives. The company’s investment banker’s pointed to the future
financing flexibility afforded by the use of equity financing, by issuing $30 million common stock,
but the dilution of earnings per share were the matter of concern for Bennett. Because Crown
stock had fallen from $51 a share in May 1968 to $30 a share. Investors were disappointed with
the earnings. Further near-term price weakness seemed likely as earnings per share remained
depressed as Crown absorbed heavy startup costs for the production of the main landing gear
for the McDonnel Douglas DC-10 in 1969. Under this conditions, announcement of a large
equity issue would drive stock price down to the low twenties. For that reason it would be
necessary to sell 1.4 million shares to rise the $30 million net to the company. So Mr. Bennett
was confused whether equity financing should deferred until the company get back to pattern of
earnings gains.
Alternative to equity financing was to take bank loans. A consortium of commercial banks had
agreed to lend the company up to $30 million at 7-1/4% interest. But there were some
conditions like net working capital must exceed $55 million, dividend payments were restricted
to earnings accumulated after the date of the loan agreement and additional funded debt was
limited to $20 million.
Another alternative could be issuing debentures. It would be possible to place a $30 million
subordinated convertible debenture issues privately with the Northern Life Insurance Company.
The debenture would carry a coupon of 6% with annual debt retirement of $2 million in years six
through twenty. The issue would not be callable for ten years, except at par for mandatory debt
retirement, and would be convertible into common stock.
Other than these Mr. Bennett was interested in the debt alternatives, although the company’s
use of debt had increased sharply.
Financial Statements
Income Statement
Crown CorporationIncome Statements for the years 1962-1968 (Figures in $ Millions Except Per Share data)
1962 1963 1964 1965 1966 1967 1968
Net Sales 110.00 122.00 122.00 141.00 176.00 213.00 230.00
Cost of Sales and Overheads 101.70 117.40 116.50 128.24 153.00 180.50 196.50Depreciation 4.50 4.70 5.00Operating Profit 8.30 4.60 5.50 12.76 18.50 27.80 28.50Financial Income 2.48Financial Expenses 3.48Other Income (Expense) (0.40) (0.60) (0.30) (0.80) (0.10) (0.70) (1.00)
Income before taxes 7.90 4.00 5.20 11.96 18.40 27.10 27.50
Federal Income Taxes 3.70 1.50 2.30 3.60 7.60 12.30 13.80Net Income 4.20 2.50 2.90 8.36 10.80 14.80 13.70Dividends 0.00 1.45 1.45 1.67 2.91 4.36 5.09
Retained Earnings 4.20 1.05 1.45 6.69 7.89 10.44 8.61Per Share Data
Earnings 0.57 0.34 0.42 0.66 1.50 2.03 1.87
Dividends 0.00 0.20 0.20 0.23 0.40 0.60 0.70Dividends accrued 0.00 1.45 1.45 1.67 2.91 4.36 5.09No. of Shares (in Millions) 7.273 7.273 7.273 7.273 7.273 7.273 7.273Market PriceHigh 9.00 7.00 7.00 11.00 27.00 51.00 51.00Low 5.00 5.00 5.00 6.00 10.00 22.00 32.00
Price Earnings RatioHigh 16.00 21.00 17.00 17.00 18.00 25.00 27.00Low 9.00 15.00 12.00 9.00 7.00 11.00 17.00
Balance Sheet
Crown CorporationBalance Sheets for the Years 1965-1968 (Figures in $ Millions)
1965 1966 1967 1968AssetsCash 3 3 5 4Marketable Securities 7 10 23 6Accounts Receivable 20 23 35 42Inventories 28 38 45 50Other 0 0 1 1Total Current Assets 58 74 109 103
Investment in aluminum plantsIntalco 32 29 34 36
Eastalco 0 0 0 4Other Net property, plant and equipment 28 31 34 42
Other 3 4 4 4Gross Fixed Assets 91Depreciation 5Net Fixed Assets 63 64 72 86
Total Assets 121 138 181 189
LiabilitiesAccounts Payable 8 10 13 14Accrued liabilities 6 7 7 10
Accrued Taxes 4 8 8 6
Dividends payable 1 1 1 1Current Maturities - Long Term Debt 2 2 2 4Total current liabilities 21 28 31 35
Long term debt 30 28 56 52Deferred federal taxes 1 2 3 3Stockholders' equity (7,273,000 shares outstanding atyear end 1968)
69 80 91 99
Total Liabilities and net worth 121 138 181 189
Q1. PROJECT CROWN’S INCOME STATEMENTS AND BALANCE SHEETS FOR THE YEARS 1969-1972
We are considering two pro-forma statements for Crown Corporation, one by full equity
financing, and other by full debt financing by debentures.
Assumptions for projected financial statements:
The Intalco project started from 1966, therefore in case of calculating the averages, we have
considered 3 years of data, 1966-1968
Income Statement Items
1. Sales – As it was given that the sales will increase 6-8% annually. We took 7% increase
annually as an average.
2. Cost of sales and overheads – Income statements gives us the operating profit from
where we can calculate the cost of sales and overheads including the depreciation.
However, in 1968 we have got the figure of depreciation of 5 million. Therefore we can
calculate the cost of sales and overheads excluding depreciation, and take the
percentage.
3. Depreciation – for ‘68 it is $5m. Before ’68, we assume that depreciation will be little less
than 5 million. For the projected income statements, we took 20 years life for each of the
capital expenditures as it is an industrial capital expenditure. Therefore new depreciation
will be 5% of the capital expenditure in addition to the $5 million from previous
investments.
4. Other Income (Expenses) – We have spited the other income (expenses) in 2 parts,
financial income and financial expenses. For the financial expense in ’68, we have got
the figure from the issuance of new debentures of $56m @6% coupon rate, therefore we
calculated the financial income from ’68 as a percentage of sales and applied
accordingly. Financial expenses for the projected income statement will change on the
financing decisions, the rate will be constant @6%.
5. Tax Rate - 45.62%
6. Dividends – Dividends will have a rate of $0.70 and it cannot be jeopardized. Therefore
in case of both debt financing and equity financing, we considered 70 cent dividend rate.
Balance Sheet Items
1. Current assets – All the items in the current assets (except other) were treated by the
percentage of sales. The “Other” item was kept at $1m as it was for the previous two
years.
2. Fixed assets – Crown will have heavy capital expenditures for the following years. The
total figure for capital expenditures were given, but couldn’t be identified that which
project will have what amount of investment. So from 1969 we have added the capital
expenditures to the total fixed assets and considered depreciation @5%.
3. Current Liabilties – Accounts payable, accrued liabilities and accrued taxes were treated
as the percentage of sales. Dividends were constant at 1m for the last 4 years, so we
kept it that way. For the current maturity of long term debt, from 1968 we are having debt
retirement of $4m. If we finance by equity, there will be no change in it, and if we finance
by debentures, there will also be no change because the debt retirement for new
debentures will be effective after 5 years.
4. Long Term Debt - Changes according to financing decision
5. Deferred tax liability - Treated as the adjustment in balance sheet
6. Shareholders equity – Changes with financing decision.
Financing Alternatives
a. Equity Financing – For equity financing, we have considered $21.43 per share and the
no. of shares will increase accordingly to the amount of financing
b. Debt Financing – For all the three finances we are considering debentures @ 6%
coupon rate with the debt retirement facilty of $ starting in 6th year.
Forecasted Financial Statements by Equity Financing
Crown CorporationProjected Income Statements by Equity Financing (Figures in $millions except per share data)
1969 1970 1971 1972
Net Sales 246.10 263.33 281.76 301.48
Cost of Sales and Overheads 209.19 223.83 239.50 256.26
Depreciation 6.95 8.55 8.90 11.40
Operating Profit 29.97 30.95 33.36 33.82Financial Income 2.66 2.84 3.04 3.26
Financial Expenses 3.36 3.12 2.88 2.64
Other Income (Expense) (0.70) (0.28) 0.16 0.62
Income before taxes 29.26 30.67 33.53 34.44
Federal Income Taxes 13.35 13.99 15.30 15.71
Net Income 15.91 16.68 18.23 18.73
Dividends 6.07 6.79 6.79 7.77
Retained Earnings 9.84 9.89 11.44 10.96
Per Share DataEarnings 1.83 1.72 1.88 1.73
Dividends 0.70 0.70 0.70 0.70Dividends accrued 6.07 6.79 6.79 7.77No. of Shares (in Millions) 8.673 9.700 9.700 10.800
Crown CorporationProjected Balance Sheets by Equity Financing (Figures in $ Millions)
1969 1970 1971 1972AssetsCash 4.75 5.08 5.44 5.82Marketable Securities 15.65 16.75 17.92 19.17
Accounts Receivable 39.18 41.92 44.86 48.00
Inventories 52.89 56.59 60.55 64.79
Other 1.00 1.00 1.00 1.00Total Current Assets 113.47 121.34 129.76 138.78
Gross Fixed Assets 125.00 150.05 148.50 189.60Depreciation 6.95 8.55 8.90 11.40Net Fixed Assets 118.05 141.50 139.60 178.20
Total Assets 231.52 262.84 269.36 316.98
LiabilitiesAccounts Payable 14.67 15.69 16.79 17.97
Accrued liabilities 9.52 10.19 10.90 11.67
Accrued Taxes 8.96 9.59 10.26 10.97
Dividends payable 1.00 1.00 1.00 1.00Current Maturities - Long Term Debt 4.00 4.00 4.00 4.00
Total current liabilities 38.15 40.47 42.95 45.61
Long term debt 48.00 44.00 40.00 36.00Deferred federal taxes 6.53 5.94 2.67 10.80Stockholders' equity 138.84 172.43 183.74 224.57
Total Liabilities and net worth 231.52 262.84 269.36 316.98
DEBT MANAGEMENT RATIOS 1969 1970 1971 1972
1. Long Term Debt Ratio = Long TermDebt/Total assets
0.225 0.183 0.163 0.126
Long Term Debt 52.000 48.000 44.000 40.000
Total Assets 231.518 262.840 269.364 316.978
2. Debt Equity Ratio=Long TermDebt/Owner's Equity
0.375 0.278 0.239 0.178
Long Term Debt 52.000 48.000 44.000 40.000
Owner's Equity 138.840 172.427 183.738 224.565
PROFITABILITY RATIOS 1969 1970 1971 1972
1. Net Profit Margin = Net Profit AfterTax/Sales
0.065 0.070 0.064 0.062
Net Profit 15.913 18.377 18.101 18.597
Sales 246.100 263.327 281.760 301.483
2. Operating Profit Margin = OperatingProfit/Sales
0.122 0.118 0.118 0.112
Operating Profit/EBIT29.965 30.949 33.364 33.822
Sales 246.100 263.327 281.760 301.483
3. Return on Assets = Net Profit /TotalAssets 0.069 0.070 0.067 0.059
Net Profit 15.913 18.377 18.101 18.597
Total Assets 231.518 262.840 269.364 316.978
4. Return on Equity = Net Profit /Stokholder's Equity 0.115 0.107 0.099 0.083
Net Profit 15.913 18.377 18.101 18.597
Stockholder's Equity 138.840 172.427 183.738 224.565
5. Payout Ratio = DividendsDeclared/Net Profit After Tax
0.381 0.369 0.375 0.418
Dividends Declared 6.070 6.790 6.790 7.770
Net Profit 15.913 18.377 18.101 18.597
6. Plowback Ratio = 1 - Payout Ratio 0.619 0.631 0.625 0.582
Payout ratio 0.381 0.369 0.375 0.418
MARKET VALUE RATIOS 1969 1970 1971 1972
1. Earnings Per Share= NetIncome/Outstanding No. of Shares
1.835 1.894 1.866 1.722
Net profit 15.913 18.377 18.101 18.597
Outstanding Shares 8.673 9.700 9.700 10.800
2. Book Value Per Share=TotalEquity/Outstanding No. of Shares
16.008 17.776 18.942 20.793
Total Equity 138.840 172.427 183.738 224.565
Outstanding No. of Shares 8.673 9.700 9.700 10.800
Forecasted Financial Statements by Debt Financing
Crown CorporationProjected Income Statements (Debt Financing by Debentures) (in $ millions)
1969 1970 1971 1972
Net Sales 246.10 263.33 281.76 301.48
Cost of Sales and Overheads 209.19 223.83 239.50 256.26
Depreciation 6.95 8.55 8.90 11.40
Operating Profit 29.97 30.95 33.36 33.82Financial Income 2.66 2.84 3.04 3.26Financial Expenses 3.36 4.92 6.00 5.76Other Income (Expense) (0.70) (2.08) (2.96) (2.50)
Income before taxes 29.26 28.87 30.41 31.32
Federal Income Taxes 13.35 13.17 13.87 14.29
Net Income 15.91 15.70 16.54 17.03Dividends 5.09 5.09 5.09 5.09
Retained Earnings 10.82 10.61 11.45 11.94
Per Share Data
Earnings 2.19 2.16 2.27 2.34
Dividends 0.70 0.70 0.70 0.70Dividends accrued 5.09 5.09 5.09 5.09
Crown CorporationProjected Balance Sheets (Debt Financing by Debentures)
1969 1970 1971 1972AssetsCash 4.75 5.08 5.44 5.82
Marketable Securities 15.65 16.75 17.92 19.17
Accounts Receivable 39.18 41.92 44.86 48.00
Inventories 52.89 56.59 60.55 64.79
Other 1.00 1.00 1.00 1.00Total Current Assets 113.47 121.34 129.76 138.78
Gross Fixed Assets 125.00 150.05 148.50 189.60Depreciation 6.95 8.55 8.90 11.40Net Fixed Assets 118.05 141.50 139.60 178.20
Total Assets 231.52 262.84 269.36 316.98
LiabilitiesAccounts Payable 14.67 15.69 16.79 17.97
Accrued liabilities 9.52 10.19 10.90 11.67
Accrued Taxes 8.96 9.59 10.26 10.97
Dividends payable 1.00 1.00 1.00 1.00Current Maturities - Long Term Debt 4.00 4.00 4.00 4.00
Total current liabilities 38.15 40.47 42.95 45.61
Long term debt 78.00 96.00 92.00 118.00Deferred federal taxes 5.55 5.94 2.53 9.55Stockholders' equity 109.82 120.43 131.88 143.82
Total Liabilities and net worth 231.52 262.84 269.36 316.98
DEBT MANAGEMENT RATIOS 1969 1970 1971 1972
1. Long Term Debt Ratio = Long TermDebt/Total assets
0.354 0.380 0.356 0.385
Long Term Debt 82.000 100.000 96.000 122.000
Total Assets 231.518 262.840 269.364 316.978
2. Debt to Equity Ratio=Long TermDebt/Owner's Equity
0.747 0.830 0.728 0.848
Long Term Debt 82.000 100.000 96.000 122.000
Owner's Equity 109.820 120.431 131.876 143.817
PROFITABILITY RATIOS 1969 1970 1971 1972
1. Net Profit Margin = Net Profit AfterTax/Sales
0.065 0.060 0.059 0.056
Net Profit 15.913 15.701 16.535 17.031
Sales 246.100 263.327 281.760 301.483
2. Operating Profit Margin = OperatingProfit/Sales
0.122 0.118 0.118 0.112
Operating Profit/EBIT29.965 30.949 33.364 33.822
Sales 246.100 263.327 281.760 301.483
3. Return on Assets = Net Profit /TotalAssets
0.069 0.060 0.061 0.054
Net Profit 15.913 15.701 16.535 17.031
Total Assets 231.518 262.840 269.364 316.978
4. Return on Equity = Net Profit /Stokholder's Equity 0.145 0.130 0.125 0.118
Net Profit 15.913 15.701 16.535 17.031
Stockholder's Equity 109.820 120.431 131.876 143.817
5. Payout Ratio = DividendsDeclared/Net Profit After Tax
0.320 0.324 0.308 0.299
Dividends Declared 5.090 5.090 5.090 5.090
Net Profit 15.913 15.701 16.535 17.031
6. Plowback Ratio = 1 - Payout Ratio 0.680 0.676 0.692 0.701
Payout ratio 0.320 0.324 0.308 0.299
MARKET VALUE RATIOS 1969 1970 1971 1972
1. Earnings Per Share= NetIncome/Outstanding No. of Shares
2.188 2.159 2.274 2.342
Net profit 15.913 15.701 16.535 17.031
Outstanding Shares 7.273 7.273 7.273 7.273
2. Book Value Per Share=TotalEquity/Outstanding No. of Shares
15.100 16.559 18.132 19.774
Total Equity 109.820 120.431 131.876 143.817
Outstanding No. of Shares 7.273 7.273 7.273 7.273
Interpretation of the ratio analysis
Net Profit Margin
1969 1970 1971 1972
Equity Financing0.065 0.070 0.064 0.062
Debt Financing0.065 0.060 0.059 0.056
In equity financing, the net profit margin is little higher than the debt financing. It is a result of
reduced amount of interest expense.
Return on Equity (ROE)
1969 1970 1971 1972
Equity Financing0.115 0.107 0.099 0.083
Debt Financing0.145 0.130 0.125 0.118
For Debt financing, the return over equity increases significantly over the years.
Dividend Payout Ratio
1969 1970 1971 1972
Equity Financing0.381 0.369 0.375 0.418
Debt Financing0.320 0.324 0.308 0.299
Dividend payout ratio increases in equity financing because the no. of shares will increase and
the payout remaining constant at 70 cents per share.
Long Term Debt Ratio
1969 1970 1971 1972
Equity Financing0.225 0.183 0.163 0.126
Debt Financing0.354 0.380 0.356 0.385
After all the financing, the long term debt is 38.5% in 1972, which is still lowest in the industry.
Earnings per share
1969 1970 1971 1972
Equity Financing1.835 1.894 1.866 1.722
Debt Financing2.188 2.159 2.274 2.342
The most significant change in debt and equity financing is the earnings per share. In equity
financing, the no. of stocks increases in ’69, ’70, and ’72 which diluted the no. of shares rapidly
and the earning per share keep declining in equity financing whereas earnings per share keep
increasing debt financing.
Q2. RECOMMEND AND DEFEND THE FINANCING DECISIONS THAT CROWN’S MANAGEMENT SHOULD
MAKE IN 1969?
Mr. Walter Bennet, treasurer of Crown Corporation has 3 alternatives to meet the company’s
financial needs of $30m in 1969.
1. Equity financing by selling 1.4 million shares for $30 million.
2. Lending from commercial banks at an interest rate of 7.25%, repayable at an annual rate
of $5 million beginning in 1970 and ending in 1975. Additional funded debt limited to 20
million and restrictions on dividend payments.
3. Convertible debenture issue privately with Northern Life Insurance Company at a
coupon rate of 6% and annual debt retirement of $2m starting in year six through twenty.
Debentures can be converted after ten years @$31.50 per share.
Out of the three alternatives, the second alternative is left out at beginning without any analysis
as because since Crown have another debt alternative at a lower rate with debt retirement
facility for 20 years. Therefore we were left with two alternatives, debt financing with debentures
or equity financing.
Theoretically, we always know that cost of equity is always the highest as it doesn’t give any tax
benefit and also the investors demand higher returns. Here in Crown’s case, if we issue 1.4
million shares to raise 30 million, no. of shares will be diluted and earnings per share will
decline. This may have an adverse effect on the future and the market price of shares may go
down due to the declination in EPS. The dividend policy is 70 cent per share, and equity
financing will increase the payment of dividends as the no. of shares will increase. Therefore the
retained earnings will decrease due to the increased amount of dividend payments. In equity
financing the profit before tax rises by a little margin due to the reduced interest payments but
that also results in high tax payments.
The third alternative, going for issuing convertible debentures @6% coupon rate with Northern
Life Insurance with a debt retirement facility of $2m per year starting from sixth year seems a
very lucrative alternative. It is giving 5 years of flexibility, which means we don’t have to pay any
principal amount and we can use the whole debt for our capital expenditure needs and increase
the production. The convertible debentures can also be converted into equity stocks after 10
years @31.5 per share.
Our recommended decision for Crown Corporation is that they should go for debt financing with
convertible debentures with Northern Life Insurance. This will give us a tax benefit, dividend
payments will not increase, retained earnings will increase hence increasing the shareholders’
equity, earnings per share will increase, and as a result, the market value per share of Crown
Corporation is expected to increase.
Q3. INDICATE THE PLAN OF ACTION THAT SHOULD BE SET UP TO MEET THE COMPANY’S ANTICIPATED
FINANCE REQUIREMENTS OVER THE NEXT 3-5 YEARS AND SHOW WHY YOUR RECOMMENDED PLAN IS
BETTER SUITED TO THE COMPANY’S NEEDS THAN VIABLE ALTERNATIVE PLANS.
After the financial decision taken in 1969 to issue convertible debentures, Crown Corporation
needs another $22 million in 1970 and $30 million in 1972. Crown Corporation will be needing
the following capital expenditures:
1. $39 Million in 1969
2. $32 Million in 1970
3. $7 Million in 1971
4. $50 Million in 1970
This indicates that Crown Corporation is going for heavy industrial investment over the next few
years. One major reason for this is to complete the Eastalco project and raise the capacity to
170 million pounds of primary aluminum by 1972. Once the Eastalco project is completed,
Crown Corporation will become a fully integrated producer of aluminum and will have surplus
primary aluminum to sell. In total the sales will boost up in 1973 and cost of production will be
less.
Crown Corporation is a renowned company in aluminum industry. The most important
competitive advantage for them is the trust of the customers is so high due to their quality and
technical excellence.
If we look at the present situation of the industry, then it is found that the price of ingot has risen
several times since 1961. Current price of ingot is $0.27 per pound.
There was labor issue which was solved in 1968 and the production seems to be stable.
If Crown Corporation go for all the capital expenditures in the upcoming years to make it a fully
integrated producer through technological advancements, Crown Corporation will be able to
boost up their sales by 1973 and additionally they will be able to sell the surplus primary
aluminum at a higher rate.
For the finance requirement in 1969 and 1970, it will be lucrative to go for convertible
debentures so the share price will not be diluted and hence increasing the firm value. After their
successful operation in the three years, in 1972 the price of share is expected to rise as it will
gain the trust of the investors. Anticipated sales figures will increase at a higher rate in 1973.
Therefore in 1972, to fulfill the finance requirement of $30 million, Crown Corporation may go for
equity financing instead of debt financing as the company will already have large amount of debt
for their previous borrowing. So in case of new debt, the lenders will demand higher interest
which will also increase the interest payments.
If the market price of share goes high, Crown will be able to raise $30 million by issuing less no.
shares and dilution will not be very significant and hence the EPS is not expected to fall
significantly. The rise in the payment of dividends will be lower and will not have much effect in
the retained earnings. We assume that we will be able to raise $30m by issuing 700,000 shares.
Therefore the action plan for Crown Corporation for the financing requirements in next 3-5
years:
Borrow in form of convertible debentures in 1969, and 1970
Go for fully integrated production
Imaginative research and development program for introducing new product line
Aggressive marketing strategy to grab new market share
Finance by issuing new shares in 1972
Debt and Equity Financing Pro Forma Statements
Projected Income Statements (Debt Financing in 69, 70, and Equity Financing in 72) (In $m)1969 1970 1971 1972
Net Sales 246.10 263.33 281.76 301.48
Cost of Sales and Overheads 209.19 223.83 239.50 256.26
Depreciation 6.95 8.55 8.90 11.40
Operating Profit 29.97 30.95 33.36 33.82Financial Income 2.66 2.84 3.04 3.26Financial Expenses 3.36 4.92 6.00 5.76Other Income (Expense) (0.70) (2.08) (2.96) (2.50)
Income before taxes 29.26 28.87 30.41 31.32
Federal Income Taxes 13.35 13.17 13.87 14.29
Net Income 15.91 15.70 16.54 17.03Dividends 5.09 5.09 5.09 5.58
Retained Earnings 10.82 10.61 11.45 11.45
Per Share Data
Earnings 2.19 2.16 2.27 2.14
Dividends 0.70 0.70 0.70 0.70Dividends accrued 5.09 5.09 5.09 5.58No.of shares (in millions) 7.273 7.273 7.273 7.973
Projected Balance Sheets (Debt Financing in 69, 70, and Equity Financing in 72) (in $m)1969 1970 1971 1972
AssetsCash 4.75 5.08 5.44 5.82
Marketable Securities 15.65 16.75 17.92 19.17
Accounts Receivable 39.18 41.92 44.86 48.00
Inventories 52.89 56.59 60.55 64.79
Other 1.00 1.00 1.00 1.00Total Current Assets 113.47 121.34 129.76 138.78
Gross Fixed Assets 125.00 150.05 148.50 189.60Depreciation 6.95 8.55 8.90 11.40Net Fixed Assets 118.05 141.50 139.60 178.20
Total Assets 231.52 262.84 269.36 316.98
LiabilitiesAccounts Payable 14.67 15.69 16.79 17.97
Accrued liabilities 9.52 10.19 10.90 11.67
Accrued Taxes 8.96 9.59 10.26 10.97
Dividends payable 1.00 1.00 1.00 1.00Current Maturities - Long Term Debt 4.00 4.00 4.00 4.00
Total current liabilities 38.15 40.47 42.95 45.61
Long term debt 78.00 96.00 92.00 88.00Deferred federal taxes 5.55 5.94 2.53 9.55Stockholders' equity 109.82 120.43 131.88 173.82
Total Liabilities and net worth 231.52 262.84 269.36 316.98
Appendix