Case let and discussion questions on corporate finance

Case study 1: Profit vs Wealth Maximisation

Falcon Electronics experienced a 22% decline in quarterly profits due to heavy R&D expenditure However, the market price of shares increased, leading to a higher market capitalisation.
This situation clearly highlights the classic conflict between Profit Maximisation (short-term focus) and Wealth Maximisation (long-term value creation). While accounting profits have reduced, shareholder wealth has increased.

Discussion question.

1.   Should Management Continue Heavy R&D? Justify with appropriate explanation

 

 

Case Study 2 : Interface Between Finance and Other Business Functions

Bright Wave Appliances Pvt. Ltd. is a mid-sized company manufacturing home appliances such as mixers, air coolers, and induction stoves. Recently, the company announced plans to launch an energy-efficient mixer grinder to meet growing consumer demand.

To move forward, different departments must coordinate with the Finance Department:

·       The Marketing Department wants a higher promotional budget to position the product as a premium eco-friendly appliance.

·       The Production Department requests funds for new machinery needed to manufacture the energy-efficient model.

·       The Human Resource Department seeks budget approval for technical training for workers.

·       Meanwhile, the Finance Department is concerned about rising costs and limited working capital. They must evaluate whether the proposed investments will generate sufficient returns and keep the company financially stable.

The leadership team now expects the Finance Department to work closely with Marketing, Production, and HR to evaluate the feasibility of the new product launch.

Discussion Questions

1. Why is coordination between the Finance Department and the Production Department essential in this case?

2. How does the Finance Department support the Marketing Department’s promotional strategy?

 

3. What is the role of the Finance Department in supporting HR’s training and development initiatives?

 

Capitalisation

 

Case study 3

Steel Manufacturing Ltd expects a stable annual profit of ₹12,00,000 based on its existing operations.

The normal rate of return (NRR) for this type of business in the industry is 10%.

The company currently has the following capital employed:

 

Particulars	Amount (₹)
Equity Share Capital	80,00,000
Preference Share Capital	20,00,000
Long-term Debt	10,00,000
Total Capital Employed	1,10,00,000

 

The management wants to evaluate whether the company is over-capitalised, under-capitalised, or adequately capitalised.

 

Questions

Q1. Calculate the capitalized value

Q2. Compare the calculated capitalized value with the actual capital employed.

Q3. Decide whether the firm is over-capitalised, under-capitalised, or adequately capitalised.

 

 

Case study 4: Sustainable Financing at Evergreen Textiles Ltd.

Evergreen Textiles Ltd., a 12-year-old garment manufacturing company, plans to shift towards eco-friendly production to meet global sustainability standards and secure long-term competitiveness.
The company wants to install solar rooftops, adopt water-recycling units, and introduce a zero-waste manufacturing process. These initiatives require an investment of ₹40 crore.

To fund the project, Evergreen’s management is evaluating several financing sources:

Traditional Sources of Finance

·       Equity Capital: The company can issue new shares to raise long-term funds, but existing shareholders fear dilution of ownership.

·       Term Loans from Banks: Banks are willing to provide loans but at higher interest rates due to long payback periods.

·       Debentures/Bonds: Issuing corporate bonds could provide stable long-term funds, but requires strong credit ratings.

·       Retained Earnings: Some internal funds are available, but not enough to cover the full project cost.

Sustainable/Green Financing Options

·       Green Bonds: Global ESG investors have shown interest in funding the solar and water-recycling system if Evergreen issues certified green bonds.

·       Government Subsidies and Grants: The government offers subsidies for solar installations and waste-management technologies under sustainable manufacturing schemes.

Discussion Questions and Answers

1.     Identify a balanced financing mix that ensures financial stability

2.     Give justification for the combination made to source the financial requirements.