Shun Chi Matthew Yeung Fin 425 September 7, 2011 Case Study: Kota Fibres, Ltd.

In this case, a company Kota Fibres, Ltd. had some problems occurred in early January 2011. The company did not have enough cash to pay excise tax and a tax inspector needed them to pay immediately. When they were trying to look at their account and saw if they could pay the excise tax, they found out that their bank account had overdrawn. Since the tax problem, the company could not delivery them good to their customer on time. After the situation, company managers wanted to analyze their company financial date and found out what they could solve the above problems. Then, they figured out the company was facing a significant financial problem which the forecast showed that the income of the company could not pay off their debt. In the meantime, the manager should look at other issue, such as sales credit, inventory and company operation. Some of them might help the firm to solve the financial problem. The most important thing for the manager was to come up with the solution to solve the financial problem related with the cash flow. Analysis First, I compared the financial date between 2000 and 2001. In exhibit 2, we could see that the net sales rose 20% from 75 million increased to 90 million which the company in 2001 seem more profitable than 2000. However, the net profit in 2001 had significant drop almost 50% because of the 24% increase from COGS. When we compared the increased between the net sales and COGS in 2001, we could see that they had 4% difference (equal 2 million) in this relationship. If we put this 2 million in the net profit, the overall performance would be better, so the management should concern how to lower their COGS. Second, according to those financial dates, the company was growing. During the growing state, PP&E, inventory, sales and operation cost would growth and it already showed on the forecast. Then, the firm would need a huge amount of cash to cover those expenses. However, the company planned to pay 20 million dividends per in 2001 which more that the net profit 1.3 million. For the solution of their financial problem, they might decrease the payout ratio, which pay fewer

dividends and use that money to pay off the debt. The other things they could do might be outsourcing, sell new equity, profitable pruning, etc. Increasing leverage was the only thing they could not do because the company already had too much debt.