Case #02: Kota Fibres LTD.
(Questions for Case Preparation
The following questions will help you in the preparation and analysis of this case. Use these questions as a guide in your study of the case. However, do not limit yourselves to these questions only, but rather allow yourselves to expand your thinking and analysis of this case.
1. How did Mehta construct his financial forecast? Using the financial forecast, prepare to show the “cash cycle” of the firm (i.e., the flow of funds through the working-capital accounts of the firm).
2. Examine the exhibits in the case. On the basis of Mehta’s forecast, how much debt will Kota need to arrange for the coming year? Will Kota be able to repay the line of credit this year?
3. Why do Kota’s financial requirements vary across the year? What are the key determinants of
Kota’s borrowing needs? Please exercise the spreadsheet model to identify the critical forecast assumptions.
4. Consider the four memos that Pundir received. Use your intuition to assess the desirability of two of the proposals:
Pondicherry’s request for credit: What will be the effect of this proposal on accounts receivable and debt balances across the year?
The level-production proposal: If Kota undertakes level production now, at the low point of the annual business cycle, what is the likelihood of inventory stock-outs at the peak of the business cycle? If Kota undertakes level production just after the peak, what will happen to inventory and debt balances at the cyclical low?
Are these proposals liable to relieve, or worsen, Kota’s ability to “clean up” its bank loan by the end of 2001? What action should Pundir take on these two proposals?
5. Why does the bank require 1 30-day “clean-up” of the loan? Should the bank continue to waive compliance with this covenant?
6. Please identify the three most important actions or policies