A SMALL CASE STUDY ON

FINANCIAL MANAGEMENT
Financial management:
 There was a major airline based in Mumbai, established in
2003.It was India’s fifth largest passenger airline providing
national to international, high frequency and medium to
high fare service. It started operations in 2005, from
Mumbai to Delhi and international operations in 2008 from
Bangalore to London.
 2006-Income was 4.1 billion, losses were 4.19 billion.
 In 2007, it acquired 46% of Air Deccan.
 In 2009, domestic fleet reduced and international increased.
Also, the shareholders were yet to receive their first
dividend. Losses increased and gross income shrunk.
Contd..
 In 2010, it reported increased gross income and reduced
losses. Indigo was getting into market.
 2011- It First time declared about having some serious
cash flow problems and blamed the rising fuel prices.
 2012 – turbulent year for the airline. SBI declared
kingfisher as the Non-performing asset and also declined
to further issue more debt to the company.
The airline that we were talking about:

Airlines The owner- Vijay Malya

Kingfisher story:
WHY DID IT FAIL?
 Kingfisher’s net worth had been completely eroded. While its

auditors had raised several questions regarding its accounting

practices in its annual report
 Kingfisher Airline Ltd’s loan funds stood at Rs7,543 crore (debt-

to-equity ratio of about 3:2) & Spice jet Ltd, on the other hand,
had lowest debt at Rs712 crore (debt: equity ratio about 0.7).
 Kingfishers fixed assets stood at Rs2,286 crore, but it had a

negative net working capital(excluding cash and bank balance)of

Rs1,970 crore. Jet airways had much stronger asset base with the
value of its fixed assets at rs14,417 crore, its negative net WC
was relatively lower at Rs560 crore.
Kingfisher story:
Key points:
 Kingfisher could not deliver on profitability even last
year when the going was considered to be good.
 According to analysts, the sector experienced its best
returns in the quarter ended December 2010. Even during
such times, Kingfisher net loss in 2011 stood at Rs1,027
crore.
 A higher interest cost, coupled with higher operating
losses, has led to pressure on kingfisher’s ability to
service its interest and debt. Further, it’s current liabilities
have increased by 23% in September from March.
One more case study:
 Sudha is an enterprising business woman who has been
running a poultry farm for the past ten years. She has saved
Rs. Four Lakhs for her business. She shared with her family
her desire to utilize this money to expand her business. Her
family members gave her different suggestions like buying
new machinery to replace the existing one, acquiring
altogether new equipments with latest technology, opening a
new branch of the poultry farm in another city and so on.
Since these decisions are crucial for her business, involve a
huge amount of money and are irreversible except at a huge
cost  Sudha wants to analyze all aspects of the decisions,
before taking any final decision.
 (i) Investment decision/Capital budgeting decision:
Investment/Capital budgeting decision involves
deciding about how the funds are invested in
different assets so that they are able to earn the
highest possible  return for their investors.
(ii) Factors that affect capital budgeting
(a) Cash flows of the project
(b) Rate of return of the project
(c) Investment criteria
Case study-3:
 S' Limited is manufacturing steel at its plant in India. It's
enjoying a buoyant demand for its product as economic
growth is about 7 to 8% and the demand for steel is
growing. It is planning to set up a new steel plant to cash
on the increased demand it is facing. It is estimated that it
will require about Rs.5,000 crores to setup and about Rs.
500 crores working capital to start the new plant.
(a) What is the role and objectives of financial
management for this company?
(b) What is the importance of having a financial plan for
this company?  Give an imaginary plan to support your
answer.
 Solution:
 The role of financial management
(i) Size and composition of fixed assets
(ii) Amount and composition of current assets
(iii) The amount of long-term and short term financing
(iv) Fixing the debt equity ratio in capital
While playing this role the main objective of finance manager will be
maximization of wealth of equity share holders
(b) The main importance: (i) To ensure availability of funds whenever these are
required
(ii) Determination of suitable policies for proper utilization and administration of
funds
 Case study-4:
 'Sarah Ltd' is a company manufacturing cotton yarn. It has been
consistently earning good profits for many years. This year too, it has been
able to generate enough profits. There is availability of enough cash in the
com[any and good prospects for growth in future. It is a well managed
organization and believes in quality, equal employment opportunities and
good remuneration practices. It has many shareholders who prefer to
receive a regular income from their investments
It has taken a loan of Rs. 40 lakhs from IDBI and is bound by certain
restrictions on the payment of dividend according to the terms of loan
agreement.
The above discussion about the company leads to various factors which
decide how much of the profits should be retained and how much has to be
distributed by the company.
Quoting the lines from the above discussion identify and explain any four
such factor.
Solution:
 Factors affecting
(i) Stability of earnings: A company having stable earnings is
in a position to declare more dividends and vice-versa
"It has been consistently  for many years."
(ii) Cash flow position: The better the cash flow position of the
company, the will the capacity of the company to pay dividend
"There is availability of enough cash in the company"
(iii) Growth opportunities: If the company has more
opportunities for growth, it will require more finance. In such
a situation, a major part of the income should be retained and a
small part of it should be paid as dividend
"Good prospects for growth in the future"
 Contd..
(iv) Shareholders preference: There are two types of shareholders
from the point of view of investment (a) those who invest with the
purpose of getting some regular income and (b) those who invest
in the company to gain capital profit. If the majority of the
shareholders are of the former type, the company must declare
dividend according to their expectation. On the contrary, if the
majority of the shareholders are of the latter type the company
enjoys freedom about declaring dividend
"It many have shareholders from their investments."
(v) Contractual constraints: When a company receives finance in
the form of debt, the debt provider can put a ban on the company
to give any dividend
"It has taken a loan of Rs. 50 lakhs agreement".