Case Study : National Foods Corporation

Group 8

• Rachana Walavalkar (PF2123-D032)
• Rukkaiya Bhadsorawala (PF2123-D036)
• Pragati Tripathi (PF2123-A041)
• Riya Pandit (PF2123-D044)
• Raveena M (PF2123-A045)
• Hemant Singh (PF2123-E301)
• Supriya Sant (PF2123-E296)
 Introduction 

In early 1994,National Foods Corporation, was reviewing capital expenditure

procedures for the major divisions of the company.

This minimum return recently had been lowered from 15% to 13%

The company was uneasy not only about the overall required rate of return but
also about allocating capital at this single rate.

As the March board of directors meeting was less than two months away, Mr.
Quick and others in senior management needed to come forth with a proposal.
Agriculture 
• At the beginning company was
only a grain processor
• In the 1920, it started to brand
certain corn and wheat products
• From time to time , division
acquired other enterprises 
• Divestment of business in 1985
 Bakery
• Bakery products division consists
entirely of branded products, with
many of them enjoying dominant
positions
• Competition is intense in this industry,
but National Foods has achieved
product dominance
• bakery products division is profitable
• Average beta - 0.82 

This Photo by Unknown author is licensed under CC BY-NC-ND.

 Restaurant 

• It has highest sales and profit in all

the segments
• The identifiable assets were lower
as compared to bakery in 1999 but
in 1993 it has become highest in all
the segments
• Average beta of the segment 1.27.
• Long term liability to capitalization
is 0.40.
Issues 

Restaurant head was

Single or multiple Parameters for aggressive for more
rate of return capital allocation long-term liability-
to-capitalisation ratio
 Calculations
  Rfr (5 yr) Rm(early1994) Beta Re
Agriculture 5.40% 11.00% 0.98 10.88800%
Bakery 5.40% 11.00% 0.82 9.99200%
Restaurant 5.40% 11.00% 1.27 12.51200%
Overall 5.40% 11.00% 1.05 11.28000%

  Avg. Sales Avg. Profit   Total Capital Equity Debt

Agriculture 22.71% 17.62% Agriculture 18%
0.7 0.3
Bakery 40.72% 37.08% Bakery 37%
Restaurant 36.57% 45.30% Restaurant 45% 0.5 0.5

Assumptions
• Average Beta of the industry is considered as beta of the company
• 5-year Treasury rate is taken as the risk-free rate
• Long term liabilities to capitalization ratio is assumed as Debt-Equity ratio
 Solution
• Multiple rate of return 
• Variable weightage  
• Better efficiency 
• Focus on all divisions 
• More allocation for restaurant 
Conclusion 
• A firm's management seeks to allocate its capital
in ways that will generate as much wealth as
possible for its shareholders.
• “If your objective is competitive advantage and
growth, you have to keep an eye on the
fundamentals of the business.​