qweqweqwweqwweqweqweeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee- eeeeeeeeeeeeeeewwwaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa- aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaasssssssssssssssss- ssssssssssssssssssssssssssssssssssssssssssssssssssssssssssss- ssssssssssssssssssssssssssssssssssssssssssssssssssssssssssss- ssssssssssssssssssssssssssssssssssssssssssssssssssssssssssss- sssssssup the analysis at the end of 1976 before trouble began. We will ask what capital structure might have been appropriate to prepare for what was coming. Then we will watch MF’s downward spiral after 1976 and its subsequent default. The focus will be on what can happen to an over-leveraged firm and the enormous costs of financial distress. Assignment
1. Evaluate MF's operating performance (5-year sales growth rate, recent ROEs) using data available through 1976 before the troubles began.
2. What was MF’s financial policy (through 1976) in terms of leverage measures? 3. What target coverage ratio (1, 2, or 3) would you have recommended in 1976? Why? Taking 4% (see the table below for 1978-80) as the realistic worst case OPM and borrowing costs of 10% in 1976, what target debt ratio would you have recommended?
4. Where was MF relative to your target? Where were Harvester and Deere in 1976? 5. What went wrong after 1976? How did MF respond? (See Exhibits 4 and 6.) Look at receivables, inventory, short- and long-term debt, market share and CAPEX share. Questions for Discussion
1. Review the key elements of MF's product market strategy through 1976, e.g., the strategy for the third world, new product line extensions, dealing with competitors, etc. Did these strategies make sense?
2. How did they deal with political risk, foreign exchange risk, and logistics problems? (See Exhibit 5.) 3. Deere has the upper hand in the North American market by the end of 1980 but its debt ratio has risen dramatically as it rode out the storm. MF has defaulted and Harvester is on the ropes. What should Deere do...
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