Kano Fashion Case Study

Kano Fashions:

A)

1) Restructuring is a process in which may result in transfer of ownership or change the scope of business for the betterment of the company. Restructuring is based on a serious decision that whether to get rid of financial debts, reduction of services or selling a part of business to investors. To implement this decision either the new CEO or the company will make that decision.

The objective of restructuring is to ensure that the entity will become more organized and effective.

Companies which are financially unstable usually use corporate reconstructions, which facilitates them to remain in business rather than to go for liquidation. Corporate reconstructions usually involves raising the capital and trying to satisfy

According to that approach value of the firm is not dependent on the capital structure. Cost of debt will remain constant and corporate income tax doesn’t exists. Value of the firm is calculated using the overall cost of i.e. the WACC only. In other words finance mix is irrelevant and doesn’t effects the value of the firm.

• Modigliani and Miller model (MM): This theory supports the NOI concept and accepts that capital structure has no effect on the value of firm. According to that theory capital markets are perfect and investors are free to buy, sell and switch between securities. Investors can borrow without any restriction and are informed about the risk and return of all securities. There will be no corporate income tax and transaction cost.

• Traditional Approach: This theory exists in the middle of Net Income Approach (NI) and Net Operating Income Approach (NOI). According to that approach a best possible mix of debt and equity will maximize the value of the firm. Because cost of debt is less than cost of equity so the entity should debt finance to a point where WACC is lowest. A point came where more debt financing will not reduce the WACC. But will increase the business risk which will increase the cost of equity and ultimately WACC increases and value of firm

By adopting that capital structure approach Kano fashions will have lower WACC as they have choose to utilize internal funds rather than go for equity and debt finance. And ultimately this will benefit the company and shareholders.

Kano Travel:

1) Kano travels must consider the following factors before the investment:

Economic:

With respect to economic factors Kano have already spend £0.3 million on research and the result of research shows that due to continuous fall in oil prices this is a good business opportunity for Kano to invest in. On the other hand arranging £150 million funds for the investment is needs to be consider that whether the entire investment will be from internal sources, debt or issuing new equity, or a mix of all three.

The followings are also needs to be considered:

i. Interest Rate Risk: It is a risk in which there is a probability that due to the rise in interest rates fixed rate debt instrument will decline in value. ii. Business Risk: A risk in which the company needs to consider that whether the risk in the finance is bearable for the company or the company should