Kano Fashions 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

The situation becomes very critical when the entity shows a poor financial performance or when a company required a huge amount of loan for business activities. For this lenders required an assurance that their investment is safe, so the loan will be secured by an asset by pledging it as a collateral. If the entity is unable to pay the lenders on time that collateral will be used to recover the amount.

Kaplan-urwitz model is developed to generate a credit score, which incorporates entity size, profitability, type of debt, gearing ratios interest cover and level of risks are entered in a formulae to determine the credit rating of a company. E.g. a score above 6.76 suggests an AAA rating.

Yield represents return on debt issued by the company. Yield curve shows a prediction regarding the change in future interest rates due to economic activity. Bonds with lower yield are more risky than higher yield bonds due to the risks associated with time.

A positive yield curve shows that investors expects that economy will grow in future but it will also increase the inflation in future. That situation will ultimately force the central bank to tighten the monetary policy by increasing the short term rates in the future to minimize the effects of

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