A. Basic financing strategy of Garuda Udyog between year 2000 and 2005. 1) In 2000, Company has gone for heavy capital investment of around 12 billion; 7.5 billion of which was financed through own funds and remaining 4.5 billion was financed by Long Term Debt. 2) In 2001, the capital and financial requirement was financed from long term debt of about 5.5 billion and selling of investments worth 3 billion. 3) In 2002, The debt burden has been reduced significantly which was mostly done out of business profits. 4) In 2003, the Public Issue was made which was subscribed almost 20 times higher than the face value. 5) In 2004, the operating profit margin and sales has been increased substantially which resulted in to higher profits. The surplus funds from business profits and Public issue was mainly parked in the investments. 6) In 2005, the profits were further increased but the funds have been withheld by company perhaps for the further business investments.
B. Rationale of the financing policy adopted by the company 1) Company%u2019s financing policy is dynamic and prudent which uses the proper financing tool at a proper time such as when own funds are insufficient; they use debt finance when the interests are low and Public issue when share markets are very responsive. 2) The company has been earning a good operating margin over the years i.e. from 1.74% (2000) to 15.66% (2005) this has been done by reducing the costs which also involved effective management of working capital. 3) The surplus funds has been used very effectively either for investments to earn income (the Investments earned an average return of 24.50% p.a. in last 2 years) or for yearly gradual payment of long term debt to reduce interest cost.
C. How should Garuda Udyog finance its future capital investments 1) Company's plan is to invest 60 billion in the next four to five years. This investment is more than the current total assets of the company which is 46.86 billion, hence company cannot finance the whole project on its own and have to resort to finance from outside. 2) If we assumed that the said investment of 60 billion will be done in phases over the 4-5 years. Then company can adopt the following measures of finance
A) Initial Year a. In the Initial Year - It can raise the money by increasing the authorised capital and going for public issue, looking at the impressive performance of the company over the years. The issue can easily be priced at minimum 25 times of the face value. b. It can issue their 0.5 billion share capital for 12.5 billion. c. The revised capital will bring down the shareholding of Tokyo motors from 56% to 41%, this can be avoided by having a right issue or preferential allotment. d. EPS may also fall down but it will be for short term only and the same will be compensated in the long run.
B) Subsequent Years a. Company have a bank balance of 10 billion, looking at the current progress of the company the balance will increase because of the possible increase in operating profits. Hence company can finance some of the project investments on their own b. For further project finance, company can resort to debt finance at the lending rate of 10% to 13%. Current rate of return in business is 15.66% and on investments it is 26% in 2005. Hence the borrowing will be more favourable option than to use either business funds or sale of investments for rest of the finance requirement.
