A Pharma company has recently recruited 4 scientists at an average age of 27 and is looking to develop quite a few pharmacological formulations. With a view to retain them the company proposes to offer a housing scheme to them on the following terms and conditions:

• The number of beneficiaries will be four in number
• The total cost of purchasing apartments will be Rs.1 crore
• PNBHFL offers an 18 year term @ 9.00% interest and HDFC offers 15 years term @ 8% interest.
• The company will pay the housing finance company on an installment basis.
• A Down payment of 5% of the cost of the apartment has to be made and recoverable from the employee in 24 installments. The upfront payment will be made by the company.
• In case of availing the loan from HDFC,50% of the installment will be recovered from the employee on a monthly basis and in case of availing the loan from PNBHFL 45% will be recovered from the employee. The option of choosing the service rests with the company only.
• Assume that employee deductions happen on the first day of the month and housing loan payments made by the company happens on the last day of the year.
• The housing loan is offered on a fixed interest basis and EMI will not change.
• Assume the individual apartments are of equal value.

You are called upon to do the following:

• Calculate the two EMI options and choose the best one.

 

 

 

 

 

 

• Case Let on Agency Conflict                                                                   20 Marks

Lean Conductors Ltd is a mid-sized Public limited company engaged in the manufacture and sale of electrical cables. As a public limited company the organization was performing reasonably well, earning steady profits and declaring a stable dividend of 12-15%.

The CEO was feeling the urge to expand the business and taste the growth of business operations and profits. He started addressing various options and shortlisted 2 options namely manufacture of LED bulbs and solar panels.

He called the Gen Mgr. - Finance for a discussion in this regard to probe the matter further. He also went on to share his dream of making the company a larger one and his belief in people like the GM who needs to stay and grow with the organization.

The GM felt excited at this prospect and started making a project report. He decided in his own mind the solar panel project with a larger profit margin looked to be a better one than LED bulbs which was dealer intensive and lesser in terms of unit margin.

Feeling the need to expand rapidly on the investment of the company and make it bigger and become a CFO in the bargain, he chose the solar panel project which was more capital intensive. An assumption about a capital structure and cost congruent to the existing structure was assumed and the projected financials were prepared.

The board of directors representing the majority of shareholders believing in the recommendations of the report adopted it for implementation.The project faced various hurdles in its implementation such delays in signing collaboration agreements, inflated costs due to poor supply of money in the market, the downturn of the economy and so on. The project cost started spiraling up and to fund the expansion the funds of the existing business line were inducted into the new project since no further borrowing could be made. The company slipped into the red and reached a stage of bankruptcy without the new project even taking off.   

Questions:

• Trace the conflict between the management and the shareholders in this case study.
• Is the act of GM Finance an error or sin?
• Where do you think the CEO went wrong?

 What according to you is the approach the CEO should have taken