Cumberland Worldwide Corporation (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Cumberland Worldwide Corporation (A) Case Solution

Sam Adams:

The Samuel Adam Mutual life insurance company imposed the restriction upon the Cross River that it cannot transfer money more than specified level to its holding corporation. Which is reflecting the deep covenant level from Sam Adams’s towards Cross River.

Preferred Stock Holders:

As we know that the preferred stock holders are coming under both categories; as stock holders and as bond holders. So, they are very much concerned about their wealth that can be plummeted when the company loses its wealth. They avoid taking loan because it will increase the risk for preferred stock holders because they will receive their dividends after making their payments to the debt holders and before the payment of common stock holders.

Common Stock Holders:

The common stock holders are intending to increase the value of investment in Cumberland Worldwide Corporation because the current beta of the company shows that they are facing less financial and business risk. So, it is the best time to invest and produce new products because this will enhance the revenues for the company that will generate higher profits and ultimately, they will receive more dividends.

Chapter 11 Protection:

Chapter 11 provides many benefits and protections to the company like; it will provide the ease in raising external capital for the product development and market penetration. In contrast, it has some negative consequences for the business of Cross River that includes the confirmation plan for the company from most of the claimers before its implementation.

The main problem in chapter 11 protection is the filling of plan which will take the time duration of 2 to 3 years for completion and if any claimer refuses the plan then the plan can no longer be proceeded for implementation.

Another disadvantage is that the loan taker will bear all the legal charges to proceed the plan and to follow the method of acceptance of plan that requires the huge time and investment which according to me has the high chances of bankruptcy.

Bank Lender:

Here the problem is; the lender may accept those projects which doesn’t provide financial benefits to the company due to the less knowledge about the business and management skills.

Sam Adams:

The insurance company might react moderately on the above plan as the plan provides the company indifference that the insurance company perceives of not much benefit. The short-term finance will become the long run which is not beneficial for the enterprise.

Preferred Stock Holders:

The bankruptcy plan will not be useful for the preferred stockholders because they will receive their claims after the lenders which will not be as much higher as compared to previous. So, the short-term financing will not be beneficial for the preferred stock holders.

Common Stock Holders:

They will receive their claims after the preferred stock holders. So, at the time of bankruptcy, they will receive almost nothing as compared to the debt holders and preferred stock holders. So, the short-term finance is not beneficial for common stock holders.

Motor’s Recapitalization Plan:

The main reason for the recapitalization plan is to maintain the interest cover ratio and debt to equity ratio. In which the company will decrease its debt to maintain the interest cover ratio and debt to equity ratio.

Another reason to go for recapitalization plan is to remove the preferred share holders from its balance sheet, because they are like debt holders and they don’t have any maturity (for infinite period).

This restructuring will increase the tax payment as their interest rate will reduce. Interest rate reduces, income increases and when income increases, tax will be imposed upon income.

When the debt will get secured it will increase the interest of equity financers into the company, which will lead to an increase in the prices of shares because the perspective of shareholders will change about the company then they will either to sell or those who do not have the enough shares, will purchase more. When demand increases and supply decreases then prices will goe up. This will be very beneficial for the company.

Recommendation for Recapitalization:

For the offer of secured debt holders, the debt segment has long maturity period which demotivates the debt holders to switch or convert their interest in the mixture of debt and equity offer. On the other hand, the unsecured debt holders also get longer maturity debt which can persuade the debt holder to refuse the offer which is not in the best interest of the company.

In contrast, the early maturities attracts the lenders to invest in the new plans for the company with new covenants. Although this will increase some costs like renewal of covenant cost and others, which will specially increase for taken loan. But overall, short term loan will give the more benefits than long term loans.

The company requires the high acceptance from debt holders and less acceptance is required from preference stockholders, so the company can reduce the benefits offered to preference stockholder that mean more specifically the company reduces the common share offer to 1.20 so that equal benefit distribution can be possible.

The company needs to negotiate with the fund providers deeply, especially with Sam Adams because he is imposing too much covenants while giving bank loan.........

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