JC Penney Company Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

JC Penney Company Case Study Analysis

Issuance of Default bonds:

Considering the current situation of the bonds, it is likely to default because of the organization’s insignificant performance in the market. Thus, the issuance of debt in the non-investment grade i.e. speculative-grade which represents substantial credit risk does not mean the complete disappearance of the bonds. Rather, the trading of bonds continues to occur at fewer prices. After the bond’s entrance in the default region, the amount to be received and at what time will be received, would beunknown. The cost of default varies concerningthe change in the market value of organizational assets. Thus, the cost size that arises from default tends to be based on the change in the combined market value of the organization's equity and debt upon default. This significantly reflects the total default cost.

The consideration of the consistency of leverage ratios with trade-off theory, the average default cost is expected to around 45 percent. The proceeding of default occurs among the issuance of lower-rated bonds. JCP should not drawdown to the revolving line of credit because it would allow the organization to pay the debt in the period manner and can be reborrowed once it is paid. This would allow the organization with the opportunity to keep its financial status safe from running out of credit. The implication of financing costs would be based on raising funds to have enough cash to run its operations and bring an improvement in the products and services, which would potentially result in a profitable growth.

Stock Price Performance:

The performance of stock price from January 2011 to January 2013 demonstrated a drastic change. During this period, the highest stock price was observed from January 2012 to April 2012. Whereas the lowest stock price has represented a significant decline since then it is below the average stock price. This resulted in the downgrading of the stock price by about 34 percent. Declining stock prices requires the organization to sell its stocks to raise money. But, the interest of investors is not significant due to the inefficient performance of the organization followed by loss of consumer base resulting in decline sales. This results in the increased concern of investors based on the value return.

The comparison of the stock price performance with the market trends has demonstrated vast difference i.e. the stock price performance of S&P in the market was measured to be about 14 percent up as compared to the 34 percent decline in the share price of JC Penney. This means that the organization's performance is not well over a period and requires sufficient raise in the amount, in order to be able to pay the debt and continue to grow profitably. Due to this reason, the interest of investors to purchase the stocks has demonstrated a significant decline, causing the bonds to fall in non-investment grade. Thus, the bonds turned out to be near default.

Alternatives:

Common stock sale:

A common stock sale is generally referred to as equity financing, which is known to be associated with the sale of shares. This approach is used by many companies to raise capital despite taking debt from the market. Considering the financial situation of JC Penney, the concern to sell the share to raise capital does not predict the potential outcomes. This is because of the poor financial performance of the organization, such as: poor cash flows, increased debt, and other liquidity issues. Thus, the willingness or probability of the investors to buy the organization is quite low.

If an organization is known to struggle financially, the issuance of shares in the market would result in a decline in stock prices. This means that equity financing and stock prices have an inverse relationship, which causes negative impact over other factor. (Officials, 2020)Similarly, the organization does not represent the potential to demonstrate growth in the future. Based on this fact, the interest of the existing stakeholders would be negatively affected, resulting in decreased willingness to continue with the organization. The concept or perspective of investors regarding the potential of organizational growth is mainly influenced by the historical performance of the organization.

Debt Financing

The relationship between the stock price and debt financing is direct i.e. an increase in debt would result in an increased stock price by bringing a significant improvement in the market value of the organization. Similarly, liabilities in equity capital are known to bring a reduction in the cost of business operations. In case of an increase in the operational cost; an appropriate ration of liabilities would reduce the cost of equity capital beyond the increased cost of debt capital. Thus, reduction in the operational cost would allow the organization to achieve the aim of bringing improvement in the organizational performance. (Xu Lixin, 2009)

Recommendations:

Based on the analysis of the study; JC Penney is presented with two alternative approaches to consider to bring improvement in organizational performance. The analysis of both the alternatives represented an inverse relation of the stock price with equity financing and direct relation with debt financing. Similarly, restricting the organization to move below the revolving line of credit, provides the organization with an opportunity to borrow credit again. Thus, this would allow the organization to efficiently utilize debt financing to resolve the financial liquidity issues and it would also help in improving the organization through the approach of debt financing.

Fundraising impact:

The impact of fundraising of approximately $1 billion on the income statement and balance sheet of the organization can turn out to be in the favor of the organization. For this purpose, there is a requirement to make an efficient use of debt raised by setting up an expert team to analyze the market trends and to retain the interest of investors and shareholders to the business operations of the organization. These are the key requirements for the survival of the organization. In case of any mismanagement or lack of ability to determine and mitigate any related risk; the organization might experience bankruptcy......................

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