Massey-Fergusion Case Study Essay
Massey-Fergusion Case Study
1. Net sales for Massey-Ferguson actually increased between 1979 and 1980. Despite this, net income and income from continuing operations both dropped sharply in 1980. Which item on the income statement was most responsible for this drop in income?
The item on the income statement most responsible for this drop in income was the rise in cost of goods sold due to currency risk exposure. The pound appreciated strongly against currencies that Massey sold its products. Especially since engine production was highly concentrated in the United Kingdom. Cost of goods sold rose from $238.18 million to $2568.5 million from 1979 to 1980 because of the rise in strength of the British pound.
2. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?
A bulk of Massey’s operations were centralized in Canada which meant that a large portionof Canada was employed by Massey (6,700 in Ontario) and without the help of the Canadian government these jobs would be loss and they would need to pay out unemployment. Also, Argus Corporation, a stock holding company in Canada, had a 16.5% stake in Massey and was a conservative supporter who wanted more support for Massey.
3. Why would it be difficult for Massey-Ferguson to conduct an equity issue to pay down its debt?
It would be difficult for Massey to conduct an equity issue to pay down its debt because of how much debt Massey accrued and their consistent inability to pay it. Also, Argus refused to take a block of preferred share issues Massey intended to issue in 1980. Since Argus was Massey’s largest shareholder, if they lacked confidence in Massey it shows a lot. Massey also fell behind with dividends to both preferred and common shares due to covenants on their outstanding loans. So equity capital was out of the question.