Playing the role of the directors of Kota Fibres analyze the firm situation and its
alternatives taking into consideration the following questions:
1. How did Mehta construct his financial forecast? Using the financial forecast, prepare to show the
“cash cycle” of the firm (i.e., the flow of funds through the working-capital accounts of the firm).
2. Examine the exhibits in the case. On the basis of Mehta’s forecast, how much debt will Kota
need to arrange for the coming year? Will Kota be able to repay the line of credit this year?
3. Why do Kota’s financial requirements vary across the year? What are the key determinants of
Kota’s borrowing needs? Please exercise the spreadsheet model to identify the critical forecast
assumptions.
4. Consider the four memos that Pundir received. Assess the desirability of two of the proposals:
Pondicherry’s request for credit: What will be the effect of this proposal on accounts receivable
and debt balances across the year?
The level-production proposal: If Kota undertakes level production now, at the low point of the
annual business cycle, what is the likelihood of inventory stock-outs at the peak of the business
cycle? If Kota undertakes level production just after the peak, what will happen to inventory and
debt balances at the cyclical low?
Are these proposals liable to relieve, or worsen, Kota’s ability to “clean up” its bank loan by the end
of 2001? What action should Pundir take on these two proposals?
5. Assess the impact of the other two proposals, and then analyze them with the aid of the
computer-spreadsheet model. What action should Pundir take on these two proposals?
(Please note that the forecasting model incorporates a circular reference among the financial statements.
Accordingly, students should set the model to iterate a number of times [try 15] to find a solution in which the
various financial statements converge toward agreement. In Excel, students should click on options,
calculation, and iteration.)
The new inventory policy proposal: (Hint: purchases will be a percentage of next month’s sales, and
wages will be a percentage of this month’s purchases.) What effect will this scheme have on
inventory and debt balances? To see whether the effect will be material, reforecast the financial
statements based on an adjustment to the purchases/sales ratio that produces the desired reduction in
the final inventory balance (in the model, purchases drive wages and, hence, inventory).
Hibachi Chemicals’ “just-in-time” proposal: (Hint: assume that this proposal will reduce 35
percent of the firm’s inventory to about 5 percent of its former balance.) What will be the effect of
this proposal on inventory and debt balances? To see whether the effect is material, reforecast the
financial statements based on an adjustment to the purchases/sales ratio.
6. Why does the bank require a 30-day “clean-up” of the loan? Should the bank continue to waive
compliance with this covenant?
7. Please identify the three most important actions or policies that Pundir should take. What should
Pundir say to the bank? To the customers?