massey-ferguson case question
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?
2. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?
1. Other interest expense and the exchange adjustments on the income statement were mostly responsible for the drop in income. There are high interest rates in the late 1970s, so creating a double negative effect on the performance of Massey-Ferguson. First, the cost of Massey's short-term debt increased sharply, contributing to a higher interest expense. Second, the sales of the company was greatly affected because of the fact that the high interest rates depressed markets for farm and industrial machinery, lowering the demand for the machinery. Besides, the production process and the market are in different geographical locations. Engine production was heavily concentrated in the United Kingdom, while the market is spreaded around the globe. In 1980, the pound rose sharply relative to currencies in which Massey sold its products due to the influx of North Sea oil. With the appreciation of pound, the cost of goods sold of Massey was increased, hence a lower income was achieved.
2. The Canadian government had a big incentive in helping to refinance Massey- Ferguson Company. They wanted to keep them operating in Canada because they provided a lot of jobs to Canada and because it was politically convenient because an election was about to take place. Another big reason was because Argus Company was invested in Massey – Ferguson and if they had to provide more cash for Massey- Ferguson to not go under they may scale back some of their growth and possibly lay people off or pursue other opportunities elsewhere so that cost of making their products is even lower than Canada.
2. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?
1. Other interest expense and the exchange adjustments on the income statement were mostly responsible for the drop in income. There are high interest rates in the late 1970s, so creating a double negative effect on the performance of Massey-Ferguson. First, the cost of Massey's short-term debt increased sharply, contributing to a higher interest expense. Second, the sales of the company was greatly affected because of the fact that the high interest rates depressed markets for farm and industrial machinery, lowering the demand for the machinery. Besides, the production process and the market are in different geographical locations. Engine production was heavily concentrated in the United Kingdom, while the market is spreaded around the globe. In 1980, the pound rose sharply relative to currencies in which Massey sold its products due to the influx of North Sea oil. With the appreciation of pound, the cost of goods sold of Massey was increased, hence a lower income was achieved.
2. The Canadian government had a big incentive in helping to refinance Massey- Ferguson Company. They wanted to keep them operating in Canada because they provided a lot of jobs to Canada and because it was politically convenient because an election was about to take place. Another big reason was because Argus Company was invested in Massey – Ferguson and if they had to provide more cash for Massey- Ferguson to not go under they may scale back some of their growth and possibly lay people off or pursue other opportunities elsewhere so that cost of making their products is even lower than Canada.