CASE STUDY 5 FACTS OF THE CASE Robin is the managing director of Style Limited which was incorporated by his father twenty years back. The Company is in garment retail business and has a store in Pune. The store did not show expected growth in the initial years. However, when Robin took over as Managing Director, the Company has shown consistent profit during the past ten years. Robin believes that his store is one of the best managed in the city and he is considering now opening several new stores. FUNDING REQUIREMENTS When Robin's father started the store, most of the equity was financed by him and the remaining financing was arranged from personal loans from friends and family members. In order to open new stores Robin needs a bank loan. The bank will examine financial statements. Robin has asked you to analyse his financials. For this purpose he has also gathered relevant information of a close competitor who is in the same business for the last twenty five years. Although Robin has tabulated some information as given below, he needs your support in calculating other missing figures. ParticularsStyle Ltd.'s StoreCompetitor RevenueINR 2,000 lakhsINR 2,500 lakhs Net IncomeINR 60 lakhs----- Return on Equity (ROE)22%----- Net Profit Margin3%6% Asset Turnover22 Equity multiplier-----2 Debt Equity Ratio2----- In addition to the above, the other key issue with which Robin is confronted with is determining appropriate level of current asset. He wants your input on the key factors that need to be considered for this purpose which he agreed to do so in the next meeting. Recently one of his friends has advised Robin to revise credit payment period and receivable period in a manner that would increase value of Style Limited but Robin is also concerned about the asset-liability mismatch. In the next meeting he wants your inputs on the asset-liability mismatch. MANAGEMENT ISSUES As the level of operations is expected to significantly grow in the coming years, Robin has planned to have a robust risk management systems and procedures. Currently it is being done in silos and also he is worried about the risk culture. There is no risk strategy in writing and also risk appetite statement has not been prepared and hence decisions are made without understanding the risk. The internal auditors have also pointed out number of irregularities with respect to dealing with the suppliers, customer management, inventory management, hiring of staff and response management. Currently, reward and consequences are not aligned and hence there is a tendency amongst employees to be ignorant of risk. Reinforcing risk culture is the top most agenda at this moment. Robin has approached you to take suggestions highlighting ways to reinforce risk culture in Style Limited. EXPLORING OVERSEAS MARKETS Robin has extensive experience of Moscow & Russia markets and therefore, exploring the possibilities of opening one store in Moscow. He sees a huge opportunity there especially after recent conflict with Ukraine as most of the international brands have closed their operations. However, this decision would depend upon the analysis of related risks in opening a store in Moscow. Robin is looking your inputs on this account and also wants to know how Delphi technique can be used for political risk analysis purpose. ACQUISITION PROPOSAL Robin is also evaluating an opportunity to acquire a company named Start Ltd. which is in garment manufacturing. He has hired a registered valuer, Mr. Samal, to carry out valuation of equity shares of Start Ltd. The value per equity share of Start Ltd. as estimated by Mr. Samal is INR 1250. Before committing for the acquisition of Start Ltd. Robin wants to fully grasp the risk appetite and risk aversion. He also wants your help in estimating risk of bankruptcy of Start Ltd. He has gathered the following information for this purpose. EquityINRGoodwillINR 1000 (Face value: INR 10 each)10,00020,000 Retained Earnings (RE)86,750Net Property Plant and2,20,000 Deferred Tax Liability15,250Equipment (PPE) Long-Term Debt1,80,000Current Assets1,60,000 Total Current Liabilities (CL)1,20,000Other Assets12,000 Total4,12,000Total4,12,000 Last reported EBIT is INR 1,10,000 and Revenue is INR 9,00,000. Based on the facts given above, you are requested to answer the following questions: Multiple Choice Questions Choose the most appropriate answer from the given options.