Colt Industries Case Solution

Purpose of recapitalization for Colt Industries

Recapitalization refers to the change in company’s capital structure. For example, an exchange of bonds for stock. The common purpose of recapitalization is to make the structure of company more stable and make change in debt and equity. More often recapitalization is made so as to boost the stock price of the company through the issuance of buying stock and bonds.

Some companies deliberately issue share and bonds in order meet the finance need and making the stock riskier. However, riskier stocks tend to have more dividend payout ratio that stillmake them attractive investment. On the other hand, recapitalization also undertook by those bankrupt companies who are going through their reorganization process.

Colt Industries has been very successful during past years of its operation. The management is happy from its success but the financial community has several concerns. The Colt performed well in 1985, the profits have increased but however, some of its business segments areexperiencing a high competition that was the due to the technical obsolescence.

The management put nil effect as far as the aerospace/government department is concerned. The result of this has beenno increase in its sales as compared to the previous year. Whereas, the segment accounted for 34% of total company sales in 1985 and 35% of operating income. The other segment whose position declined was company’s automotive industry segment. The reason for this was the lack of company’s competence of proving fuel injection rather than focusing on carburetion which was not the company’s major fuel management system. Whereas, this segment accounted for 34% of total company sales and 39% of operating income.

These two segments were the major concern for Colt Industries as profits from these two were declining and not improving. Colt wanted an immediate recovery in earnings in the upcoming years and intent to raise the share price to approximately $6.60. The management of Colt Industries is positive that it would again stand up with these two segments and would put emphasize on new technology regarding car manufacturing. The growth in aerospace/government segment is full of potential and the Colt could gain relatively flat level of profits.

To make these plans possible, Colt Industries wanted to invest in the technological advancement in order to compete in its large market and earn substantial returns. Improvements are necessary to be made and for this purpose the company needs finance. Specifically, the Colt Industries is considering to inject the investment in fuel injection to increase its sales and meet the demand of the people for cars.

The industrial-segment information reveals that sales revenue of aerospace/government segment has increased from $497 million to $539 million that shows that there has been an increasing demand of products from this segment whereas, the sales from automotive segment has declined that due to reason of customers switching from carburetion to fuel injection management system.

The operating income for aerospace/government segment however remained the same showing no change. Whereas, on the other side the sales revenue for this segment increased and thus the expenses inclined as well with approximately the level as sales revenue increased. Operating income from automotive segment worsened in 1985 indicating that something went wrong and thus driving the attention of the management towards it.

Apart from this, similarly, the operating margins of both segments had declined during in the year 1984 and 1985. As far as the aerospace/government segment is concerned, there was the increase in the fixed assets held. The reason for this could be the traditional strategy of the company by acquiring more and more companies. This further reflects that the company is also focusing on this segment much but its result would be foreseeable in the coming years or longer term period.

The increase in capital expenditures in both of the segments reflect that the company is consistently trying to yield more benefit out of it by injecting capital and similarly, the need for working capital has also been increasing.

As Colt Industries is considering to recapitalize itself, the above discussed scenarios are the possible reason for company’s future plan. Colt Industries needs finance to invest in the technological advancement so as to boost up these two segments again in order to make sufficient profit so as to be the successful market leader in the coming……………………

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Colt Industries Case Solution
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