Â Cumberland worldwide corporation Case Solution
2. Are the financial markets, as reflected in trading prices of CWâ€™s securities, accurately assessing the companyâ€™s prospects? Is there money to be made by investing in CWâ€™s securities? Specifically, does the market value of the right hand side of the holding companyâ€™s balance sheet fully reflect the liquidating value of the assets? If not, why not?
The financial markets are based on the current situation of the company and its financial position. It does not reflect the real prospect of the company. The company has a subsidiary which is the market leader in its business sector, manufacturer of consumer appliances and related products with high brand reputation. The company may perform better by its subsidiary and can make it more competitive in the long run through major restructuring. The financial markets are not based on the future prospects and other information. They are primarily based on the current situation and confidence of investors as well as market conditions. The company may become successful in the long run.
Based on the current situation, the company is already in crisis;therefore it is highly recommended to refrain from investing in the company for the purpose of making money. The company is already not paying its stockholders and is in financial crisis. However, if money making is concerned through speculation of the stock market, then it can be made but on short term and by selling and buying of the shares, it istoo risky. The investors may wait until the company is reorganized and gets in a better position after bankruptcy.
No, the balance sheet does not fully reflect the liquidating value of the assets. In reality, an organization may be worth more as going concern than the estimation of its net assets. The company has a vital organizational structure including administration, representatives, bookkeeping systems, clients and suppliers. It has office hardware set up, for example, work areas, PCs, telephones and cupboards. It also has hardware, devices and distribution center gear. Furthermore, it has immaterial resources, for example, a brand name, a site address, a physical address and telephone number(s) are set up. The company also has intangibles and has its goodwill. All these factors increase the companyâ€™s net worth.
Moreover, assets are on previous cost rather than their current fair value. Therefore, the assets need to be revalued at a fair value, as the current prevailing market prices of the asset are in the same condition and of the same nature. The liquidating value is the value of each asset in cash that can be obtained through its sell in the market. However, there might be some assets that can be used only by certain type of industry or in a certain operation or in combination with another asset. Therefore,the book value of such asset on the balance sheet is not appropriately reflected in its real value. Moreover, for calculating the liquidating value, assets can be valued at their earning power, which is from the expected future inflows. Inflation might also affect such values slightly.
The business of Cumberland will be affected in various ways, which include:
The reorganization under chapter 11 would take a long time. There will also be some legal and accounting cost to be incurred by the company. Therefore, for this the company will have to make personal cash outflows for these expense payments.
The management of the company will make their back breaking efforts for making recommendations and preparing materials for hearing in the court as well as participating in the court hearings. These all will incur cost for the company that can be classified as opportunity cost since all these will be incurred in non-productive activities as far as the companyâ€™s operations are concerned………………….
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