JC Penny Company Case Solution
Qualitative Analysis of the framework:
Capital structure plays an important role in the valuation of the company, as the return of the investors is depends on the capital structure. The higher WACC will result in the lower market value and the lower WACC will result in the higher market value of the company. The ideal capital structure for JC Penny is might be 60% of equity and 40% debt, apart from the financial implications there will also some positive non-financial implications as well. The suppliers can easily extend the credit period and the customers will also enters into long-term contracts with the company which can be very favorable for the company given the liquidity problems facing by the JC Penny. In addition to this the morale of the employees will be increased because of the increase likelihood of the survival of JC Penny.
Quantitative Analysisof the framework:
There can be many quantitative benefits of total leverage ratio of 60:40 to JC Penny, firstly the WACC is minimal at this leverage level which can increase the profitability of the company and it will also provide the highest value of the company as well. Furthermore, the cost of distress can also be avoided by the company which can improve the profitability of the company. In addition to this, the company can easily obtain new equity finance because the risk of equity investors will be lowered because of lower leverage level, this factor can be very beneficial for JC Penny because the management have to inject substantial capital in order to ensure the survival of the company in these difficult trading conditions.
It can be said that there are many financing alternatives that can increase the wealth of shareholders, the equity investment can be the most appropriate source of finance for the company and shareholders. The company can avoid many costs if it raises equity finance by offering shares to the public, although the transaction costs can be higher but the costs of financial distress and the risk of equity investors can be minimized by issuing additional equity as compare to the issue of debt finance.
On the other hand, the company can use the sale and leaseback transactions in order to raise additional finance. The company should sell its properties and take bake those properties on operating lease, this can increase the cash reserves of JC Penny Company without increasing the liabilities of the company. This method of financing is called as off-balance sheet transaction because the company is obliged to pay operating lease rentals but this obligation is not recorded as non-current liabilities on the statement of financial position. The cash will be raised without affecting the risk of the equity investors, however, it can be possible that fix charges have been made on these properties because of the existing long-term debt.
Evaluation of the investment of Bill Ackman:
It can be said that Bill Ackman have lots of experience and he is one of the biggest sole investor in U.S. On many occasions his strategies plays an important role in increasing the profits of its investment. Furthermore, the confidence of common stockholders can be increased in the companies because of the investment of one of the most successful investors. The importance of the confidence of stockholders needs to be increase because many analyst have predicted the potential liquidation of JC Penny. His strategies and policies can be implemented by the management because of the profitable history of his strategies.
The interest of Bill Ackman is align with the other stockholders to some extent as he was to exploit the opportunities which are available to the retail industry giants in the modern trading environment. However, it can be argued that he is more interested in the properties held by the company which are worth more than $900 million, Bill can be interested in acquiring those properties of JC Penny in case of liquidation of the company which can be very profitable in the future. However, there are more chances that his policies can add value to the organization.
Assessment of the board’s decision:
The board of JC Penny should have to retain Mike Ullman, the policies and strategies of previous CEO Mike Ullman are can be regarded as very effective. Under the leadership of Mike, the company survives in one of the biggest recession of all time. As opposed to this, under the leadership of Ron Johnson the company is continuous failing to generate profits in very improved trading conditions. Although Ron Johnson was one of the main reason of the success of Apple but JC penny is very different organization as compare to Apple, the dynamics and risks of the industry are completely different of both the industries which makes the appointment of Ron Johnson very risky.
It can be said that Ron Johnson is not the appropriate choice for the position of CEO at JC Penny, mere a wish to lead the large retail organization cannot guarantee the success of the organization under his leadership. Personnel having vast experience of leading a retail organization can be more suitable for the designation of CEO at JC Penny, given the difficulties which the organization is facing also increase the need of personnel having relevant experience……………………
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