The purpose of this research is to analyze the financial management function at the Megansett Corporation as of early 1983. The company, at that point in time, was in the midst of a general managerial restructuring, of which financial manage ment was a part.
Magansett Corporation had a history of success. The com pany's development and operation, however, was heavily influ enced by the managrial will of its founder and Chief Executive Officer (CEO), until that individual's retirement in 1976. Profit levels and return on equity deteriorated subsequent to his departure, and the downward trend continued through 1981, when a turnaround appeared to begin. Under the former CEO, the company observed a highly conservative financial strategy.
The major financial problem areas and issues confronting the company in early 1983 concerned (1) working capital manage ment, (2) capital structure, (3) capital budgeting, and (4) cash dividend payout. In the area of working capital manage ment, the company carried an excessive level of non productive or low productive current assets, while, in the area of capi tal structure, the company failed to make a productive use of
1 2debt. With respect to capital budgeting, the company neglected cost of capital considerations in the development of investment priorities, relying instead on an overly restrictive payback period criterion. The company's policy on cash dividend payout neglected shareholder considerations, with policies which implied that company earnings were management's to do with as it chose.
The analysis of the problems and issues is presented in this section. The four major problem/issue areas indentified in the problem statement (1) working capital management, (2) capital structure, (3) capital budgeting, and (4) cash dividend payout are considered separately in this section.
As indicated in the problem statement, in the area of working capital management, the Meganse...