Case Study Attached: Which Proposal Should Kootenai Ad?

Case Study Attached1which Proposal If Any Should Kootenai Adopt De

Which proposal, if any, should Kootenai adopt? Defend your position based on the value effect and the present financial position of the company. Indicate why you chose the discount rate used in the analysis.

How does the financial position of the company strengthen or weaken the recommendation you made in question 1?

The assistant treasurer indicates to you that one of the Electronic Products senior managers thinks capital should be allocated to his unit instead of to the Lodging Group. How should the assistant treasurer respond to this concern? (You may use any business concept or approach to answer this, not limiting the answer to the credit policy proposals.)

What competitor reactions are likely if Kootenai unilaterally makes one or both credit policy changes? How might this be incorporated into the present analysis?

Paper For Above instruction

The decision on which proposal Kootenai should adopt necessitates a comprehensive analysis rooted in both the value implications and the current financial health of the company. This examination involves understanding the potential impact of each proposal on Kootenai's profitability, risk profile, and strategic positioning, alongside its existing financial resources.

To approach this, it is essential to evaluate the proposals through the lens of value creation, which is often reflected in the net present value (NPV) of future cash flows generated by each policy. A proposal that enhances the company's cash flows or reduces costs without disproportionate risk typically aligns with shareholder value maximization. Conversely, proposals that introduce excessive risk or are unlikely to generate sufficient returns may diminish value. The financial position of Kootenai—its liquidity, leverage, and overall profitability—serves as a crucial input into this analysis, as a stronger financial position provides more buffer to absorb risks and invest in growth opportunities.

Regarding the discount rate selection, it is prudent to choose a rate that reflects the company's cost of capital, incorporating the risks specific to the proposals under review. The weighted average cost of capital (WACC) is commonly employed, as it represents the average rate that the company must pay to finance its operations through debt and equity. If the proposals involve specific risks (e.g., high default risk, market volatility), adjustments to the discount rate may be necessary to accurately estimate the present value of future benefits or costs. Ensuring that the discount rate mirrors the company's opportunity cost of capital enhances the validity of the valuation and supports sound decision-making.

Moving to the influence of the company's financial state on the recommendation—if Kootenai maintains robust liquidity, manageable debt levels, and healthy profits, it is better positioned to undertake proposals that may require upfront investment or entail transitional risks. This strength allows for flexibility in strategy and may justify more aggressive proposals that could lead to higher future value. Conversely, a weaker financial position, characterized by high leverage or liquidity constraints, might advise caution, favoring proposals with lower risk profiles or those that preserve cash flows.

The concern raised by the senior manager in Electronic Products about reallocating capital away from their unit warrants a strategic response rooted in capital budgeting principles. The assistant treasurer should emphasize that resource allocation decisions must align with overall company value, prioritizing projects or units that offer the highest expected returns adjusted for risk. Demonstrating that the Lodging Group's proposals or initiatives might provide superior value or strategic benefits can justify the current allocation or inspire reevaluation of investment priorities. It is vital to maintain transparency and communicate that decisions are driven by maximizing long-term shareholder value rather than isolated preferences or departmental agendas. Using tools such as economic value added (EVA) or risk-adjusted return measures can substantiate the rationale behind prioritizing certain projects and ensure equitable capital deployment across units.

If Kootenai limits credit policies unilaterally, competitors are likely to respond by adjusting their own credit terms or engaging in competitive pricing and promotional tactics to retain or expand their market shares. Such reactions could erode profit margins or trigger a price war, diminishing overall industry profitability. To incorporate this into the current analysis, scenario planning and sensitivity analysis should be employed, modeling various competitive responses and their potential impact on Kootenai’s revenue, costs, and market position. This helps reveal the resilience of proposed credit policy changes and aids in designing strategies that mitigate adverse competitive effects.

In conclusion, the optimal decision for Kootenai hinges on a balanced assessment of proposed policies, company financial health, strategic priorities, and competitive dynamics. A financially sound company focused on creating long-term value should prioritize proposals that enhance cash flows and reduce risks, supported by a rational cost of capital estimate. Furthermore, transparent communication and strategic foresight regarding competitive reactions form the foundation for sustainable decision-making that aligns with corporate objectives.

References

• Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley Finance.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.
• Brigham, E. F., & Houston, J. F. (2014). Fundamentals of Financial Management (13th ed.). Cengage Learning.
• Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243.
• Damodaran, A. (2010). The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses. FT Press.
• Kaplan, S. N., & Norton, D. P. (2004). Measuring the Strategic Readiness of Intangible Assets. Harvard Business Review, 82(2), 52-63.
• Harrison, J. S., & Wicks, A. C. (2013). Stakeholder Theory, Value, and Firm Performance. Business Ethics Quarterly, 23(1), 97-124.
• Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), 81-102.
• Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297.
• Chen, S., & Davydenko, A. S. (2012). Industry Dynamics and Competitive Strategy. Journal of Business Strategies, 29(2), 235-258.