ACC4320 Week 5 D1

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Northeastern University *

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Finance

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Feb 20, 2024

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Which types of risk were present? List and discuss them. What types of ratio calculations and analysis should have taken place to better predict Grant's demise? Which ratios, in particular, were likely indicators of Grant's impending demise? I think these are some of the evident risks present in the WT Grant case: Credit Risk: Grant made it very simple to get credit, and the monthly repayment requirements were mainly just $1. The detrimental impacts of the easy-credit lure started to show up in 1970. However, the corporation did not start to worry about the circumstance until after the annual report for 1971, which exposed the credit issues. As a result, there was a consistent and large increase in write-offs of uncollectible credit balances. In the fiscal year 1972, uncollectable increased from 2.1% to 3.2% (Jacob, n.d.). Economic Risk: Rising interest rates during the 1974–1975 recession affected the economy as a whole. Although it should not impact big businesses like WT Grant, studies suggest otherwise. It's said that the recession was to blame for the business's weak approach to collecting from late-paying customers. Given that so many of Grant's clients appeared to be suffering from the recession, management made the decision not to seek delinquencies hoping that the economy would improve and these clients could catch back. Instead of discontinuing, Grant prolonged its typical time window. Thus, from 1972 to 1973, Grant's past-due accounts grew further significantly because of this slack strategy (Jacob, n.d.). Sales Risk: From 1966 to 1975, sales volume per sq ft decreased by 33%. Earnings per dollar of sales for the corporation also fell, from 7 cents in 1969 to 2 cents in 1973. There were several indications of deteriorating health, even if the management of the company didn't seem to be fully aware of its true inventories and accounts receivable (Jacob, n.d.). Bad Debt Risk: The earnings for the entire year had to be restated by Grant by the end of October: $177 million in losses, of which $92 million was deemed to be bad debt (Jacob, n.d.). Operational risk: Grant's methods allowed the use of operational discretion with some limitations, such as inadequate inventory controls, poor credit controls, and hasty overexpansion. This direction in decision-making appears to play a significant role in the internal development of the company's cash flow issues. Unfortunately, despite abundant evidence of managerial incompetence, the banking industry—which was highly represented on Grant's board— continued to offer credit rather than adopt financially sound objectives (Jacob, n.d.). Ratios and Analysis: A detailed examination of the cash flows of the business would have shown approaching catastrophe up to 10 years earlier. The company's failure to create any internal cash flow over that decade was its most conspicuous feature. Investors should have immediately understood by looking at Grant's continuous inability to earn cash from operations (the stock was still selling despite this) (Largay & Stickney, 1980). The profitability ratio, turnover ratio, and liquidity ratio of Grant had been declining throughout the ten years prior to bankruptcy (Largay & Stickney, 1980). This should have helped expose some of their problems. Liquidation Analysis: Grant should have done a close analysis of its liquidation and focused on long-term loans. According to Citibank's liquidation study, "the lenders would earn

68 cents per dollar." It proved "that the Grant liabilities were expected to outweigh its assets in liquidation." So, the banks were aware that if Grant was liquidated, they would not be repaid in full for their loans. So, a long-term solution was never what the banks had in mind. The loans' durations were too short for the severely struggling company to adequately repay payments (Jacob, n.d.). Dividend Payout Ratio: high dividend payout rates increase the company's dependency on outside capital providers since significant amounts are transferred to investors. Thus, the stock is typically desirable to banks if it has a high payout rate. The crucial impact these rates have on Grant's cash flow situation is more significant than appealing dividend rates to banks. This could have contributed to creating the firm's cash flow issues (Jacob, n.d.). References: Jacob, M. (n.d.). The Social Construction of Bankruptcy. Retrieved from https://publishing.cdlib.org/ucpressebooks/view? docId=ft4x0nb2jj&chunk.id=d0e1075&toc.id=&brand=ucpress on October 5, 2022. Largay, J. A., & Stickney, C. P. (1980). Cash Flows, Ratio Analysis, and the W.T. Grant Company Bankruptcy. Financial Analysts Journal, 36(4), 51–54. http://www.jstor.org/stable/4478363 Sheirndil, S. (2022). Week 3 Discussion Post # 1.

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