Crown Corporation Case Study (Hbs 273-086)

Topics: Generally Accepted Accounting Principles, Balance sheet, Revenue Pages: 18 (5313 words) Published: April 1, 2012
Case Study on
Crown Corporation

Prepared for
Dr. Shaikh A. Hamid
FIN 680.1

Prepared By
Abdullah Resalat Rahman0930477060
Md. Towhidul Hoq0930393060
Md. Sabbir Alam0930391060
Md. Nafiz Enam0930404060
Debabrata Bhowmik1020071090
Company Background

Crown Corporation started as mining company, but a series of acquisitions and divestitures during the 1960s had totally transformed Crown Corporation from mining company to a manufacturer of superalloy castings for aircraft and industrial uses and aluminum products for the building, packaging and aircraft industries. Sales were evenly divided between castings and aluminum products. Crown’s castings were for the most part designed for operation in the “hot part” of the gas turbine engine. Crown’s constant emphasis on quality and technical excellence had established a high level of confidence among its customers. The other half of crown’s sales comprised aluminum products, including a broad product line for the building and construction industry. To assure a steady and economical source, Crown Corporation participated with American Metal climax, Inc. in a project in 1966 known as Intalco, which made them a producer of primary aluminum. Crown’s share of Intalco’s output was 130 million pounds. Crown decided to build a second aluminum ingot plant in 1967, named Eastalco, which provide Crown with additional primary aluminum capacity of 85 million pounds a year and increased net income of $3-4 million. A planned addition of 85 million pounds in 1972 would raise Eastalco’s capacity to 170 million pounds and would meet the company’s objective to be a fully integrated producer. Crown’s sales performance was good initially, it’s sales had risen sharply from $60 million in 1958 to $230 million in 1968 on the strength of 23 acquisitions, strong internal growth and a firming of aluminum prices. But after some time it faces some bad turns, after reaching a peak of $1.13 in 1959, earnings per share fell to $0.34 in 1963 as overcapacity developed in the aluminum business. During that time domestic industry capacity roses and growth potential in the industry encouraged new producers to enter into the market. So overcapacity developed and therefore, price falls down. Producers sold their product in low rate to grab the market. But demand-supply conditions in the industry improved in the early 1960s. with this improvement higher earnings came for Crown and other aluminum producers in the industry. But some producers were still maintaining lower prices to obtain business for their idle machine. When producers started getting consumers and order from them they rose the prices slowly, and soon the industry price situation improved after 1968, whereas process of fabricated products remained weak until 1965. Problem Definition

In February 1969 Mr. Walter Bennet, treasurer of Crown Corporation was considering several financing alternatives. Crown’s decision to integrate backwards into the production of primary aluminum ingot had resulted in very heavy capital expenditures. Its need for funds for working capital and for completion of Eastalco now outstripped the company’s internal cash generation and it would be necessary to raise $30 million within the next 6 months to cover capital needs for 1969.

Expected Growth and Estimated Capital Expenditures
Mr. Walter Bennett, treasurer of Crown Corporation expected that sales would increase at 6-8% annually, exclusive of acquisitions, over the foreseeable future. Sales of aluminum products were expected to rise by 15-20% annually as the company broadened its penetration of major aluminum consuming markets. Total capital expenditures, including the Eastalco project, were forecast at $39 million in 1969, $32 million in 1970, $7 million in 1971 and $50 million in 1972. The heavy capital spending would require that Crown raise $30 million in 1969, $22 million in 1970 and $30 million in 1972.

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