1. Net sales for Massey-Ferguson actually increased between 1979 and 1980. Despite this, net income and income from continuing operations both dropped sharply in 1980. Which item on the income statement was most responsible for this drop in income?
2. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?
3. Why would it be difficult for Massey-Ferguson to conduct an equity issue to pay down its debt?
1. Other interest expense and the exchange adjustments on the income statement were mostly responsible for the drop in income. There are high interest rates in the late 1970s, so creating a double negative effect on the performance of Massey-Ferguson. First, the cost of Massey's short-term debt increased sharply, contributing to a higher interest expense. Second, the sales of the company was greatly affected becasue of the fact that the high interest rates depressed markets for farm and industrial machinery, lowering the demand for the machinery. Besides, the production process and the market are in different geographical locations. Engine production was heavily concentrated in the United Kingdom, while the market is spreaded around the globe. In 1980, the pound rose sharply relative to currencies in which Massey sold its products due to the influx of North Sea oil. With the appreciation of pound, the cost of goods sold of Massey was increased, hence a lower income was achieved. 2. The Canadian government was interested in helping Massey-Ferguson refinance its debt because a lot of production of Massey was carried out in Canada, in which 6,700 Canadians were hired by Massey; in order to prevent the 6,700 citizens from losing their job and the annual unemployment compensation of $67 million. Being a country with huge welfare, Canadian government was willing to help out. Furthermore, there was huge pressure from the labor unit at that time, the Canadian government would like to gain the support from labor...
Please join StudyMode to read the full document