Case #2: Kota Fibres LTD.

Questions for Case Preparation:

The following questions will help you in the preparation and analysis
of this case. Use these questions as a guide in your study of the
case. However, do not limit yourselves to these questions only, but
rather allow yourselves to expand your thinking and analysis of this
case.
1.

How did Mehta construct his financial forecast? Using the

financial forecast, prepare to show the cash cycle of the firm
(i.e., the flow of funds through the working-capital accounts of
the firm).

2.

Examine the exhibits in the case. On the basis of Mehtas

forecast, how much debt will Kota need to arrange for the
coming year? Will Kota be able to repay the line of credit this
year?

3.

Why do Kotas financial requirements vary across the year?

What are the key determinants of Kotas borrowing needs?
Please exercise the spreadsheet model to identify the critical
forecast assumptions.

4.

Consider the four memos that Pundir received. Use your

intuition to assess the desirability of two of the proposals:
Pondicherrys request for credit: What will be the effect of this
proposal on accounts receivable and debt balances across the
year?
The level-production proposal: If Kota undertakes level
production now, at the low point of the annual business cycle,
what is the likelihood of inventory stock-outs at the peak of
the business cycle? If Kota undertakes level production just
after the peak, what will happen to inventory and debt
balances at the cyclical low?

Are these proposals liable to relieve, or worsen, Kotas ability

to clean up its bank loan by the end of 2001? What action
should Pundir take on these two proposals?
5.

Why does the bank require 1 30-day clean-up of the loan?

Should the bank continue to waive compliance with this
covenant?

6.

Please identify the three most important actions or policies

that Pundir should take. What should Pundir say to the bank?
To the customers?