Case #02: 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 Mehta’s 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 Kota’s …show more content…

Except Mr. Pundir and Mr. Mehta can assure that all of the sales can be collected into cash, Kota Fibres can pay all it’s debt.

3. Kota’s financial requirements vary across the year because the demand for synthetic textiles especially Nylon is influenced by seasonal event and competition among suppliers that was keen. We can say that Kota’s business is seasonal business in this case.

The key determinant of Kota’s borrowing needs is the suppliers who buy the nylon fiber. Kota has to borrow to purchase raw material for production. If we analyze the Schedule of Cash Receipts and Disbursements for 2001 (Exhibit 9) in the first 4 months, the purchase of Kota Fibres is bigger than sales. Since the business influenced by seasonal peak in demand in late summer and early fall, Kota make money at May – December. The suppliers that buy the nylon from Kota usually ask for credit also.

4. Pondicherry’s request for credit terms of 80 days (since the Kota’s standard terms only 45 Days) will increase Kota’s account receivables. This mean Kota’s make good sales but no cash in. This will affect to the payment of Kota’s debt.

The level-production proposal: If Kota undertakes level production and the inventory stock-outs at the peak of business cycle, Kota’s sales will decrease and debt can’t