The National Industries Group

Question 1

The National Industries is located in Kuwait, and it is a holding multinational organization. The managers of the company need to increase the debt usage of the company because the organization is involved in a strategic diversification procedure. The managers need to expand the company’s asset portfolio through industrial diversification. Through this strategy, the managers of the company hope to achieve diversification and increase its income resource.

The organization enjoys a wide range of diverse markets through its international subsidiaries. In the Middle East, the organization is second in industrial firm listings. National Industries also enjoys a diversified team of management experts. Their ambition and focus pushed the company to develop a diversification strategy that they have put in place. The managers aim to diversify the company’s operations to other industrial opportunities. However, the company plans to expand its operations to other industries, although they will be limited to portfolio assets related to its prior operations.

Expansion and magnetization of new markets requires financial support. This is because to achieve the diversification, the strategy involves acquiring new firm and industries. National Industries has to increase their debt usage to cater for the financial requirements during their expansion plan implementation. The management also evaluated the company’s credit performance and realized that they have a good record. In addition, usage of debt would be beneficial to the company because the credit interest rates are very low in Kuwait. The organization will be able to expand its asset portfolio by increasing its debt usage. The increment will enable the company to acquire other companies and magnetize new markets.

Question 2

Using debt financial in the company expansion will deliver the national Industries several advantages. First, the biggest problem companies have when acquiring financial support for their operations is the interest. In this case, the company’s loan is reduced significantly because the interest is deductible from its tax return. In addition, the interest and principal amount is well known by the company. In this, the company can plan sufficiently on how to pay the debt without experiencing financial constraints.

Debt financing is also beneficial to the company because the company does not lose its ownership interest by acquiring a debt. Unlike other financing such as equity on business, the debtor retains full control of the ownership rights of the business. Further, the company gains big profits by acquiring debts rather than using other methods. For instance, the company is entitled to pay the principal and the interest of the debt only. In case the company used another method such as selling stock to finance its needs, the investors would have to share the company’s future forever. In this case, the National Industries will benefit by utilizing debt financing other than selling shares.

Selling stocks and shares is controlled by federal and state securities. Debts are strictly monitored by the lender and the debtor. In the latter case, complication may arise when the regulations require the company to raise dividends. In addition, debt financing is useful to the company because it helps in tax reduction. The company’s tax is reduced because they are paying debt interest. National Industries will be able to cut down their tax burden through debt financing.

Debt financing is less cumbersome than other financing methods such as stakeholder financing. A company using shareholders to cater for its financial needs will have to take the shareholders on board in all management decision making. The company will be obligated to hold numerous meetings, mail all investors, and vote to make important decisions.

Question 3

The National Industries is multinational holding organization. The managers of the company need to increase the debt usage of the company because the organization is involved in a strategic diversification procedure. The organization enjoys a wide range of diverse markets through its international subsidiaries. In the Middle East, the organization is second in industrial firm listings.

The managers need to expand the company’s asset portfolio through industrial diversification. Through this strategy, the managers of the company hope to achieve diversification and increase its income resource. The company’s full debt potential has not been reached yet, considering that the company is still growing. Furthermore, the company has a very strong and clean financial record. The company has demonstrated that it can pay its debts with ease. In this case, the company has not yet reached its optimal debt level.

Question 4

Financial health and solvency explain the company’s ability to survive in the market and meet its future plans and goals. The company’s financial health is assessed by the company’s liquidity and solvency. Liquidity is less important, but it defines the company’s ability to meet short term goals. On the other hand, every organization is started with long term goals that define the company’s future standing. The company is prepared for any upsurge in customer base, for instance an increase in customer number by a large percentage. Also, financial health dynamics should scale up rapidly to ensure that changes in the market can be managed easily.

The ability to meet the future plans and goals define the company’s solvency. The future goals translate into financial obligations. In terms of debt acquisition, the National Industries can be defined as a solvent organization because it can pay its debts. In concise, the company has expanded its asset portfolio to the extent that it owns more than it is being owed. The overall financial health of the company is positive because the company has both adequate liquidity and solvency.
Question 5

Inflation may have various effects on investment and financial needs. In extreme cases, the business ethical boundary is crossed. The investment sector has a direct linkage to the banking system and was also involved one way or the other with the real estate sector. The ethical boundary that is crossed in the investments sector was the line beyond which investment is supposed to reach was passed as the majority of the companies received huge bailouts from the government, and still continued to invest in the economy in a bid to increase consumer demand which had substantially plunged into a halt.

Major companies would undertake risky investment decisions due to the deregulatory of the economy, which would increase their confidence levels to great heights as they continue to acquire loans and even reduce their liquidity ratios. When the financial crisis and inflation would hit the economy, the investing companies would be left stranded as they did not having any liquid assets but more indebted than ever. This would make them ask the government for the stimulus package and to ask for government bailouts.

Inflation would also reduce the rate of investments. The investors would be discouraged to invest during inflation because of slow returns. Inflation hinders economic development and impairs financial planning. Companies cannot plan ahead because the future of their products and services is uncertain.

Question 6

As observed earlier, the biggest problem companies have when acquiring financial support for their operations is the interest. In this case, the company’s loan is reduced significantly because the interest is deductible from its tax return. This is the case where a company such as National Industries utilizes the debt financing. In this case, the debt is calculated as follows;

Take the annual debt interest to be 20%

State income to be 50%

The after tax debt is calculated as follows;

20% interest rate × (100% – 50% tax rate)

= 20% × 50%

= 10%

In the scenario where there is no tax in Kuwait, the company will have to pay full interest rate. The only justification for debt financing would be because debt financing is less cumbersome than other financing methods such as stakeholder financing. Additionally, debt financing is also beneficial to the company because the company does not lose its ownership interest by acquiring a debt.

Question 7

The debt coverage ratio represents the available money in the company’s financial docket, which can be utilized in debt payments, interest payments and other services. From the table, National Industries has the biggest percentage debt coverage ration than other companies. The ratio is used to determine the viability of the company’s resources. In concise, the ratio is used to show whether the organization is earning enough to cater for its debt obligations. Ideally, the ratio is supposed to be 1 and above. Negative ratios show that the company involved is not able to meet its debt obligations.

The debt coverage ratio is calculated by:

Net operating income/ debt service (total)

Using this formula shows that National Industries has always been able to meet its debt requirements.
Question 8

To determine whether an organization has reached a reasonable debt level, one has to assess the investment of the organization. The National Industries is multinational holding organization. The managers of the company need to increase the debt usage of the company because the organization is involved in a strategic diversification procedure. The organization enjoys a wide range of diverse markets through its international subsidiaries. In the Middle East, the organization is second in industrial firm listings. These statistics show that the company is rapidly growing.

With this, one should expound on the managers need to expand the company’s asset portfolio through industrial diversification. Through this strategy, the managers of the company hope to achieve diversification and increase its income resource. The company’s full debt potential has not been reached yet, considering that the company is still growing. Furthermore, the company has a very strong and clean financial record. The company has demonstrated that it can pay its debts with ease. In this case, the company has not yet reached its optimal debt level. Based on the report, National Industries has the biggest percentage debt coverage ration than other companies. This ratio can be used alongside other parameters to determine the company’s debt level.

Works Cited

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