Autozone Inc. (Corporate Finance Strategies) Harvard Case Solution & Analysis

Problem: The issue occurred when Mr. Edward decided to take out his shares from the company. As he is the main shareholder of the company, this situation will have an impact on its investors who may also divest their shares from the company. If this happens then company will be in debt which will reduce the credit rating of the company. Another problem related to this is, the repurchasing of the shares which will impact on leverage of the company.

Finance Alternatives:  There are three financial alternatives through which the company can improve their capital leverage and their credit rating of the company. First Alternative is to increase the debt with the limit of 40% and checking out the credit rating category and operating cash flow used for repurchasing. Second alternative is to prevent the increase in the repurchase of shares to maintain the company's financial leverage with acquisition. The last alternative is to maintain the shares up to 60% and debt to 40% for maintaining the capital structure and regaining the investors’ confidence regarding the enterprise value and its position in terms of returns.

Recommendation: It is recommended to increase debt with universal rate of corporate finance, which is sixty & forty percent of equity and debt ratios respectively. This would ensure that the capital structure of the entity and the growth rate of the company are stable. Hence, return would be constant which would create a favorable and compatible environment for the company.

Problem Statement

Main Highlights

The main problem of the AutoZone is securing the position of the capital structure with respect to the investors’ point of view. These issues arrived as the main investor whose name is Mr. Edward, is withdrawing his shares from the company by following the strategy of repurchasing shares. This would result in the high gearing and fluctuation in the capital structure of the company. To overcome this problem the company would like to insert the debt element or to repurchase its shares from operating cash flows. This would also help in the dividend payment of the company. But the issue is to adopt the best decision criteria which maintains the overall company’s position.

Key Problems

The key problems are evaluating the operating cash flow programs to stabilize the situation of the repurchasing shares and the cash dividend programs. The totally concern is related to the financial leverage of the company and the outcomes of the capital structure for maintaining the debt and equity balance in the company. Furthermore, these key highlights are impacting the gearing of the enterprise. It neglects the actual performance of the company and gives a better earning at some stages then it would affect on the shareholders’ wealth.  This would not be satisfactory for the firm for the future going concern of the business.

Period of the Problem

Actually the period of this problem would be discussed in both terms with the nature of the investors, because the investors would take their decisions on the basis of the change in the economic environment.  The above mentioned terms are discussed below.

Short term Problems

Short term Problem relates to the cash dividend and action which should be taken within a year whether to resolve it or not. The second main concern of the company is paying the dividend from the operating cash flow with respect to the net earnings of the enterprise. This problem would be resolved through acquisition of the auto parts which are big retailers.

Long term Problems

The long-term problem consists of the repurchasing of the shares. This problem has been predicted more than a year ago and it would affect the operating earnings of the company. The solution for this problem is to set a benchmark for the repurchasing of shares because the excess would also affect the capital structure of the company and its financial statement with prolonging of the leverage of the debt and equity position of the entity.

Decision Criteria of Problems

The decision criterion of the problem is to develop the alternatives for the problem and adopt the best decision for the betterment of the company. The decision should be sound enough to contain all the fact and figures of the company with respect to the capital structure and earnings of the company in term of investors as well as stakeholders of the enterprise.

Causes of the Problems

The causes for these problems were that no proper strategy was been maintained which created loopholes in the running the organization. The main cause relates to the repurchasing of the shares only with the setting the price of shares with retained earnings of the company.  Furthermore, the impact of the problems creates a deficiency in terms of the returns which is not satisfactory for the company......................

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