Lessons in Corporate Finance, 2nd Edition

CHAPTER 5Why Financing Matters (Massey Ferguson)

This chapter discusses how firms make financing decisions—that is, how firms raise capital. It is meant to be at the level of an “issue spotter” discussion rather than answering the question in detail. We begin with an overview of the topic. In later chapters, we will detail how financing decisions are made. This chapter demonstrates that how a firm should finance itself is not answered merely by choosing the cheapest method possible. We illustrate our discussion with the situation faced by Massey Ferguson (Massey) in the early 1980s.

PRODUCT MARKET POSITION AND STRATEGY

Your authors have a strong belief that you cannot undertake corporate finance without first understanding a firm's product market position—that is, its product, its industry, its competitors, its advantages and disadvantages, its product market strategy, and so on.

Good corporate finance always begins with the product market. Massey was a manufacturer of agricultural equipment such as tractors, combines, harvesters, and so on. Although based in Canada, it was an international concern and sold its product throughout the world. At the time of our investigation in 1980, the firm's main competitors were International Harvester (Harvester) and John Deere (Deere).

Farm equipment is large, complicated, and expensive machinery. A farmer in North America will spend multiple hours a day in their combine plowing, seeding, and harvesting. Combines are enclosed vehicles that ...