Seabreeze Vessels (SV)
Over the years, SV has embraced both internal and
external growth strategies to enhance its operations. Between 1995 and 1998,
the company experienced a 20% increase in its workforce, reflecting its steady
expansion. A pivotal moment in SV’s journey occurred in 1998 with the
acquisition of Ocean Bound, a business specializing in regular travel services
between Tim River and Misty Island.
James Go's leadership style is distinctive and highly
effective. While he retains significant control over key decisions, he
emphasizes setting clear objectives for employees and conducts regular
performance reviews. This balanced approach has been instrumental in driving
both the company’s success and the professional growth of its workforce.
With the passenger boat industry experiencing rapid
growth, SV adapted to rising financial requirements by transitioning into a
public limited company.
Recent financial analysis indicates that while SV remains profitable, it faces challenges related to liquidity. The data, as presented in Table 1, underscores the need for immediate action to resolve these issues.
| Ratios | 2022 | 2023 |
|---|---|---|
| Profit Margin | 22% | 26% |
| Current Ratio | 1.81:1 | 0.6:1 |
| Quick Ratio | 1:1 | 0.4:1 |
SV is exploring solutions to enhance liquidity,
ensuring continued growth and financial stability in the competitive passenger
boat industry. To improve liquidity, the company is evaluating two potential
options:
Option 1: Borrowing
a long-term loan:
Option 2: Selling additional shares:
Questions:
Q1: With reference to Seabreeze Vessels (SV), distinguish between internal growth and external growth. (2 marks)
Q2: Explain two advantages for SV of setting clear objectives for its employees. (4 marks)
Q3: Explain one advantage and one
disadvantage of converting SV into a public limited company. (4 marks)
Q4: Recommend whether SV should choose Option
1 or Option 2. (10 marks)
Suggested Answers
Q1: With
reference to Seabreeze Vessels (SV), distinguish between internal growth and
external growth. (2 marks)
External growth occurs
when a business expands by acquiring or merging with other companies. For SV,
the acquisition of Ocean Bound in 1998, which allowed the company to diversify
into regular travel services, exemplifies external growth. This strategy enabled
SV to grow its market presence and capabilities beyond its internal resources.
Q2: Explain two advantages for SV of setting clear objectives for
its employees. (4 marks)
Two advantages are:
Improved employee focus
and productivity
Clear objectives
provide employees of SV with a clear understanding of their roles and
responsibilities. At SV, this ensures that employees align their efforts with
the company’s goals, leading to increased efficiency and productivity in
achieving targets, such as maintaining high-quality service and innovative
boat manufacturing.
Setting clear
objectives allows for regular performance reviews, as practised at SV. It also
enables the management to track progress and make necessary adjustments to
improve the overall performance of employees. For instance, special skill
training in boat making can be arranged for employees who do not meet
standards.
Converting to a public
limited company allowed Seabreeze Vessels (SV) to raise substantial funds by
selling shares to the public. This provided the company with the financial
resources needed to support its growth and expansion (as mentioned in
the stimulus) such as investing in new
technology or increasing production capacity, without incurring significant
debt.
As a public limited
company, James Go's decision-making authority was reduced, as shareholders now
have voting rights and a say in the company’s strategic decisions. This could
lead to potential conflicts or slower decision-making, especially if the shareholders'
interests do not align with James's vision for SV.
Driving forces for
selling shares include access to immediate funds and no dilution of ownership.
Access to immediate funds:
Loans provide businesses with the necessary funds to resolve the current issue
of liquidity. As per Table 1 in the stimulus, their liquidity ratios are below the standard
ratios. Since the company’s profitability is good ( increased by 4 %
between 2022 and 2023) it should not be a problem to borrow a loan.
However,
Interest payments:
Borrowing a loan requires repayment with interest, which increases the overall
cost of the loan. High-interest rates can strain a business's cash flow and
reduce profitability. Since SV is already experiencing liquidity issues, with a
current ratio of 0.6 and a quick ratio of 0.4, regular interest payments are
likely to worsen the financial condition
( restraining force)
Risk of default:
If SV fails to make timely repayments, it can lead to penalties, damage to
credit scores, and even the risk of losing assets if the loan is secured with
collateral. This could be another restraining force in borrowing loans.
Access to long-term capital:
Selling additional shares provides SV with substantial funds that can be used
for growth, expansion, or reducing debt, without the obligation to repay like
loans.
No interest payments: Unlike
loans, raising capital through shares does not incur interest, helping the
company avoid regular financial outflows and easing the burden on cash flow, as
it is already facing liquidity problems.
However, the factors
against ( restraining forces) the
selling additional shares are:
Dilution of Ownership:
Issuing additional shares reduces the percentage of ownership held by existing
shareholders of SV potentially leading to a loss of control for the original
owners or major stakeholders. Additionally raising funds by selling shares may
take longer time than borrowing loans.
Dividend Obligations:
While not mandatory, new shareholders may expect dividend payments, increasing
the company’s long-term financial commitments and impacting retained earnings.
Considering SV's
current liquidity problems, Option 2: Selling additional shares is the more
viable solution. While ownership
dilution, longer time to obtain funds, and dividend expectations are notable
concerns ( restraining forces) the driving forces of enhanced liquidity
and no additional debt burden outweigh these restraining forces. For SV,
prioritizing financial stability and reducing cash flow pressures is critical,
given the current liquidity crisis. Hence, Option 2: Selling additional
shares is recommended.
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Model Used [SADEC]
Statement
of the problem
Advantages
Disadvantages
Evaluation
Conclusion
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