Ferguson biggest reason for drop in income of 1980 was the cost of goods sold. It accounted for $2,568 (U. S. $millions) of cost and expenses on the income statement. The reason for this high cost of goods sold is because of the decline in value of the U. S. dollar in relation to other countries in which the firm was operating in. For instance a good majority of their product was made in England at a time when the pound was at an all-time high which made the cost of selling the good in the U. S. ollar extremely expensive to American firms.
Also their operations in Germany were halted because they German mark was appreciating in value at the same time the United States dollar was depreciating which made it too hard to sell the products for Massey- Ferguson at a profit. 2. Massey- Ferguson market value of common stock at the end of the fiscal year of 1980 was 176. 9 million dollars. This number was much lower than its book value of equity because the market was unsure of the company’s ability to pay back its short and long term debt causing a plunge in its market value.
The debt was being used to expand its operations before 1980 and because of this the book value of equity in the company was high because they had a lot of assets that they had purchased in the company’s growth period. 3. The Canadian government had a big incentive in helping to refinance Massey- Ferguson Company. They wanted to keep them operating in Canada because they provided a lot of jobs to Canada and because it was politically convenient because an election was about to take place.
Another big reason was because Argus Company was invested in Massey – Ferguson and if they had to provide more cash for Massey- Ferguson to not go under they may scale back some of their growth and possibly lay people off or pursue other opportunities elsewhere so that cost of making their products is even lower than Canada. 4. It would be hard for Massey-Ferguson to pay down their debt by issuing equity because of the lack of new ways to pay for the new debt that they are acquiring.
Many investors were already weary of the ability for Massey-Ferguson to become competitive again because of the massive amount of debt that they already had. Also borrowing more to pay the debt that is already owed is not a good strategy for reparining a decaying company. Furthermore they had failed to pierce the US market which provided a lot of new revenue and continued to fail at adjusting to foreign markets which were outperforming the US at the time making it hard for them to compete because of the exchange rate between the foreign country and the US firm.