144 Corporate Finance
The Solution
A good way to segregate companies is to classify them as service and manufacturing companies. The service
companies include:
- Advertising agency
- Commercial bank
- Airline
- Computer software
Note that service companies have little or no inventory. Companies A, B, C, and D match the description.
Company D has mostly financial assets and its liabilities are payables (deposits) and it has a thin net worth
typical of a commercial bank. So company D must be a bank.
Company A has relatively high accounts receivable, payable, intangible assets and relatively low fixed
assets. This is typical of an advertising agency. Accounts payables are high for an advertising agency because
the agency does not pay for its media purchases on behalf of a client until the funds required to purchase the
media is collected from the client.
We are left with Airline and Computer software. Company B has relatively high investment in fixed
assets (63.85 percent) and borrowings (54.74 percent). This company has to be an airline. Airline companies
invest heavily in property, airplanes, and so on. What distinguishes an airline from a software company is the
structure of liabilities. Software companies derive their value from intangible assets because of which the
value of hard asset collateral is low. Consequently software companies either do not borrow or borrow very
little. These companies finance their operations from equity. Company C is a software company. We are left
with E and F that are to be matched with:
- Electric Utility
- Pharmaceutical Manufacturer
Company E has high investment in fixed assets, negligible investment in R&D, very low inventory. Company
F on the other hand has significant investment in R&D, relatively high level of intangible assets. So company
E must be an electric utility and company F must be the pharmaceutical manufacturer. The companies are:
A. Vision Technology Ltd., an advertising agency
B. Air India Ltd.
C. Infosys Technologies
D. State Bank of India
E. Tata Power Ltd.
F. Dr Reddy’s Laboratories Ltd.