Qualitative literature review of Harnischfeger by Scholes & Black theory

Harnischfeger was a major manufacturer of cranes then based in Oaks Creek, Wisconsin (Tjahjana & Seifoddini, 1999). In 1981, Harnischfeger used massive batch production to manufacture its parts in order to reduce the cost. The company's excessive inventory resulted in a loss due to an unexpected drop in demand. A trail era began in 1980 for the one- hundred and four –year- old company. The demand for new cranes would decline due to the economic recession and Harnischfeger situation would worsen with an inventory that could not move (Palepu & Healy, 2008). Purpose of the study The theory of risk management has made strides in predicting company bankruptcies, acquisitions, and mergers (Fehle, F., & Tsyplakov, S., 2005). Harnischfeger massive lift in sales from 1973- 1980 had its factory in Escanaba, Michigan producing cranes continually, taking toll on the equipment (Palepu & Healy, 2008). Harnischfeger equipment usage from 1979- 1980 brought about the desire to replace parts and machinery (Denis & McKeon, 2012 ). Faced with the dilemma of replacing warn equipment, and repaying loans and compound interest rates requires probability models that will produce financial value (Fehle, F., & Tsyplakov, S., 2005). The purpose of the study is to reduce risk investments with firms on the verge of bankruptcies, acquisitions, and mergers (Weston & Brigham, 1979). Significance of the study Harnischfeger faced financial trouble in 1983 from its liability of compounded interest rate plus inventory surplus (Palepu & Healy, 2008). The interesting component of the relationship between investors and Harnischfeger was the halo effect the company had on investors. After a residual low liquidity ratio and $75 million reported capital loss in 1984 the company was still able to raise $150 million from investors (Palepu & Healy, 2008). The company admitted to its shareholders operations would need only minimum liquidity (Palepu & Healy, 2008). With $150 million raised from stock issuance and $80 million in discounted cash borrowed from both American and Canadian banks the investors believed Harnischfeger would turn it sales performance around (Palepu & Healy, 2008). The study purpose is to take an explicit view of the relationship of the ratio analysis and company bankruptcy, and acquisitions. Other studies have viewed liquidity ratio and substantial debt from a firm’s position to address operational needs as oppose to equity pay outs (Denis, McKeon 2012). Its quality equipment once set industry standards such as its use of welds oppose to rivets. Harnischfeger inability to respond to change in the qualitative demand presented obstacles for the company's progressive business model. Unfortunately for the crane industry giant its focus on quality and lack of attention to industry trends would allow a competitor to take over its equipment operation. Closing the doors to its plant in Escanaba, Michigan Harnischfeger contracted with global competitor Kobe Steel Ltd to produce its trucks and cranes (Palepu & Healy, 2008). In 1973, US lifted the oil embargo that is said to have triggered Harnischfeger boost in revenue (US Department of State, 2014). During the period of 1973 through 1980, the company grew its revenue by sixty-six percent and continued to dominate market share in the mining equipment industry (Palepu & Healy). Nature of the study The study will use a qualitative literature review approach used to evaluate the face value of company stock. The qualitative literature will be used to advocate the purpose of using models such as Scholes & Black theory suggested the current value of the stock minus the price of a pure discount bond that expires on the same day is an accurate account of its true worth, at face value equal to the discount bond itself (Scholes & Black, 1973). Hypothesis The company liquidity & debt ratio were indicators of the trouble that it was facing (Palepu & Healy, 2008). The company rigid business model contributed to its insurmountable debt (Palepu & Healy, 2008). The crane manufacturer batch productions efforts could not keep up with the volatile demand of the correlated oil industry (Palepu & Healy, 2008). The competitive effects of globalization made it hard for the company to compete in 1984. Harnischfeger was a major manufacturer of construction equipment error in business was due to its lack of risk management (Tjahjana & Seifoddini, 1999). The company lacked in its detail of attention to accrued liability and discounted cash flow. The high debt ratio brought about poor decision making from the management team to liquidate the company capital and increase long term liability. Harnischfeger failed to practice the disciplines in risk management and address its financial liabilities properly (Palepu & Healy, 2008). Reference Denis, D.J., & McKeon, S.B. (2012 , March ). Debt financing and financing flexibility evidence from proactive leverage increases. The Review of Financial Studies , 25(6 ), 1897-1929 . doi;10. 1093/ rfs/hhs005 Fersen, W., Heusen, A., & Su, T. (2005, October ). Weak-Form and Semi-Strong-Form Stock Return Predictability Revisited. Management Science , 51(10), 1582-1592. Retrieved from www.proquest.com National Mining Hall of Fame to honor five during 22nd ceremony. (2009, August ). Mining Engineering , 61(8), 24-27. Retrieved from www.proquest.com Palepu, K., & Healy, P. (2008). Business Analysis & Valuation. Using Financial Statements (4th ed.). Retrieved from The University of Phoenix eBook Collection database. Scholes, M., & Black, F. (1973, June ). The pricing of options and corporate liabilities. Chicago Journal , 81(3), 637-654. Retrieved from http://www.jstor.org/stable/1831029 Tjahjana, B., & Seifoddini, H. (1999, September). Part-family formation for cellular manufacturing: a case study at Harnischfeger. International Journal of Production Research, 37(14), 3263-3273. Retrieved from www.taylorandfrancis.com/JNLS/prs.htm Weston, F.J., & Brigham, E.F. (1979). Essentials of managerial finance (5th ed.). Hinsdale, Illinois: The Dryden Press.