Crown Corporation: Case Summary

CROWN CORPORATION: CASE SUMMARY

Challenge:

In February 1969, Walter Bennett, the treasurer of Crown Corporation was faced with the challenge of raising $30 million in funds to complete the construction of an aluminum plant and to fulfill working capital requirements. He has three main funding options for the corporation that will be discussed later in the case.

To meet the demands of growing sales and to retain a competitive edge, Crown had to obtain $30 million of funds. This was their only option in terms of meeting their own growth potential. If they did not complete the plant construction and obtain working capital, the company would not be able to increase its production capacity and would then lose the increased sales they could reasonably expect over the next several years.

Goals:

* To hold to a $0.70 dividend rate

* To have a financing plan that will help meet both the short-term and long-term needs of the company.

Historical background:

* Crown's sales are evenly divided between casting and aluminum products.

* The completion of the new plant will increase Crown's capacity by about 85 million pounds per year and increase revenues by $3 to $4 million per year.

* Crown is constantly threatened with new entrants to the market of fabricated products. The fact that so many small independent companies entered this part of the industry caused prices to drop by 20 percent between late 1961 and late 1963.

* Demand-supply conditions improved, however, and demand rose by 14 percent between 1961 and 1966. Prices, however, were still depressed.

* Earnings were erratic ranging from a high of $1.13 in 1959 to a low of $0.34 in 1963.

* Profits in the industry went from $88 million in 1960 to $230 million in 1966 and Crown's dividends increased from $0.34 per share in 1960 to $2.07 in 1967.

* Aluminum imports were increasing and it was estimated that supply from foreign manufacturers would be twice the production of American producers.

* Supply was estimated to exceed demand over the next several years. Analysts suggested the supply could be as much as 9 percent more than the demand over the next few years into the 1970s.

* Crown's expected sales growth over the next few years was expected to be between 6 and 8 percent per year.

Funding Options:

There were three major funding options that were available to Mr. Bennett in 1969 to raise $30 million: