The cost of goods sold and the other interest expense are the most responsible for the drop in income in the year of 1980. First, Massey’s engine production was concentrated in UK. Together with the influx of North Sea oil, the British pound had been increased a lot, and hence the cost of goods sold in 1980 had been increased. Besides, the other interest expense was also included since the total amount in 1980 was approximately doubled to the amount in 1979. With the high interest rate and large amount of short-term debts used in expanding operation, the interest expense became a large burden to the company caused the drop in income.
There were several incentives to Canadian government to bail Massey-Ferguson Company out from the debt. First, Massey wanted to relocate their capacity in Canada when it came to the consideration of economies of scale, which required the company to concentrate facilities to increase their engine production. It was a great chance to provide more job opportunity in Canada solving the unemployment problem. Also, the company already had two main facilities in Canada. The government was also worried about the employment condition in their country. Once Massey Company was closed down, 6,700 Canadians would become unemployed.
The Term Paper on Canada Goose Inc.
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Therefore, in order to restraint this situation from happening, the government was willing to give support to the company. 3. Since Massey-Ferguson had total debt up to the amount of U. S. $1. 6 billion in 1980 and its debt-to-equity ratio was 214%. The company was, therefore, prohibited from free access to the capital markets due to its many loan covenants. Also, with the large amount of debt, people were wondering whether the company had ability to pay back its debt or not. Without any news and foreseeable strategy to secure its future and gain trust from people, it would be hard to issue more equity, let alone pay back its debt.
