Autozone inc corporate finance strategies harvard case solution analysis

Autozone Inc. (Corporate Finance Strategies) Harvard
Case Solution & Analysis
Problem: The issue occurred when Mr. Edward decided to take out his shares
from the company. As he is the main shareholder of the company, this situation
will have an impact on its investors who may also divest their shares from the
company. If this happens then company will be in debt which will reduce the
credit rating of the company. Another problem related to this is, the
repurchasing of the shares which will impact on leverage of the company.
Finance Alternatives: There are three financial alternatives through which the
company can improve their capital leverage and their credit rating of the
company. First Alternative is to increase the debt with the limit of 40% and
checking out the credit rating category and operating cash flow used for
repurchasing. Second alternative is to prevent the increase in the repurchase of
shares to maintain the company’s financial leverage with acquisition. The last
alternative is to maintain the shares up to 60% and debt to 40% for maintaining
the capital structure and regaining the investors’ confidence regarding the
enterprise value and its position in terms of returns.
Recommendation: It is recommended to increase debt with universal rate of
corporate finance, which is sixty & forty percent of equity and debt ratios
respectively. This would ensure that the capital structure of the entity and the
growth rate of the company are stable. Hence, return would be constant which
would create a favorable and compatible environment for the company.

Problem Statement
Main Highlights
The main problem of the AutoZone is securing the position of the capital
structure with respect to the investors’ point of view. These issues arrived as the
main investor whose name is Mr. Edward, is withdrawing his shares from the
company by following the strategy of repurchasing shares. This would result in
the high gearing and fluctuation in the capital structure of the company. To
overcome this problem the company would like to insert the debt element or to

repurchase its shares from operating cash flows. This would also help in the
dividend payment of the company. But the issue is to adopt the best decision
criteria which maintains the overall company’s position.


Key Problems
The key problems are evaluating the operating cash flow programs to stabilize
the situation of the repurchasing shares and the cash dividend programs. The
totally concern is related to the financial leverage of the company and the
outcomes of the capital structure for maintaining the debt and equity balance in
the company. Furthermore, these key highlights are impacting the gearing of the
enterprise. It neglects the actual performance of the company and gives a better
earning at some stages then it would affect on the shareholders’ wealth. This
would not be satisfactory for the firm for the future going concern of the
business.
Period of the Problem
Actually the period of this problem would be discussed in both terms with the
nature of the investors, because the investors would take their decisions on the
basis of the change in the economic environment. The above mentioned terms
are discussed below.
Short term Problems
Short term Problem relates to the cash dividend and action which should be
taken within a year whether to resolve it or not. The second main concern of the
company is paying the dividend from the operating cash flow with respect to the
net earnings of the enterprise. This problem would be resolved through
acquisition of the auto parts which are big retailers.
Long term Problems
The long-term problem consists of the repurchasing of the shares. This problem
has been predicted more than a year ago and it would affect the operating
earnings of the company. The solution for this problem is to set a benchmark for

the repurchasing of shares because the excess would also affect the capital
structure of the company and its financial statement with prolonging of the
leverage of the debt and equity position of the entity.
Decision Criteria of Problems
The decision criterion of the problem is to develop the alternatives for the
problem and adopt the best decision for the betterment of the company. The
decision should be sound enough to contain all the fact and figures of the
company with respect to the capital structure and earnings of the company in
term of investors as well as stakeholders of the enterprise.


Causes of the Problems
The causes for these problems were that no proper strategy was been
maintained which created loopholes in the running the organization. The main
cause relates to the repurchasing of the shares only with the setting the price of
shares with retained earnings of the company. Furthermore, the impact of the
problems creates a deficiency in terms of the returns which is not satisfactory
for the company………………….
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