Question

The collapse of W. T. Grant, the 17th largest retailer in the U.S. with 1,200 stores and 82,000 employees in 1975, came as a surprise to the capital markets! research W.T. Grant Department stores. Which types of risk were present? List and discuss them. What types of ratio calculations and analysis should have taken place to better predict Grant's demise? Which ratios in particular were likely indicators of Grant's impending demise? Provide examples and include outside research to strengthen your responses.

Answer 1

W. T. Grant became slow down  in finance capital markets partially because a long series of unrestrained managerial decisions produced severe cash shortages. These decisions included exceedingly rapid overexpansion, a poorly conceived and inadequately managed inhouse credit system, an incomprehensible inventory system, and an ill-conceived and confusing attempt to shift its merchandising emphasis from soft goods to durable goods. The net result of these managerial decisions was that by 1974 Grant had suffered substantial cash losses, and it eventually filed a Chapter XI bankruptcy. A prolonged investigation, prompted by contentious litigation over the firm's liquidation, revealed the banking community's tacit approval and encouragement of management's decision making

Example of poor and unchecked managerial decisions was Grant's credit system. Credit was extremely easy to obtain from Grant, and repayment schedules were often as low as one dollar per month. The firm instituted this program to induce its customers to purchase expensive appliances and furniture. Managers, who are traditionally expected to maximize profits, were under constant pressure to increase credit sales.

Grant’s profitability, turnover and liquidity ratios should have taken place to avoid such risk