Over the 1990s, the Loewen Group expanded from funeral homes to cemeteries, partly financed by $2...

 

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Over the 1990s, the Loewen Group expanded from funeral homes to cemeteries, partly financed by $2 billion of bonds and S300 million of bank loans. For the six months ending June 30, 1999, Loewen's operating earnings were $73 million. However, interest expenses of $77 million and other non-operational expenses dragged the group down to a $88 mil- lion pre-tax loss. Worried about further losses, Loewen filed for bankruptcy protection in Canada and the United States. Chairman John Lacey called on bondholders to convert hundreds of millions of dollars of bonds into equity. (a) If you had to justify the Loewen Group's expansion from funeral homes to cemeteries, would you rely on economies of scale or scope or neither? (b) Suppose that bondholders converted $500 million worth of bonds to equity. How would this affect Loewen's earnings before income taxes as compared with its "economic value added" as defined by Stern Stewart? (c) For a bondholder converting Loewen bonds to equity, which concept of cost would be relevant? Over the 1990s, the Loewen Group expanded from funeral homes to cemeteries, partly financed by $2 billion of bonds and S300 million of bank loans. For the six months ending June 30, 1999, Loewen's operating earnings were $73 million. However, interest expenses of $77 million and other non-operational expenses dragged the group down to a $88 mil- lion pre-tax loss. Worried about further losses, Loewen filed for bankruptcy protection in Canada and the United States. Chairman John Lacey called on bondholders to convert hundreds of millions of dollars of bonds into equity. (a) If you had to justify the Loewen Group's expansion from funeral homes to cemeteries, would you rely on economies of scale or scope or neither? (b) Suppose that bondholders converted $500 million worth of bonds to equity. How would this affect Loewen's earnings before income taxes as compared with its "economic value added" as defined by Stern Stewart? (c) For a bondholder converting Loewen bonds to equity, which concept of cost would be relevant?

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