United International University

CASE ANALYSIS OF TONKA CORPORATION

Managerial Finance
Course Code: FIN 602
MBA Program
Summer 2020

Prepared for
M. Sadiqul Islam, Ph.D, FCMA
United International University

Prepared by

Name ID
Priyanka Kundu 112 193 011
Md. Imjamul Haque 112 201 059

Section: A

Date of Submission: 29-09-2020

i
 LETTER OF TRANSMITTAL

September 29, 2020

M. Sadiqul Islam, Ph.D, FCMA

United International University

United City, Madani Avenue, Badda, Dhaka-1212

Subject: Submission of term report on “CASE ANALYSIS OF TONKA CORPORATION”

Dear Sir,

I, on behalf of our group members, would like to draw your kind attention that we are
submitting term report on “case analysis of tonka corporation”. With most respectfully
thank you for giving us the opportunity to prepare a report on this topic. We have attempted
our absolute best to set up a commendable report by gathering important data, breaking down
and decipher them genuinely.

We have submitted this report for your kind appraisal. We could do it significantly enhanced
but due to time constraint it was not possible to submit it so widely. We are thankful to you
for your assist in this regard.

Thanking you in anticipation.

Sincerely yours

On behalf of the group

Md. Imjamul Haque

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 ACKNOWLEDGEMENT

It is high time for us to express our deepest gratitude and humble submission to the almighty
Allah but for whose support we would to be able to complete task of preparing this report
within the scheduled time.

We would like to take the opportunity to express our gratitude to our honorable course
instructor M. Sadiqul Islam, Ph.D, FCMA, School of Business & Economics, United
International University whose direction, guidance and support helped us a lot to complete
this report.

I hope the report will help us pursue our goal in the near future. I also hope I will be able to
implement the knowledge that I have required from this report in real life. So Lastly, I would
again like to express our heartfelt thanks to our course teacher for giving his valuable
direction and suggestions for the process of case solutions.

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 EXECUTIVE SUMMARY

Before going to the analysis part of TONKA CORPORATION, a simple portray of economy,
industry and company analysis is done for this case. In the economic analysis, we tried to
relate the economy with the industry and quantitatively justify the nature of the industry and
its relativity with the economy. When we do industry analysis part, we done PESTLE
analysis to analysis the different variable’s impact on the industry including political,
economic, social, legal, etc. Then we used Porter’s five forces model to see the industry
competitiveness. In the next section, we calculated a different ratio for the company that
gives us a clear picture of the financial situation of the company. I had to analyse the
strength, weakness, opportunities, and threat for Tonka Corporation. The valuation is done
for each of the alternatives to estimate the overall price range in each, and to see which
alternative maximizes value. After the recommendation of valuation, we see which
alternative is best. Overall, the intended report gives some ideas for the case includes
addressing the problems and giving a thorough analysis of the solutions.

The findings of this report present a clear picture how do valuation and implementing the
valuation and achieve their benefit.

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Table of Contents
LETTER OF TRANSMITTAL......................................................................................................................ii
ACKNOWLEDGEMENT...........................................................................................................................iii
EXECUTIVE SUMMARY..........................................................................................................................iv
Chapter 1: Introduction.........................................................................................................................1
Chapter 2: Analysis of The Economy......................................................................................................2
Chapter 3: Analysis of the Industry........................................................................................................4
3.1 PESTEL ANALYSIS.........................................................................................................................4
3.2 PORTER’S 5 FORCES ANALYSIS.....................................................................................................6
Chapter 4: Analysis of the Company......................................................................................................8
4.1 Ratio Analysis...............................................................................................................................8
4.2 Risk Analysis.................................................................................................................................9
4.2.1 Business Risk.........................................................................................................................9
4.2.2 Financial Risk........................................................................................................................9
4.3 SWOT ANALYSIS.........................................................................................................................10
Chapter 5: Problem Statement............................................................................................................12
Chapter 6: Alternative Course of Action..............................................................................................12
Chapter 7: Analysis of Each Alternatives.............................................................................................13
Recommendation................................................................................................................................15

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 CHAPTER 1: INTRODUCTION

Tonka Corporation is the fifth largest toy company in the United States and they had two of
the most successful years in its history in 1985 and 1986. They had amazing sales and
profitability was outstanding. Tonka additionally had given more than 1 million portions of
common stock in December 1986 and had resigned its long-term debt, the two of which
added to its low leverage and high liquidity. They were popular for their traditional line of
metal toy and they want to minimize their sale through diversification into other types of toy.

The toy industry also was capable to changes in demographics, in seasons. Segmenting
patterns are expanding demand for toy items. A rising number of births is creating more toy
recipients for the next 10 years. Also. an increasing percentage of births (over 40 percent) is
now firstborn children and most families spent more on first born.

Tonka Corporation was most popular for its customary line of durable metal toy trucks,
backhoes and development vehicles, which were answerable for about $70 million of
corporate deals lately. Probably the best accomplishment in the course of recent years of
them had been GoBots-little vehicles that could be changed vigorously figures; they
contended directly with Hasbro's Transformers, which generally outsold them. Their
performance dependent on single line of product which bring success for them. In
meanwhile, Tonka introduced new toy ideas every years and Puppy New-borns, Super Pound
Puppies and Pound Purries as well as such accessories as a doghouse, dog dish and clothing.

Tonka
Corporation

Bathing
Pound Love Me Maple
GoBots Keypers Beauties &
Puppies Tender Town
Hollywood

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 CHAPTER 2: ANALYSIS OF THE ECONOMY

The change in sales overtime the firm have to take mode based on making a forecast.
forecasting is depending on many other factors like economy may undergo a recession.
Recession is forthcoming and predicting thar recession is forthcoming. Business may at a loss
in that case sales volume may not grow as it happened during last years. For example, after
coming Covid-19 many firm’s sales growth is decreasing because economy slow down. So,
first the firm has to analyse the economy.

There have some leading indicators with many given ideas how the economy is going to do in
forthcoming period. For example, real estate sector; if saw that real estate business become
slow down than overall economy become slow down. The growth of real estate is leading
indicator of the economy of forthcoming period. There has a factor in industry which affect
the industry in general. From the case we see that sales in 1986 were down by 25%. Since
1983, the U.S economy was experiencing growth in different matrix and such are: There has
some lagging indicator from analysis the economy in case:

 GNP growth (Gross national product)

 Disposable personal income
 Unemployment rate
 Consumer price Index
Such growth rates associated with increase in unemployment rate, customer price index, price
leading rate.

 GNP (Gross national product): “Gross national product (GNP) is the value of all
goods and services made by a country's residents and businesses, regardless of
production location. GNP counts the investments made by U.S. residents and businesses
both inside and outside the country and computes the value of all products manufactured
by domestic companies, regardless of where they are made”. From the case we see that,
Growth of real gross national product went down. From year 1983 to year 1986 growth
of real gross national product was going down respectively 3.6%, 6.8%, 3% and 2.9%
 Real per capita disposable income: It rose by 2% from 1983 to 1986 which is from
$9,930, $10,419, $10,622, $10,947.
 Unemployment rate: Unemployment rate decreasing. From year 1983 to year 1986 we
saw that the employment rate went down which is from 9.6% to 7%.

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  Customer Price Index: “A comprehensive measure used for estimation of price
changes in a basket of goods and services representative of consumption expenditure in
an economy is called consumer price index”. From the case we see that, it was
increasing from 1983 to 1986 3.2%, 4.3%, 3.6%, 1.9%.
 Prime Lending Rate: It was decreasing from 1983 to 1986 10.79%, 12.04%, 9.93%,
8.33%.
tonka's sales, in any case, developed quickly for four straight years. Except for games and
puzzles, plush toys, and baby and preschool toys, assessed 1986 sales by class were went
somewhere around as much as 25 percent, similar to the case with action figures, dolls, and
electronic games. Subsequently, overall industry sales were down $27 million out of 1986.
Inside each segment, the essential and innovation upgraded toys progressed nicely, and
industry examiners anticipated.

Due to change in technology the sale of toy industry declined by 27million in 1986 where
Demographic trends are increasing demand for toy products. A rising number of births is
creating more toy recipients for the next 10 years. Also. an increasing percentage of births
(over 40 percent) is now firstborn children and more dollars and the increasing number of
two-income families are resulting in more buyers with more money to spend on toys.

GNP: Growth of real gross national product went down

Lagging Unemployment Rate: increasing
Indicators Consumer Price Index:increasing
Interest Rate: increasing

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 CHAPTER 3: ANALYSIS OF THE INDUSTRY

3.1 PESTEL ANALYSIS

“PESTEL Analysis is a system or instrument utilized by marketers to investigate and screen
the macro-environmental (external marketing environment) factors that affect an
organization. The aftereffect of which is utilized to recognize dangers and shortcomings
which are utilized in a SWOT analysis”.

PESTEL stands for:

Social Technological

Economic Environmental

PESTEL
political Legal
ANALYSIS

Political Factors

Solid law-based arrangement, successful principle of law and tight Regulatory bindings is
considered as a political factor of Tonka Corporation. These are about how and how much a
legislature intercedes in the economy. This can incorporate government strategy, political
security or shakiness in abroad business sectors, unfamiliar exchange strategy, charge
strategy, work law, ecological law, exchange limitations, etc. It is obvious from the rundown
over that political factors frequently affect associations and how they work together.
Associations should have the option to react to the current and foreseen future enactment and
modify their promoting strategy in like manner.

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Economic Factors

High economic growth and higher growth rate in the Toy Industry is the component of the
economic factor of Tonka Corporation. Economic elements significantly affect how an
association works together and furthermore how beneficial they are. Factors incorporate
financial development, loan costs, trade rates, swelling, extra cash of shoppers and
organizations, etc. Micro-economic factors are about the manner in which individuals spend
their wages. This affects B2C associations specifically.

Social Factors

An expanding level of birth and a growing population of grandparents is considered as a

political factor of Tonka Corporation. The social factor is otherwise called socio-social
components, are the regions that include the common conviction and perspectives of the
populace. These elements incorporate populace development, age circulation, wellbeing
cognizance, profession perspectives, etc. These components are quite compelling as they
directly affect how marketers get clients and what drives them.

Technological Factors

Ongoing Technological turn of events, innovation's effect on product offerings & pace of
technological diffusions is included components of technological variables of Tonka
Corporation. We all know how skill quick the mechanical scene changes and how this effect
the manner in which we market our products. Technological factors influence advertising and
the administration thereof in three particular manners, for example, better approaches for
delivering merchandise and enterprises, better approaches for conveying products and
ventures and better approaches for speaking with target markets.

Environmental Factors

Eco-accommodating Toys is one of the significant contemplations of the environmental

variables of Tonka Corporation. These components have just truly gone to the cutting edge
over the most recent fifteen years or something like that. They have gotten significant
because of the expanding shortage of crude materials, contamination targets, working
together as a moral and feasible organization, carbon impression targets set by governments.

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Legal Factors

Severe regulation and guidelines, wellbeing measures are contemplations of the legal
elements of Tonka Corporation. Legitimate elements incorporate wellbeing and security,
equivalent chances, promoting principles, purchaser rights and laws, item marking, and item
security. Plainly organizations need to recognize what is and what isn't legitimate so as to
exchange effectively.

3.2 PORTER’S 5 FORCES ANALYSIS

“Porter's five forces model Porter's Five Forces is a business analysis model that helps to
explain why different industries are able to sustain different levels of profitability”. The five
forces that play a part in shaping every market and industry in the world are described in the
following discussion:

High

Industry Rivalry among existing competitors

Medium

The threat of Substitutes of products

Low

The threat of New Entrants

Low

Bargaining power of suppliers

Medium

Bargaining power of Buyer

1. Industry Rivalry among existing competitors: Currently the biggest rivals are
Coleco Industries, Hasbro, Inc, Kenner Parker Toys, Mattel, Inc. This industry is
presented to high rivalry between the companies and needing effective innovation and
development in toy items. We see there are 5 companies in toy industry and their sales

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 are increased gradually over years and because of the huge number of toy companies
the rivalry among existing competitors is at high level.
2. The threat of Substitutes of products: The Tonka Corporation substitute products
(games and puzzles, plush toys, and infant and preschool toys) are an alternative that
are available in the market at comparatively better prices. As the number of toy
companies are high, so there are available substitutes among toy companies. With the
presence of current companies and the low life cycle pattern of items, there was
consistently an option for any popular items. Tonka Corporation was best known for
its traditional line of sturdy metal toy trucks, bulldozers, backhoes, and construction
vehicles, which were responsible but with consolidation, the threat of substitute was at
moderate level. Because of which the items being delivered by the companies that are
now existing in the market and is utilizing a similar innovation are than supplanted by
the other organization's items that are relatively better as far as cost and quality and
are being created from divisions with huge benefits.
3. The threat of New Entrants into the industry: High competition in this industry
and there has almost 800 toy industries throughout USA, entrance barriers are very
low that everyone can create an innovative product and there has less opportunities
for them to originate. Rather the existing industries were consolidating for better
opportunity.
4. Bargaining power of suppliers: “Powerful suppliers possess more power to capture
significant value for themselves by demanding high prices while limiting the quality
and the quantity of the product or services or by transferring the cost on the
participant of the industry”. Since there are different sorts of contribution for each
kinds of toys, no single provider could control the market. There is consistently an
elective supplier of key contributions of products in toys. So there has low power of
supplier.
5. Bargaining power of customers: Tonka corporation introduce new products in order
to satisfy the arising population needs as the number of firstborn babies will increase.
So, the demand for the toy is also increased. The level of interest and concentration of
children toward toys gives them more or less power. The divorced grandparents, two-
income families made the demand always high for toys.

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 CHAPTER 4: ANALYSIS OF THE COMPANY

4.1 RATIO ANALYSIS

The following table analyses the ratios for Tonka Corporation over the two years from 1985
& 1986. The profitability ratio shows that the gross, operating profit and net profit margin are
decreasing from 1985 to 1986. The return on asset, return of total capital, return on equity
shows a downward percentage. The liquidity ratio is highest in 1996. The activity ratio
portion is in a good state in 1986 where the receivables turnover is 5.02 and fixed asset
turnover is 12.23 indicate that there is enough generation of income from the assets. Moving
on to the debt management of the company the, debt to equity ratio is 15.79% in 1985 but the
equity is in 8.52% in 1986 that indicates the company has been using less of its debt than
equity for financing assets purchase. “Overall, the below table is a calculation of important
ratio for the company which tells a lot about the stability, profitability, debt and asset
management of the company, and this ratio will help more with the interpretation of financial
position of Tonka Corporation”.

Activity Ratio
Particulars   1985 1986
Receivable Turnover Revenue/ Average Receivables 5.54 5.02
Working Capital Revenue/ Average Working Capital 5.96 3.62
Turnover
Fixed Asset Turnover Revenue/ Average Net Fixed Assets 12.16 12.23

Profitability Ratio
Particulars   1985 1986

Return on Sales      

Gross Profit Margin Gross Profit/ Revenue 46.03 45.71%

%
Operating Profit Margin Operating Profit/ Revenue 14.81 13.74%
%
Net Profit Margin Net Income/ Revenue 7.98% 7.60%
Return on Asset Net Income/ Average Total Assets 15.82 14.06%
%

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 Return on Total Capital EBT/ Short- and Long-term Debt and 29.36 25.39%
Equity %
Return on Equity Net Income/ Average Total Equity 38.01 23.16%
%

Solvency Ratio
Particulars   1985 1986

Debt to Equity Ratio Total Debt/ Total Shareholders’ Equity 15.79 8.52%
%

Liquidity Ratio
Particulars   1985 1986
Current Ratio Current Assets/ Current Liabilities 1.66 2.51
Quick Ratio (Cash+ Short Term Marketable 1.08 1.93
Investment+ Receivables)/ Current
Liabilities

4.2 RISK ANALYSIS

4.2.1 Business Risk
Business risk is the variation of return for the main operation of firm. If the firm does not
have any debt the total risk of firm is business risk. Tonka Corporation has the following
magnitude of risks in its business and those are explained below:

 Demand Variability: In times of recession, the demand of the toys is decreased so

their business risk is high. Life cycle of their toys is small.
 Sales Price Variability: The effect of sales price is huge for Tonka. If sales price
variability is high business risk is high. Here sales are increasing from 1984 to 1986.
 The degree of operating leverage: “The degree of operating leverage shows the use
of fixed cost in the generation of revenue”. Here, we see the DOL is 0.1446 in the
year 1985 and 0.133 in year 1986 which means one % change in sales would
adversely affect the operating profit i.e. EBIT.
 Ability to develop new products in a timely cost-effective manner: Tonka
Corporation has been experiencing high business risk that comes from competition
and they did not introduce any technology-enhanced.
Tonka Corporation having high business risk should take low debt.

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4.2.2 Financial Risk
Financial risk is the additional risk placed on the common stock holders for the use of
borrowed capital. Use of debt can multiply earning. The amount is extraordinarily high for a
firm like Tonka Corporation.

Financial Risk

Degree of Financial Leverage      

Year 1984 1985 1986
EBIT 8.3 36.2 40.3
INTEREST 5.5 3.6 3.8
DFL 2.964285714 1.110429448 1.104109589
Degree of Operating Leverage
Year 1984 1985 1986
Sales 139.4 244.4 293.4
EBIT 8.3 36.2 40.3
DOL   0.144617913 0.134404925

4.3 SWOT ANALYSIS

SWOT Analysis is a demonstrated management framework that empowers a brand like
Tonka Corporation to benchmark its business and execution when contrasted with the
contenders and industry.

STRENGTH

1. Tonka Corporation owed the brand image for being the best in the toy market for their
traditional line of sturdy metal toys, trucks, bulldozers, backhoes etc. Tonka
Corporation holds the brand image of long-standing reputation in the toy market, it’s
considered as one of the strengths.
2. Tonka Corporation has different item contributions and separated Toys compared
with different stores. Tonka Corporation has an alternate line of toys for each age of
youngsters so this factor can consider as another positive quality & strength.
3. Because of variation in toy product line Tonka Corporation has increasing toys
interest for demographic reason & it is also counted as another strength of Tonka
Corporation.
4. The distribution network channel of Tonka Corporation is very strong and thus it
works as a strength of Tonka Corporation.

WEAKNESS

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 1. The measure of sales relies upon occasional deals so that it is a weakness of Tonka
Corporation.
2. Another weakness of Tonka Corporation is the higher prices compared to some
competitors in the toy market.
3. Higher dependency in one single toy line of Tonka Corporation is also counted as
weakness.
4. Lack of differentiated offerings of toys to the market is considered as another reason
of weakness of Tonka Corporation.

OPPORTUNITIES

The company website of Tonka Corporation can be additionally improved by making it more
enlightening and easier to understand.

1. Product assortment exploration can be considered as an opportunity as well for

Tonka Corporation.
2. International expansion of Tonka Corporation can be done, to lead the company to
next profitable level so that executing internal expansion can be counted as a ground
of opportunity for Tonka Corporation.
3. Internationally extension of distribution channel of toy line of Tonka Corporation
could be count as another opportunity and can result in more profit in international
market, it is a definitive opportunity for Tonka Corporation to do better in the world-
wide toy industry.
4. Making a solid presence in the online segment in toys in the United States can be
consider an open door for opportunity for Tonka Corporation.

THRETS:

1. Tonka Corporation comes up short on an upper hand against other enormous toy
companies, it is one of the major considerable threat of Tonka Corporation.
2. Low prices of products offered by the contenders or competitors is another danger for
Tonka Corporation.
3. Another threat of Tonka Corporation is risk of Tonka Corporation takeover which is
considered as a sensitive threat for any company in the market.
4. Large online retailers like Amazon expanding their market at a quicker rate with the
goal that it very well may be considered a danger for Tonka Corporation since

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 Amazon has an assortment of toy item contributions from various worldwide toy
companies.

CHAPTER 5: PROBLEM STATEMENT

The following problems were faced by Tonka Corporation:

1. Review by Capital Structure policy in Tonka Corporation was to ensured effective use
of resources
2. They only gave concentration in revenue to limited single line of products of Tonka
3. Undiversified international sales with failure in product line expansion.
4. Threat of industry acquisition and the industry was not able to produce any new
category of products.

CHAPTER 6: ALTERNATIVE COURSE OF ACTION

The following are alternative course of action for recommending for Tonka Corporation:
• 20% Debt to total capital& 80% Equity
• 40% Debt to total capital & 60% Equity)
• 60% Debt to total capital & 40% Equity)
• 1 million shares repurchased by tonka corporation
ASSUMPTIONS
■ Sales growth rate 10%
■ COGS 10%
■ Administrative Expense 2%
■ Other expenses 2%
■ Operating cost will increase by 13%
■ Depreciation 15% of Fixed Asset
■ Operating working capital 14%

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 ■ Terminal Growth rate of FCFF is 4% & WACC is 14%
■ Cash, Account Receivable, Plant, Inventory will grow at 15%
■ Accounts Payables, Accruals will grow at the rate of 25%
■ Additional Fund needed will be financed by Bond

CHAPTER 7: ANALYSIS OF EACH ALTERNATIVES

7.1 Base Case

PV of FCFF $1,308.70

+ Surplus Cash & Marketable securities 0

FIRM VALUE $1,308.70
(-) Financial distress cost $16.36
(-) Value of Debt 16.1
(-) Value of Preferred Stock 0
Value of Equity $1,276.25
Number of Shares 7.67
Value per Share 166.39

7.2 Alternative 1 (20% debt of total Capital)

PV of FCFF $1,308.70

+ Surplus Cash & Marketable securities 0

FIRM VALUE $1,308.70
(-) Financial distress cost $16.36
(-) Value of Debt 31.72
(-) Value of Preferred Stock 0
Value of Equity $1,260.63
Number of Shares 7.67
Value per Share $164.36

7.3 Alternative 2 (40% debt of total Capital)

PV of FCFF $1,308.70
+ Surplus Cash & Marketable securities 0
FIRM VALUE $1,308.70
(-) Financial distress cost $98.15
(-) Value of Debt 63.44

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(-) Value of Preferred Stock 0
Value of Equity $1,147.11
Number of Shares 7.67
Value per Share $149.56

7.4 Alternative 3 (60% debt of total Capital)

PV of FCFF $1,308.70
+ Surplus Cash & Marketable securities 0
FIRM VALUE $1,308.70
(-) Financial distress cost $229.02
(-) Value of Debt 95.16
(-) Value of Preferred Stock 0
Value of Equity $984.52
Number of Shares 7.67
Value per Share $128.36

7.5 Alternative 4 (1 million Share repurchased)

PV of FCFF $1,308.70
+ Surplus Cash & Marketable securities 0
FIRM VALUE $1,308.70
(-) Financial distress cost $98.15
(-) Value of Debt 79.30
(-) Value of Preferred Stock 0
Value of Equity $1,131.25
Number of Shares 6.37
Value per Share $177.59

7.5 Alternative Analysis

Alternative Name Value Per Share
1. 20% Debt & 80% Equity $164.36
2. 40% Debt & 60% Equity $149.56

3.. 60% Debt & 40% Equity $128.36

4. 1 million Share Repurchase $177.59

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 RECOMMENDATION

Share re-purchase alternative provides the highest share value, ensures flexibility and
utilization of excess cash. This alternative will maximize value. Tonka Corporation should
adopt share re-purchase option.

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