Lesson 3 problem set A
1. Over the 1990s, the Loewen Group expanded from funeral homes to cemeteries, partly financed by $2 billion of bonds and $300 million of bank loans. For the six months ending June 30, 1999, Loewen's operating earnings were $73 million. However, interest expense of $77 million, and other non-operational expenses dragged the group down to a $88 million pre-tax loss. Faced with the prospect of 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.
1. Discuss whether Loewen Group expansion from funeral homes to cemeteries affected its horizontal or vertical boundaries or both.
2. If you had to justify the expansion, would you rely on economies of scale or scope or neither?
3. 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?