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The National Industries Group (NI): A Case Study
Background: The National Industries Company (NIC) was incorporated in 1960 as Kuwait became independent in 1961. Being the only national firm in the field of construction, NIC gets 85% of sales from government projects. NI management was keen to restore its financial flexibility whenever possible. It chooses debt as its financial sources. The average debt ratio of NI over the last five years (1996-2000) is above 55% on the other hand the average interest expense is 14.4%. NI now is facing a promising future of profitable investments. NI management is seriously considering issuing new bonds to function as a carryover to the existing bond issue, which matures at the end of this year (year 2001).
1. Why NI managers want to increase their usage of debt? NI wants to get the financial flexibility, in order to do the investments. NI prefer debt, because it has a good credit standing and the bank in Kuwait can give the interest rate in Kuwait is low. NI wants to use these debts to renew old assets, replace current bond, and maintain equity level. So NI can benefit stockholder and attract more investors.
2. What are the advantages of using debt financing over other alternatives? Generally the biggest advantage of using debt financing over other alternatives is the tax benefits it brings. That is, debt is tax deductible while equity is not. However in this case, the taxation model in Kuwait is totally different and extremely low, which is 1% of net profit to the Kuwait Foundation for the Advancement of Science (KFAS) and 2.5% of the net profit to the National Labor Force Fund. Therefore we consider that for NI, they choose debt financing to gain the advantages of leverage using to make their ROE looks better, and to have full control of the corporation. 3. Has NI reached its full debt