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A Report on Kelly Service Inc

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Chapter 1: Introduction 1. 1: Company Profile Kelly Services, Incorporation is one of the largest temporary help services providing organizations in United States of America. It was established in 1946 in Detroit, Michigan and had remained under the family management, with William Russell Kelly as Chief Executive Officer. The company emphasized on clerical and secretarial services, but also offering some other services like: Marketing, Light Industrial, Technical, Nursing and Home Health Care, Temporary Staffing Services, and Full-Time Placement.

William Russell Kelly founded Russell Kelly Office Service in 1946, initially providing office services performed at Kelly’s offices, rather than providing temporary staffing at the client’s location.

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However, customers asked for the work to be performed at their locations, and the temporary staffing concept was born out of responding to this type of request. It was in 1946 that the first ‘Kelly Girls’ came into scope and the first ‘Kelly Girl’ was Adelaide Hess Moran who was able to demonstrate that this new working sphere for women could be one to enjoy.

The temporary workers, who were usually female, became known as ‘Kelly girls’. In recognition of this, the name of the company was changed to Kelly Girl Service, Inc. in 1957. The term ‘Kelly girl’ became a widely used term for a temporary worker, regardless of the worker’s company affiliation or gender. In 1966 the name of the company was changed to Kelly Services, Inc. , in order to reflect an expanding range of services. Kelly operates in 37 countries and territories, 650 offices in the United States, Canada, The United Kingdom, and France.

Kelly employs more than 530,000 individuals annually, in areas including office services, accounting, engineering, information technology, law, science, marketing, creative services, light industrial, education, and health care. Kelly opened 64 new offices in 1985 and 47 in 1984. But most of the company’s growth had come from increased business from existing markets and customers. Chapter 2: Analysis of the Economy Analysis of the economy means to analyze the economic condition at that particular time period, whether the economic conditions were in recession, or normal, or inflation. Kelly Service, Inc. elongs to the service industry of the USA economy. The economy of the United States is the world’s largest national economy. The economy of the United States is a mixed economy and has maintained a stable overall GDP growth rate, a moderate unemployment rate, and high levels of research and capital investment. Temporary employed in the United States is booming. According to the Bureau of Labor Statistics, employment growth in the temporary help services industry has averaged 11 percent a year over the last 13 years, compared with a 2. 1 percent growth rate for non-agricultural jobs throughout the economy.

By 1982, 46% of temporary employment and 57% of receipts of temporary help services firms were earned at non-office jobs. A 1985 survey indicated that, of temporary help hired for office jobs, 58% were used in clerical positions and 25% were used for secretarial duties; the remaining 17% were used for such tasks as word and data processing and accounting functions. About half were hired to alleviate work overloads, and one-third was hired to cover for absent employees. Chapter 3: Analysis of the Industry Temporary employed in the United States is booming.

According to the Bureau of Labor Statistics, employment growth in the temporary help services industry has averaged 11 percent a year over the last 13 years, compared with a 2. 1 percent growth rate for non-agricultural jobs throughout the economy. The increasing use of temporary help could be attributed to at least three factors. Such help was used as an employment buffer; it would decline early in a recession, but would rebound rapidly in an economic recovery in 1983, the first year of recovery from a recession, the use of temporary help had increased by 17. 5 percent. 3. 1: Porters Five Forces Model

According to Michael Porter, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product/service or to the production/service process. He proposed a model that provides conditions that have to be met for a firm to be internationally competitive and successful. The Porter Five forces analysis is a structure for business management developed by Michael Porter in 1979. It uses concepts developed in Industrial Organization economics to derive five forces that determine the attractiveness of a market.

Porter referred to these forces as the microenvironment, to contrast it with the more general term microenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed. A change in any of the forces normally requires a company to re-assess the marketplace. The Porter Five forces analysis helps the marketer to contrast a competitive environment.

Porter’s five forces model is comprised of following five completive forces: 1) Rivalry amongst the competitors 2) Threat of new entrants 3) Pressure from substitutes 4) Bargaining power of buyers 5) Bargaining power of supplier 1) Rivalry amongst the competitors: Porter states that intense competitions encourage innovation. When there are so many competitors there raises too much competition and it creates innovation, which will ultimately lead to competitive advantage. We know if the number of competitors are too many and equal in size then they will compete very hard against each other.

But here we can see that Kelly Services Inc. is bigger one compared to two firms named Volt Information Science Inc. and Olsten Corporation. According to sales volume Kelly Service is the biggest one. When there is only one single company then the customers had to buy those products/services because the customers have no other alternatives. But if there is any bad quality then the customers will go for alternatives. Kelly Service Inc. belongs in the services industry and we know service is intangible so it must be in good quality.

For that reason all the companies are trying to improve their quality as a result they are gaining competitive advantage. 2) Threat of new entrants: Threat of new entrants means when there are too many newcomers are entering into the same market. When it is happen the market share goes down and result profitability will be low. This is also increases the competition among the competitors. If the entry barrier is low then there will be lower competition and if the entry barrier is high then there will be too much competition.

According to report this industry’s growth rate is good enough and there is no entry barrier. So Kelly Service, Inc. has a threat of new entrants. 3) Pressure from substitutes Product: Kelly Service, Inc. has a threat of new entrants. So when new competitors are comes in to the market always they try to introduce something new for attracting the existing customers. And when they are able to capture some of the existing customers ultimately the profitability of the Kelly Service will also shared. New products can take away the profitability of Kelly Services Inc. ) Bargaining power of Suppliers: Bargaining power of suppliers means when there are very few suppliers and many customers, then the suppliers have the bargaining power. The suppliers can charge any price as they want. Here we can see Kelly Services, Inc. provides services of temporary employee (clerical, secretarial). So they are not doing the monopoly business. Here as we see from the case study the bargaining power suppliers is very low for Kelly Service, Inc. 5) Bargaining power of Buyers: When there are too many suppliers and had a very few customers then the customers have the bargaining power.

The customers can dictate price level. They are able to exert pressure on the manufacturers regarding quality, price, service, etc. The common dimensions of the bargaining power of buyers are: bargaining leverage, buyer volume, buyer information availability, buyer price sensitivity, etc. Here as we see from the case study that Kelly Services, Inc. not only provides only one service. They provide variety types of services for the customers like: Marketing, Light Industrial, Technical, Nursing and Home Health Care, Temporary Staffing Services, and Full-Time Placement.

So, we can say they are not depended on few customers. They have a huge corporate customer. So here bargaining power of buyers is very low. 3. 2: PEST Analysis PEST analysis is P (Political), E (Economical), S (Social), T (Technological) analysis of a country. • Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labor/law, environmental law, trade restrictions, tariffs, and political stability. Kelly Services, Inc. was founded in 1946 after the Second World War. The political condition of USA is stable.

Govt. of USA has changed the rules of political factor over the time period. Now the tax rate is 50%, but it was not that much changed that’s why Kelly Service did not face any kind of big political distress in their business life. • Economic factors are includes economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. Temporary employed in the United States is booming. Interest rate on debt of different quality had declined considerably over the previous couple of years, reducing the cost of debt even further.

In the recession, the first year of recovery from a recession, the use of temporary help had increased by 17. 5 %, Employment growth in temporary help services industry has averaged 11% a year over the last 13 years. • Social factors are the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. In the time of recession most of the firm reduces their number of employees.

But temporary help services made the employment of temporary workers at that time. This helped the society immensely. At that time employment growth of temporary help services has increased 11 % a year over the last 13 years. • Technological factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. Kelly Service Inc. provides service like: Light Industrial, Technical, Nursing and Home Health Care, etc. So they need more advance technology oriented infrastructure for their business. Chapter 4: Analysis of the company Kelly Services, Inc. s one of the largest temporary help services providing organizations in United States of America. It was established in 1946 in Detroit, Michigan and had remained under the family management, with William Russell Kelly as Chief Executive Officer. The company emphasized on clerical and secretarial services, but also offering some other services like: Marketing, Light Industrial, Technical, Nursing and Home Health Care, Temporary Staffing Services, and Full-Time Placement. |Particulars |Year:1984 |Year:1985 | |Sales |741. |876. 4 | |COGS(74% of Sales) |548. 49 |648. 54 | |EBIT |52. 87 |64 | |Interest Expense |0. 00 |0. 00 | |Net Income |26. 7 |32. 6 | |ROA |17. 90% |18. 30% | |ROE |24. 60% |25. 30% | |EPS |1. 5 |2. 01 | |Stock Price |28 |44 | |Shares outstanding(millions) |16. 19 |16. 15 | |P/E ratio |10. 9 |16. 5 | |Total Current Assets |126. 2 |151. 9 | |A/R (55% of Total assets) |81. 9 |98. 23 | |Fixed Assets |22. 7 |26. 7 | |Depreciation (15% on PY FA) |2. 9 |3. 41 | |Net Fixed Assets |19. 91 |23. 30 | |Total Assets |148. 9 |178. 6 | |Current liabilities |40. 20 |49. 50 | |Long term debt |0. 00 |0. 00 | |Total Debt (CL+LTD) |40. 20 |49. 50 | |Common Equity |108. 8 |129. 10 | |Return on Sales(PM) |3. 60% |3. 0% | |Tax rate |49. 5% |49. 4% | 4. 1: Ratio Analysis |Ratio Analysis | |Particulars |Year:1984 |Year:1985 | |Current Ratio |3. 14x |3. 07x | |DSO |39. 78days |40. 35days | | Fixed Asset Turnover |37. 24x |37. 62x | |Total Asset Turnover |4. 98x |4. 91x | |Debt Ratio |27. 0% |27. 72% | |Profit Margin |3. 60% |3. 70% | |BEP |36% |36% | |ROA |17. 90% |18. 30% | |ROE |24. 60% |25. 30% | |EPS |$1. 65 |$2. 01 | |PE ratio |10. 90x |16. 50x | |CF per Share |$1. 82 |$2. 23 | |Book value per Share |$6. 2 |$7. 99 | |Market to Book value |4. 17x |5. 50x | |Equity Multiplier |1. 37x |1. 38x | The ratios are designed to show relationship among financial statement accounts within the firms: Interpretation: Current ratio: In the year of 1984 and 1985, against Tk. 1 current liability Kelly has current assets of Tk. 3. 14 and Tk. 3. 07 respectively. This means that Kelly’s ability to pay off its current liabilities by using its current assets is decreasing which indicates that they are not utilizing their urrent assets efficiently to pay off their current liabilities. Days sales Outstanding: Kelly takes 39. 78 days and 40. 35 days to realize Accounts Receivables on its credit sales on an average in 1984 and 1985 respectively. This means that DSO of Kelly has increased which indicates their poor collection policy. Fixed Assets Turn over: In 1984, against $1 investment in net fixed assets the company is generating sales of $37. 24 and in 1985 against $1 investment in net fixed assets the company is generating sales of $37. 62 which means this ratio has increased a little bit from the previous year.

So it is indicated that, FATO ratio was almost stable in the time period of 1984 to 1985. Total Assets Turn over: In 1984, against $1 investment in total assets, the company is generating sales of $4. 98 and in 1985 against $1 investment in total assets, generating sales of $4. 91 which means this ratio has decreased a little bit from the previous year. So it is indicated that, in terms of TATO the condition of the ratio is over all same in the time period of 1984 to 1985. Debt Ratio: In 1984, 27. 00% of company’s assets are financed by debt and in 1985, 27. 2% of company’s assets are financed by debt. According to the above situation the firm is using more debt (current liabilities) to finance its assets in the year of 1985 which is not at a satisfactory level. Profit Margin: In terms of profit margin in 1984, against 1% of sales the company is generating 3. 60% profit and in 1985, against 1% sales the company generates 3. 70% profit as their net income increases at a higher rate than sales. According to the above situation the company’s situation is good in 1985 because the ratio has increased than 1984.

Basic Earning Power: Basic Earning Power (BEP) removes the effect of taxes and financial leverage. In terms of Basic Earning Power, by using its total assets Kelly is generating EBIT of 36% in both the year of 1984 and 1985. So it is indicated that, BEP ratio condition is same in the time period of 1984 to 1985. Return on Assets: In 1984, by using total assets the company is generating net income of 17. 90% and in 1985, by using total assets the company is generating net income of 18. 30%. According to the above situation the company’s situation is good in 1985 because it has increased than 1984.

Return on Equity: In 1984, by using its common equity the company is generating net income of 24. 60% and in 1985 by using its common equity the company is generating net income of 25. 30%. According to the above situation the company’s situation is good in 1985 because it has increased than 1984. EPS: In the year of 1984 and 1985 against Tk. 1 investment in share Kelly is generating net income of Tk. 1. 65 and Tk. 2. 01respectively. According to the above situation the company’s situation is good in 1985 because it has increased than 1984. P/E Ratio: In the year of 1984 and 1985 against Tk. of earning investors are willing to pay Tk. 10. 90 and Tk. 16. 50 respectively for Kelly’s share. So it is indicated that, Kelly’s P/E ratio has been in a good position in 1985 which indicates the investors will pay high for Tk. 1 of earnings. Cash flow per share: In the year of 1984 and 1985 against Tk. 1 investment in share Kelly is generating cash flow of Tk. 1. 82 and Tk. 2. 23 respectively. According to the above situation the company’s situation is good in 1985 because it has increased than 1984. Book value per Share: In the year of 1984 and 1985 against Tk. investment in share the common equity of Kelly is Tk. 6. 72 and Tk. 7. 99 respectively. According to the above situation the company’s situation is good in 1985 because it has increased than 1984. Market to Book Value Ratio: In the year of 1984 and 1985 against Tk. 1 book value investors are willing to pay Tk. 4. 17 and Tk. 5. 50 respectively which is an increasing situation. According to the above situation the company’s situation is good in 1985 because it has increased than 1984. Equity Multiplier: In the year of 1984 and 1985 against Tk. 1 common equity Kelly has total asset of Tk. 1. 7 and Tk. 1. 38 respectively. So it is indicated that, their equity multiplier condition is almost same in the time period of 1984 to 1985. Du Pont Analysis: The Du Pont system is a multiplication of Profit Margin (Expense Control), Total Asset Turnover (Asset Utilization) and Equity Multiplier (Debt Utilization). It shows how these factors combine to determine the ROE. |Year |Profit Margin |Total Assets Turn over |Equity Multiplier |Return on Equity | |1984 |3. 60% |4. 98x |1. 7x |24. 53% | |1985 |3. 70% |4. 91x |1. 38x |25. 12% | From the above calculation we can see that, the return on equity has increased in 1985 compared to 1984. Though in 1985 their profit margin has increased in a positive way but their total assets turnover has decreased and equity multiplier has increased a little bit which is not good. Moreover, their ROE has increased but the increase rate is not satisfactory enough.

In Du Pont analysis we find that profit margin ratio is good in 1985 than 1984 but we can say that the company is not able to control its expenses as their cost of goods sold is about 74% of their sales. In 1985 their TA TO ratio has decreased than1984, as their sales increased but total assets increased at a higher rate than sales. Though their FA TO ratio increased but as their DSO increased so it can be said that they have problem with current assets as their account receivables constitutes of 55% of their total revenue. It means their cash is stuck at current assets which indicate that they are not able to utilize their current assets.

So, they need to improve their receivables collection policy. EM ratio of Kelly is almost stable in 1985 compared to 1984. But their debt ratio has increased in 1985 due to increase of current liabilities (as they do not have any long term debt). So, they have to control their current liabilities to make the firm less risky. 4. 2: Analysis of Financial Projection: By analyzing the case of Kelly Service Inc. our suggestion is the companies have to maintain optimum capital structure. So, if company takes 0%, 30% and 50% long term debt then the income statement will be like the followings: |Kelly Service Inc. 5 Years Forecast) | |(dollars in millions, except per share data) | |(When Kelly Takes 0% Long Term Debt) | | | |Particulars | |Year:1986 | |Year:1987 | |Year:1988 | |Year:1989 | |Year:1990 | | | |SALES (22. 45%) | |1073. 15 | |1314. 07 | |1609. 08 | |1970. 2 | |2412. 66 | | | |COGS(74% of sales) | |794. 13 | |972. 42 | |1190. 72 | |1458. 04 | |1785. 7 | | | |EBIT (sales *7. 30%) | |78. 34 | |95. 93 | |117. 46 | |143. 83 | |176. 12 | | | |INTEREST EXPENSE (12. 0%) | |0. 00 | |0. 00 | |0. 00 | |0. 00 | |0. 00 | | | |EBT | |78. 4 | |95. 93 | |117. 46 | |143. 83 | |176. 12 | | | |TAX (50%) | |39. 17 | |47. 96 | |58. 3 | |71. 92 | |88. 06 | | | |NET INCOME | |39. 17 | |47. 96 | |58. 73 | |71. 2 | |88. 06 | | | |EPS | |2. 43 | |2. 97 | |3. 64 | |4. 45 | |5. 5 | | | | | |(When Kelly Takes 30% Long Term Debt) | | | |Particulars | |Year:1986 | |Year:1987 | |Year:1988 | |Year:1989 | |Year:1990 | | | |SALES (22. 45%) | |1073. 15 | |1314. 7 | |1609. 08 | |1970. 32 | |2412. 66 | | | |COGS (74% of sales) | |794. 13 | |972. 42 | |1190. 2 | |1458. 04 | |1785. 37 | | | |EBIT (sales *7. 30%) | |78. 34 | |95. 93 | |117. 46 | |143. 3 | |176. 12 | | | |INTEREST EXPENSE (12. 50%) | |2. 40 | |2. 86 | |3. 42 | |4. 08 | |4. 7 | | | |EBT | |75. 94 | |93. 06 | |114. 05 | |139. 75 | |171. 25 | | | |TAX (50%) | |37. 7 | |46. 53 | |57. 02 | |69. 88 | |85. 63 | | | |NET INCOME | |37. 97 | |46. 3 | |57. 02 | |69. 88 | |85. 63 | | | |EPS | |2. 35 | |2. 88 | |3. 3 | |4. 33 | |5. 30 | | | | | | | | | | | | | | | | | | | | | | | | | | |(When Kelly Takes 50% Long Term Debt) | | | |Particulars | |Year:1986 | |Year:1987 | |Year:1988 | |Year:1989 | |Year:1990 | | | |SALES (22. 45%) | |1073. 15 | |1314. 07 | |1609. 08 | |1970. 32 | |2412. 6 | | | |COGS(74% of sales) | |794. 13 | |972. 42 | |1190. 72 | |1458. 04 | |1785. 37 | | | |EBIT (sales *7. 30%) | |78. 34 | |95. 3 | |117. 46 | |143. 83 | |176. 12 | | | |INTEREST EXPENSE (12. 50%) | |4. 00 | |4. 77 | |5. 0 | |6. 80 | |8. 12 | | | |EBT | |74. 34 | |91. 16 | |111. 77 | |137. 3 | |168. 01 | | | |TAX (50%) | |37. 17 | |45. 58 | |55. 88 | |68. 52 | |84. 0 | | | |NET INCOME | |37. 17 | |45. 58 | |55. 88 | |68. 52 | |84. 00 | | | |EPS | |2. 0 | |2. 82 | |3. 45 | |4. 32 | |5. 20 | | | From the above table as we can see, if Kelly takes 50% of long term debt the net income would be $37. 17million in year 1986. In the same way if Kelly takes 30% long term debt the net income would be $37. 97million in year 1986.

And finally if Kelly takes 0% of long term debt then their net income in year 1986 would be $39. 17. Also the EPS (Earning Per Share) is increasing when there is no long term debt. So as we can say from these figures Kelly’s net income will be increase if they did not take any long term debt. But the main thing is if they do not take any long term debt there would be a chance of LBO also they cannot increase the value of the firm. Here for solving the case we took some assumption base of previous year’s data. The assumptions are: If the company takes 0% of debt then what would be the projected ratio for the upcoming year. Here we got the following ratios. –

The Du Pont system is a multiplication of Profit Margin (Expense Control), Total Asset Turnover (Asset Utilization) and Equity Multiplier (Debt Utilization). It shows how these factors combine to determine the ROE. When there is 0% long term debt. |DU Pont |1986 |1987 |1988 |1989 |1990 | |PM*TA*EQM |25. 44% |26. 12% |26. 82% |27. 53% |28. 26% | If Kelly Service Inc. takes 50% long term debt then what would be the projected ratio for the upcoming year. Here we got the following ratios. When Kelly takes 50% long term debt then their Du Pont system would be. DU Pont |1986 |1987 |1988 |1989 |1990 | |PM*TA*EQM |24. 91% |25. 58% |26. 28% |26. 99% |27. 72% | As we can see from the figure when Kelly takes 0% and 30% of long term debt the profit margin would be same. But when Kelly takes 50% of long term debt the profit margin will be decreased by 1%. Also we can see taking 0% and 30% long term debt will increase the ROA and ROE. The DSO, TA TO, FA TO ratio will be same because we calculate these things by taking some assumptions. So, it will be better for Kelly Service Inc. taking 30% long term debt.

Because if Kelly takes 50% long term debt, their profit margin, ROA and ROE will be decrease. On the other hand if they do not take any debt there will be a chance of LBO and also they will not be able to increase the value of the shareholders. Net Present Value: The NPV shows by how much a firm’s value, and thus stockholders wealth, will increase if a capital budgeting project is purchased. If the net benefit computed on a present value basis-that is, NPV-is positive, then the asset (project) is considered an acceptable investment. |% of LT Debt |0% |30% |50% | |NPV |$226. 6063 |$220. 5845 |$216. 5699 | 4. 3: SWOT Analysis

SWOT analysis is the analysis of the company’s Internal and External factors analysis. Internal and External factors are includes Internal (Strength and Weakness) External (Opportunity and Threat). Now we would like to analyze the SWOT analysis of Kelly Service, Inc. based on its given data. Strengths: ? Kelly Services, Incorporation expanded their business by opening 64 new offices in 1985 and 47 in 1984 from existing markets and customers. ? It had good quality of growth and profitability record and lack of debt. ? Kelly’s sales had grown more rapidly than its assets and equity base and had done so with no long term debt. It means that they are able to utilize their assets more efficiently to generate sales. Low debt policy maximized its financial flexibility and essentially decrease cost of debt. ? Adopting a conservative capital structure for the future would restore confidence and give the firm greater financial freedom to fund research and development and pursue new projects. Weaknesses: ? They had very high COGS (Cost of Goods Sold) as their COGS constitute of 74% of their total revenue. It means that they are not able control their expenses which is contributing to lower their net income. ? Their Account Receivables comprise of 55% of their total assets. It indicates that their credit collection policy is not good which makes their DSO (Days sales Outstanding) so high.

Moreover their TA TO (Total Asset Turnover) ratio is very low compared to their FA TO (Fixed Asset Turnover) ratio which means most of their cash is stuck on their current assts. ? As Kelly is using no long term debt they will not able to take advantage of the tax shield ? Their debt to equity ratio increased in 1985 compared to 1984 as their debt (current liabilities) increased at a higher rate than equity. Moreover their current liabilities increased at a higher rate than their current assets which lowers their current ratio. It indicates that Kelly is not able to utilize it assets to pay off its current liabilities. Opportunities: ? Employment growth in the temporary help service industry has averaged 11% a year over the last 13 years. Though the use of temporary employed decreased during recession but in 1983, the first year of recovery from recession, the use of temporary help had increased by 17. 5%. ? In case of profit consideration, Kelly is in the best position as its Profitability Ratios : ROA (Return on Assets), ROE (Return on Equity) and PM (Profit Margin) is the highest in both the year of 1984 and 1985 compared to other two companies in the market Threats: ? Kelly might become a target of LBO (Leveraged Buyout) because of not having optimum capital structure due to low leverage. ? The firm has high business risk as they did not have any financial risk and there was recession in the US economy. Because of having low debt their value of the firm is lower than Volt Information Sciences, Incorporation. Though Kelly’s sales and profit are the highest compared to two other companies (Olsten and Volt) in the industry. 4. 4: Risk Analysis: Risk is the variation from the expected return. Risk is measured by the standard deviation of return. There are two types of risk: First one is Business Risk and second one is Financial Risk. Business Risk: Business risk is the variation of return from the main operation of the firm. It is the riskiness of the firm’s stock if it uses no debt. In stand-alone sense, it is a function of the uncertainty inherits in the projections of a firm’s future return on invested capital (ROIC). [pic]

Financial Risk: Financial risk is the additional risk placed on the common stockholders from the use of borrowed capital. If Kelly takes long term debt then financial risk will arise. [pic] Kelly Service, Inc. has no long term debt, so we can say they have only business risk which is associated with the main operation of Kelly’s business. For that reason Kelly can choose to move to higher leveraged position with long term debt (financial risk) to take advantage of the tax shield created because taking a certain amount of long term debt will not increase the total risk of the firm that much. Kelly’s Leverage Structure: When Kelly Takes 30% Long term debt. Particulars |Year 1986 |Year 1987 |Year 1988 |Year 1989 |Year 1990 | |% change in EPS |16. 99% |22. 55% |22. 54% |22. 54% |22. 54% | |% change in EBIT |22. 45% |22. 45% |22. 45% |22. 45% |22. 45% | |DFL |0. 76 |1. 00 |1. 00 |1. 00 |1. 00 | According to Kelly’s leverage structure as we can see, 1% change in EBIT leads to 84% change in EPS in year 1986. But from year 1987 to 1990 it is remain same. Chapter 5: Problem Statement

The main problem of the case study is “Capital Structuring” in Kelly Service Inc. In view of the growth in Kelly Service Inc. ’s debt ratio (without any long term debt), Kelly might become a target of LBO (Leveraged Buyout) because of not having optimum capital structure due to low leverage. By taking no long term debt Kelly is minimizing the value of the firm. This will negatively affect the shareholders interest. Moreover they have very high cost of goods sold and their account receivables collection policy is very slow which should be enhanced for the further improvement of the financial performance. Chapter 6: Alternative Course of Action Kelly Service, Inc. as no long term debt to maximize the value of the firm they can take leverage from the following sources: ? Bonds are a form of debt. Bonds issued by a corporation are called corporate bonds. When a company needs to raise funds for some type of investment or expenditure, they often turn to the public markets for funding. The other major option is to sell bonds to the public and take on debt. Selling bonds is often more attractive to companies than getting a loan from a bank. ? Taking loan from bank is another source of debt. If Kelly Service, Inc. takes loan from bank then they have to pay the fixed interest payment to the bank. The costs involved in borrowing money directly from a bank are prohibitive to a number of companies.

In the world of corporate finance, many organization view banks as lenders of last resort because of the restrictive debt covenants that banks place on direct corporate loans. Covenants are rules placed on debt that are designed to stabilize corporate performance and reduce the risk to which a bank is exposed when it gives a large loan to a company. In other words, restrictive covenants protect the bank’s interests. Chapter 7: Analysis of each alternative By analyzing the case we can suggest that, Kelly Service Inc. can meet up their 30% debt requirement in two ways. Number one is issuing corporate bonds or by taking loan from the banks. Now here we show the analysis of each alternative. Alternative Number 1: Kelly Service Inc. can issue Corporate Bonds to meet up their debt requirement.

By raising money through bonds, a corporation can avoid issuing more shares, which reduce the ownership interest of existing stockholders. Sometimes investor prefers bonds because bonds can guarantee of a steady stream of income to investors and repayment of the initial loan amount when the bond matures. In case of bond issue the net proceeds that the issuer receives are the issue price, less issuance fees. The Interest payments made to bondholders are deductible on the corporation’s income tax return. Even if interest rates decline, companies often have the option to pay back the principal amount to bondholders before the bond matures. This allows a company to eliminate the old debt and issue new bonds at a lower interest rate.

Kelly Service Inc. can issue 8 years, 12. 5%, $1000 bond sold at $1020. So, the company need to issue below number of bonds to fulfill their debt requirement. |Particulars |Year 1986 |Year 1987 |Year 1988 |Year 1989 |Year 1990 | |Bond Outstanding |19187. 53 |22904. 16 |27340. 69 |32636. 59 |38958. 29 | |Bond Issue |19187. 53 |3716. 625 |4436. 536 |5295. 893 |6321. 707 | Alternative Number 2: Second option is, if Kelly Service Inc. oes not want to issue corporate bonds, then they can take loan from a bank or any other financial organizations to meet up their debt obligation. If Kelly Service, Inc. takes loan from bank then they have to pay the fixed interest payment to the bank. By taking a bank loan Kelly service can borrowed a large amount of money. If Kelly Service can take bank loan the retained ownership is maintained, instead of selling shares to raise capital which will result in a decrease or loss of profit. The bank loan can be spent on almost anything. Kelly Service Inc. can take a loan of $ 2, 00, 00,000 ($1, 91, 87,534 required for 30% debt) to be repaid in 8 years in equal amount installments at 12. 0% interest rate. In general taking of debt will increase the EPS and net income and as well as ROA of the firm and will also help the firm to take tax advantage. But in against of debt there is also cost of debt which is high in taking loan from bank than the cost of issuing bond. Chapter 8: Recommendation Companies issue bonds to finance operations. Most companies can borrow from banks, but direct borrowing from a bank is more restrictive and expensive than selling debt on the open market through a bond issue. Banks place greater restrictions on what a company can do with a loan and are more concerned about debt repayment than bondholders.

Bank provide some restrictions like: they can’t issue any more debt until the bank loan is completely paid off; they can’t participate in any share offerings until the bank loan is paid off; they can’t acquire any companies until the bank loan is paid off, and so on. But bond markets tend to be more forgiving than banks and are often seen as being easier to deal with. As a result, companies are more likely to finance operations by issuing bonds than by borrowing from a bank. From the case study we can see that, the corporate bond interest rate is decreasing gradually in the USA economy since 1982. From our point of view, as Kelly Service Inc. is an established organization in USA temporary help service industry so they can satisfy their need of debt by issuing bond.

If Kelly goes for issuing bond to fulfill their required debt then it will help the firm to decrease their cost of debt by giving lower coupon rate to their bondholders. So our suggestion if Kelly must go for issuing corporate bonds to fulfill their debt requirement. It will be better for Kelly Service Inc. taking 30% long term debt because if Kelly takes 50% long term debt, their profit margin, ROA and ROE will be decrease. On the other hand if they do not take any debt there will be a chance of LBO and also they will not be able to increase the value of the shareholders. Chapter 9: Conclusion After the analysis of different financial data of Kelly service Inc. and temporary help services industry we have provided recommendation to be performed by the Kelly.

If Kelly can perform accordingly and maintain their stability then it will give them the flexibility it needs. Finally it is obvious that better management creates opportunities for any company to sustain viably. So, with the span Kelly should take proper steps in line with the economic and industry conditions. [pic][pic] ———————– Figure: Porter’s Five Forces Model ? Fixed Assets is 15% of Total Assets ? Depreciation is 15% on Previous Year Fixed Assets ? Total Assets Growth Rate 19. 37% ? Total debt is 30% Total Debt ? Common Equity 70% of Total Assets ? Sales Growth Rate 22. 45% ? EBIT 7. 3% on Sales ? P/E Ratio 10x ? Total Current Assets is 85% of Total Assets ? Account Receivable 55% of Total assets Ratio Analysis (Projected when there is 0% Long Term Debt) | |Particulars |Year:1986 |Year:1987 |Year:1988 |Year:1989 |Year:1990 | |Current Ratio |2. 83x |2. 83x |2. 83x |2. 83x |2. 83x | |DSO |39. 34days |38. 35days |37. 38days |36. 44days |35. 52days | |Fixed Asset Turnover |38. 4x |39. 4x |40. 4x |41. 4x |42. 5x | |Total Asset Turnover |5. 03x |5. 6x |5. 30x |5. 43x |5. 57x | |Profit Margin |4% |4% |4% |4% |4% | |ROA |18% |19% |19% |20% |20% | |ROE |26. 25% |26. 92% |27. 62% |28. 33% |29. 06% | |PE ratio |10x |10x |10x |10x |10x | Ratio Analysis (Projected when there is 30% Long Term Debt) | |Particulars |Year:1986 |Year:1987 |Year:1988 |Year:1989 |Year:1990 | |Current Ratio |4. 05x |4. 72x |4. 72x |4. 72x |4. 72x | |DSO |39. 34days |38. 35days |37. 38days |36. 44days |35. 52days | |Fixed Asset Turnover |38. 4x |39. 4x |40. 4x |41. 4x |42. 5x | |Total Asset Turnover |5. 034x |5. 6x |5. 30x |5. 43x |5. 57x | |Profit Margin |4% |4% |4% |4% |4% | |ROA |18% |18% |19% |19% |20% | |ROE |25. 44% |26. 12% |26. 82% |27. 53% |28. 26% | |PE ratio |10x |10x |10x |10x |10x | Ratio Analysis (Projected when there is 50% Long Term Debt) | |Particulars |Year:1986 |Year:1987 |Year:1988 |Year:1989 |Year:1990 | |Current Ratio |5. 67x |5. 67x |5. 67x |5. 67x |5. 67x | |DSO |39. 34days |38. 35days |37. 38days |36. 44days |35. 52days | |Fixed Asset Turnover |38. 4x |39. 4x |40. 4x |41. 4x |42. 5x | |Total Asset Turnover |5. 034x |5. 6x |5. 30x |5. 43x |5. 57x | |Profit Margin |3% |3% |3% |3% |3% | |ROA |17% |18% |18% |19% |19% | |ROE |24. 91% |25. 58% |26. 28% |26. 99% |27. 72% | |PE ratio |10x |10x |10x |10x |10x | Figure: Net Present Value

Cite this A Report on Kelly Service Inc

A Report on Kelly Service Inc. (2016, Oct 01). Retrieved from https://graduateway.com/a-report-on-kelly-service-inc/

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