Bhaghwati Steel Centre: Backward or Forward?

<p align="justify">Bhagwati Steel Centre, a family-owned trading firm located in Ghaziabad, India, was facing a short-term decline in revenue from its core business, trading iron and steel components, during the COVID-19 pandemic. The company’s four partners felt that this was the right time to diversify and expand their business to establish more sources of revenue and income; they were considering diversifying and expanding their business using a business integration strategy and had to choose between two options: backward or forward integration. However, the partners had several financial factors to consider before making the final choice. What factors would influence and determine the better option for the company’s cash flow? What effect would a potential boom or bust in the market have on the two proposed expansion strategies and on cash flow? What financial techniques were available to evaluate the two proposals and which should be the preferred technique? Finally, should the company opt for backward or forward integration?</p>

<p align="justify">This case is suitable for courses on corporate finance, financial management, and business environment at the undergraduate and graduate levels. This case can also be used in executive training programs, both for beginners in finance and for senior executives looking for a deep dive into investment evaluation by using NPV or internal rate of return (IRR). The case presents a unique scenario for the investment evaluation of a business. Instead of the standard model of net present value (NPV) to free cash flow to the firm (FCFF) to weighted average cost of capital (WACC), the case uses the NPV to free cash flow to equity (FCFE) to return on equity (ROE) model. This method is preferred for this case because BSC’s WACC changes every year as debt is paid down, while the partners focus on running the company with returns earned from investment. The instructor can elaborate on this issue in class to help students understand the difference between the two models and the most appropriate use of each model.<br><br>After working through the case and assignment questions, students will be able to achieve the following objectives:</p><br><ul><li>Understand non-cash expenses and an estimation of cash flow.</li><li>Evaluate investment decisions quantitatively using the concept of time value of money.</li><li>Analyze financial decisions in different business scenarios using scenario analysis.</li><li>Analyze the impact of leverage on profitability.</li><li>Differentiate between the NPV to FCFF to WACC model versus the NPV to FCFE to ROE model.</li></ul>

• expansion
• family run business
• net present value
• NPV
• internal rate of return
• IRR
• scenario analysis
• non-cash expenses
• cash flow estimation
• investment decisions
• time value of money
• leverage
• free cash flow to the firm
• FCFF
• weighted average cost of capital
• WACC
• free cash flow to equity
• FCFE
• return on equity
• ROE