Economies of scale or scope

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Reference no: EM1375453

Over 1990's, the Loewen Group expanded from funeral homes to cemeteries, partly financed by $ 2 billion of bonds and $300 million of bank loans. For the 6 months ending June 30, 1999, Loewen's operating earnings were $73 million. Thus, interest expense of $77 million, and other non-operational expenses dragged the group down to a $88 million pre-tax loss. Faced with prospect of further losses, Loewen filed for bankruptcy protection in the United States and Canada. Chairman John Lacey called on bondholders to convert "hundreds of millions of dollars" of bonds into equity.

Show whether Loewen Group expansion from funeral homes to cemeteries affected its vertical or horizontal boundaries or both.

If you had to justify the expansion, could you rely on economies of scale or scope or neither?

Consider that bondholders converted $500 million worth of bonds to equity. Explain how would this affect Loewen's earnings before income taxes as compared with its economic value added?

Reference no: EM1375453

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