1. What business practices helped lead to Enron’s financial collapse? In particular, consider
the role of debt and what the case study calls its “asset heavy” and “asset light”
strategies.
Enron had two different strategies favored by two executives. Rebecca Mark preferred
an asset-heavy approach were Enron would invest heavily in traditional power
generations assets whereas Jeffrey Skilling was more interested in asset-light strategy
were Enron would trade in energy produced by other companies.
Enron executives decided to follow both strategies simultaneously. It required
considerable investments and put pressure on the Enron balance sheet. Enron became
very creative with its futures trading and created over 1200 different derivatives. It
needed a massive amount of working capital to maintain these books, and Enron used
short-term commercial paper (debt) to fund these books.
Another issue was with the way VPP (Volumetric Production Payments) cash flows were
marked to market and sold to its SPE (Special Purpose Entities) showing NPV (Net
Present Value) on the books. Enron used its yield curve or misused the market curves
for periods longer than intended for discounting these cash flows. Enron essentially
created a fictitious cash flow, sold to fictitious entities and made it real in the books.
2. Who were the main stakeholders in the Enron case? Who benefited and who suffered
from its failure?
The significant stakeholders were Enron executives, Enron employees, Investors, US
