CASE 51 - SAFE PACKAGING COMPANY Financial Analysis and Forecasting Questions 1. Complete the 1995 columns of Tables 3 through 6, disregarding for now the projected data in the 1996 and 1997 columns. 2. Based on the information in the case and on the results of your calculations in Question 1, list Safe's strengths and weaknesses. In essence, you should look at the common size statements and each group of key ratios (for example, the leverage ratios) and see what those ratios indicate about the company's operations and financial condition. As a part of your answer, use the "Decomposition of Profitability" concept to highlight the key relationships. 3. Now complete the tables to develop pro forma financial statements for 1996 and 1997. In making these calculations, assume the bank is willing to maintain the present credit lines and to grant the requested additional $12,750,000 of short-term credit effective January 1, 1996. In the analysis, take account of the amounts of inventory and accounts receivable that would be carried if inventory utilization (based on the cost of goods sold) and days sales outstanding were set at industry-average levels. Also, assume in your forecast that all of Safe's plans and predictions concerning sales and expenses materialize, and that the firm pays no cash dividends during the forecast period. Finally, in your calculations use the cash and marketable securities account as the residual balancing figure. (This has already been done for you in the Excel spreadsheets.) 4. Based upon the forecasts you developed for question #3, does it appear that Safe will be able to retire all its outstanding short-term loans by December 31, 1996? 5. If the bank decides to withdraw the entire line of credit and to demand immediate repayment of the two existing loans (the short-term and long-term loans) extended to Safe, what alternatives would be available to Safe? 6. Under what circumstances might the validity of comparative ratio analysis be questionable? This study source was downloaded by 100000785039786 from CourseHero.com on 10-04-2021 10:15:17 GMT -05:00 https://www.coursehero.com/file/45751963/Case-51-Questionspdf/ This study resource was shared via CourseHero.com 2 7. Revise your pro forma financial statements for 1996 and 1997 on the basis of the following assumptions: a. Allow the short-term loans to be repaid during 1996. Assume the loans will be paid gradually throughout the year, thus the average balance will be exactly the beginning balance. b. Allow Safe to reinstate its cash dividend of 25% of earnings. 8. What problems do you see with the forecasts you made in order to answer questions 3 and 7? 9. On the basis of your analysis, do you think Julia should recommend the bank extend the existing short- and long-term loans and grant the additional $12,750,000 loan, or should she recommend the bank demand immediate repayment of all existing loans? If she does recommend continuing to support the company, what conditions might the bank impose to help protect against losses should Safe's plans go awry? For example, should she require collateral, guarantees, or some other safeguards? This study source was downloaded by 100000785039786 from CourseHero.com on 10-04-2021 10:15:17 GMT -05:00 https://www.coursehero.com/file/45751963/Case-51-Questionspdf/ This study resource was shared via CourseHero.co