Cash Flow statement
Question. PLEASE ANSWER QUESTION A to C
- Briefly, summarize the key facts of the case, identify the problem, and explain why the problem is important.
- Comment on the Cash Flow Statements. What insights do they provide?
- Analyze the firms liquidity, leverage, turnover and profitability using ratio analysis. (Calculate important ratios and comment on them.)
"Greg, the board of directors' meeting is scheduled two weeks from today, and I'm depend ing on you to come up with a realistic and honest appraisal of our company's position," said Warren, to his assistant Greg Chapman. "I'm sure that there's more to us than meets the eye!" he quipped. "But those darn analysts are still punishing us for Robert's accounting jugglery," he said with a frown. "Why don't you prepare a detailed financial performance analysis of the firm for the most recent three years, complete with industry comparisons and a DuPont analysis? It will help me make the case to the rating agencies that they need to raise our rating "After that, I'd like you to preparea 12-month pro-forma forecast using a scenario analysis. Use our current average compound growth rate in sales as the base estimate and vary that up and down by 10% for the best-case and worst-case scenarios respectively. This will help us figure out how much additional funds we are going to have to acquire over the next year. The production folks tell me that we are currently operating at 90% of capacity, so we should be able to support some growth without additional plant and equipment," he added looking rather stressed Warren Badges, the new CFO of Paramount Paper Inc., was hired last year to replace Robert Malnight. Robert was fired because the firm had come under Federal investigation for noncompliance of the Sarbanes-Oxley Act (2002). Under Robert's watch, the stock had plummeted to its all-time low despite reasonably strong sales and income growth. Warren implemented various measures to bring the firm in compliance with the 2002 Act. The firm's sales had been increasing steadily due to its excellent commitment to quality. However, stock market analysts had been unforgiving because the stock price was still hovering around its all-time low of $12 The significant growth rate that the firm had been experiencing had necessitated the infusion of more capital. But lenders were reluctant to lower interest rates due to their suspicions about the firm's past reporting practices. Warren had a hunch that the company could save a bundle in interest costs if the markets were convinced that the firm's accounting and reporting practices were clearly within the Sarbanes-Oxley guidelines. He knew that an upgrade in the firm's credit rating would help expedite the process Moreover, when he took over from Robert, Warren realized that there was no formal policy of conducting long-term planning and forecasting in place. Most of what Robert did was based on his gut feelings regarding the economy. Being an industry veteran, Warren was fully aware that haphazard growth could be a recipe for disaster. He was determined to set things straight and he knew that the market would take note. One of the first things that Warren did upon joining paramount was to lure his assistant, Greg Chapman, away from their prior employer, Holland Paper. Greg had been working for Holland Paper for over 10 years. When the opportunity came up, Greg initially hesitated. He was enjoying a fairly comfortable lifestyle, and the city had a lot to offer. But Warren made him an offer that he found very hard to refuse. The remuneration package included a very attractive stock option plan and a signing bonus. Moreover, Greg knew that Warren was an honest, ethical person and he enjoyed working for him. Paramount Paper Inc. Prior 3-Year Income Statements 2014 2015 2013 Sales Revenues 28,255,000 37,340,000 54,670,000 Cash Operating Costs 22,321,450 32,112,400 47,562,900 Depreciation 2,775,000 2,915,000 3,513,000 Total Operating Costs 25,096,450 35,027,400 51,075,900 Operating Income (EBIT) 3,158,550 2,312,600 3,594,100 623,000 Interest Expenses 325,000 512,000 Taxable Income 2,833,550 1,800,600 2,971,100 Taxes 1,133,420 720,240 1,188,440 171,500 Preferred Dividends 108,500 136,500 Net Income 1,591,630 943,860 1,611,160 Paramount Paper Inc. Prior 3-Year Balance Sheets 2013 2014 2015 Cash 396,000.00 428,000.00 587,000.00 Marketable Securities 460,000.00 540,000.00 638,000.00 Accounts Receivables 2,225,000.00 2,525,000.00 3,758,000.00 3,850,000.00 Inventories 4,950,000.00 6,013,000.00 8,443,000.00 Current Assets 6,931,000.00 10,996,000.00 13,875,000.00 17,568,000.00 Net Fixed Assets 14,576,000.00 20,806,000.00 23,019,000.00 28,564,000.00 Total Assets Accounts Payables 425,000.00 478,000.00 518,000.00 Accruals 495,000.00 567,000.00 694,000.00 Notes Payables 150,000.00 180,000.00 175,000.00 1,070,000.00 Current Liabilities 1,225,000.00 1,387,000.00 6,714,140.00 Long Term Debt 5,250,000.00 8,985,980.00 6,320,000.00 Total Liabilities 7,939,140.00 10,372,980.00 1,550,000.00 1,950,000.00 2,450,000.00 Preferred Stock Common Stock 10,250,000.00 9,500,000.00 10,500,000.00 Retained Earnings 2,686,000.00 3,629,860.00 5,241,020.00 Total Common Equity 12,936,000.00 13,129,860.00 15,741,020.00 Total Liabilities and Owner's Equity 20,806,000.00 23,019,000.00 28,564,000.00 Aggregate Income Statement for Paper Industry- Select 6 for Year Ended December 31, 2015 590,000,000 Sales Revenues Cash Operating Costs 505,040,000 Depreciation 31,270,000 Total Operating Costs 536,310,000 Operating Income (EBIT) 53,690,000 Interest Expenses 7,670,000 Taxable Income 46,020,000 Taxes 18,408,000 590,000 Preferred Dividends 27,022,000 Net Income Aggregate Balance Sheet for Paper Industry Select 6 As of December 31, 2015 Cash 6,554,000.00 Marketable Securities 45,200.00 Accounts Receivables 32,046,800.00 Inventories 55,867,200.00 Current Assets 94,513,200.00 Net Fixed Assets 131,486,800.00 Total Assets 226,000,000.00 Accounts Payables 5,085,000.00 3,073,600.00 Accruals Notes Payables 1,898,400.00 Current Liabilities 10,057,000.00 Long Term Debt 72,885,000.00 Total Liabilities 82,942,000.00 Preferred Stock 11,752,000.00 Common Stock 30,510,000.00 Retained Earnings 100,796,000.00 Total Common Equity 131,306,000.00 Total Liabilities and Owner's Equity 226,000,000.00 Historical Sales for Paramount Paper Inc. Year Revenues 2005 8,825,000 2006 12,450,000 2007 13,246,000 2008 14,250,000 2009 16,275,000 2010 18,235,000 2011 21,234,000 2012 24,345,000 2013 28,255,000 2014 37,340,000 2015 54,670,000 Paramount Paper Inc. 1 2014 2015 2 Statement of Cash Flows 1,080,360 2,915,000 1,782,660 3,513,000 3 Net Income Available for Paying Dividends Add Depreciation 4 Sources of Cash 5 6 Increase in Accounts Payable 53,000 40,000 127,000 7 Increase in Accruals 72,000 Uses of Cash 8 Increase in M/S (80,000) (300,000) (1,233,000) (1,100,000) (1,063,000) (98,000) 10 Increase in A/R 11 Increase in Inventories 12 13 Operating Cash Flow 14 2,640,360 3,068,660 15 Cash Flow From Investments (3,616,000) (6,505,000) 16 17 Cash Flow From Financing 18 Notes Payables 19 Long-Term Debt 30,000 1,464,140 400,000 (750,000) (136,500) (5,000) 2,271,840 500,000 20 Preferred Stock 21 Common Stock 1,000,000 (171,500) 22 Preferred Dividends Paid 23 24 Csh Flow From Financing 1,007,640 3,595,340 25 26 27 Change in Cash 28 Beginning Cash Balance 29 Ending Cash Balance 32,000 396,000 428,000 159,000 428,000 587,000 30 31 "Greg, the board of directors' meeting is scheduled two weeks from today, and I'm depend ing on you to come up with a realistic and honest appraisal of our company's position," said Warren, to his assistant Greg Chapman. "I'm sure that there's more to us than meets the eye!" he quipped. "But those darn analysts are still punishing us for Robert's accounting jugglery," he said with a frown. "Why don't you prepare a detailed financial performance analysis of the firm for the most recent three years, complete with industry comparisons and a DuPont analysis? It will help me make the case to the rating agencies that they need to raise our rating "After that, I'd like you to preparea 12-month pro-forma forecast using a scenario analysis. Use our current average compound growth rate in sales as the base estimate and vary that up and down by 10% for the best-case and worst-case scenarios respectively. This will help us figure out how much additional funds we are going to have to acquire over the next year. The production folks tell me that we are currently operating at 90% of capacity, so we should be able to support some growth without additional plant and equipment," he added looking rather stressed Warren Badges, the new CFO of Paramount Paper Inc., was hired last year to replace Robert Malnight. Robert was fired because the firm had come under Federal investigation for noncompliance of the Sarbanes-Oxley Act (2002). Under Robert's watch, the stock had plummeted to its all-time low despite reasonably strong sales and income growth. Warren implemented various measures to bring the firm in compliance with the 2002 Act. The firm's sales had been increasing steadily due to its excellent commitment to quality. However, stock market analysts had been unforgiving because the stock price was still hovering around its all-time low of $12 The significant growth rate that the firm had been experiencing had necessitated the infusion of more capital. But lenders were reluctant to lower interest rates due to their suspicions about the firm's past reporting practices. Warren had a hunch that the company could save a bundle in interest costs if the markets were convinced that the firm's accounting and reporting practices were clearly within the Sarbanes-Oxley guidelines. He knew that an upgrade in the firm's credit rating would help expedite the process Moreover, when he took over from Robert, Warren realized that there was no formal policy of conducting long-term planning and forecasting in place. Most of what Robert did was based on his gut feelings regarding the economy. Being an industry veteran, Warren was fully aware that haphazard growth could be a recipe for disaster. He was determined to set things straight and he knew that the market would take note. One of the first things that Warren did upon joining paramount was to lure his assistant, Greg Chapman, away from their prior employer, Holland Paper. Greg had been working for Holland Paper for over 10 years. When the opportunity came up, Greg initially hesitated. He was enjoying a fairly comfortable lifestyle, and the city had a lot to offer. But Warren made him an offer that he found very hard to refuse. The remuneration package included a very attractive stock option plan and a signing bonus. Moreover, Greg knew that Warren was an honest, ethical person and he enjoyed working for him. Paramount Paper Inc. Prior 3-Year Income Statements 2014 2015 2013 Sales Revenues 28,255,000 37,340,000 54,670,000 Cash Operating Costs 22,321,450 32,112,400 47,562,900 Depreciation 2,775,000 2,915,000 3,513,000 Total Operating Costs 25,096,450 35,027,400 51,075,900 Operating Income (EBIT) 3,158,550 2,312,600 3,594,100 623,000 Interest Expenses 325,000 512,000 Taxable Income 2,833,550 1,800,600 2,971,100 Taxes 1,133,420 720,240 1,188,440 171,500 Preferred Dividends 108,500 136,500 Net Income 1,591,630 943,860 1,611,160 Paramount Paper Inc. Prior 3-Year Balance Sheets 2013 2014 2015 Cash 396,000.00 428,000.00 587,000.00 Marketable Securities 460,000.00 540,000.00 638,000.00 Accounts Receivables 2,225,000.00 2,525,000.00 3,758,000.00 3,850,000.00 Inventories 4,950,000.00 6,013,000.00 8,443,000.00 Current Assets 6,931,000.00 10,996,000.00 13,875,000.00 17,568,000.00 Net Fixed Assets 14,576,000.00 20,806,000.00 23,019,000.00 28,564,000.00 Total Assets Accounts Payables 425,000.00 478,000.00 518,000.00 Accruals 495,000.00 567,000.00 694,000.00 Notes Payables 150,000.00 180,000.00 175,000.00 1,070,000.00 Current Liabilities 1,225,000.00 1,387,000.00 6,714,140.00 Long Term Debt 5,250,000.00 8,985,980.00 6,320,000.00 Total Liabilities 7,939,140.00 10,372,980.00 1,550,000.00 1,950,000.00 2,450,000.00 Preferred Stock Common Stock 10,250,000.00 9,500,000.00 10,500,000.00 Retained Earnings 2,686,000.00 3,629,860.00 5,241,020.00 Total Common Equity 12,936,000.00 13,129,860.00 15,741,020.00 Total Liabilities and Owner's Equity 20,806,000.00 23,019,000.00 28,564,000.00 Aggregate Income Statement for Paper Industry- Select 6 for Year Ended December 31, 2015 590,000,000 Sales Revenues Cash Operating Costs 505,040,000 Depreciation 31,270,000 Total Operating Costs 536,310,000 Operating Income (EBIT) 53,690,000 Interest Expenses 7,670,000 Taxable Income 46,020,000 Taxes 18,408,000 590,000 Preferred Dividends 27,022,000 Net Income Aggregate Balance Sheet for Paper Industry Select 6 As of December 31, 2015 Cash 6,554,000.00 Marketable Securities 45,200.00 Accounts Receivables 32,046,800.00 Inventories 55,867,200.00 Current Assets 94,513,200.00 Net Fixed Assets 131,486,800.00 Total Assets 226,000,000.00 Accounts Payables 5,085,000.00 3,073,600.00 Accruals Notes Payables 1,898,400.00 Current Liabilities 10,057,000.00 Long Term Debt 72,885,000.00 Total Liabilities 82,942,000.00 Preferred Stock 11,752,000.00 Common Stock 30,510,000.00 Retained Earnings 100,796,000.00 Total Common Equity 131,306,000.00 Total Liabilities and Owner's Equity 226,000,000.00 Historical Sales for Paramount Paper Inc. Year Revenues 2005 8,825,000 2006 12,450,000 2007 13,246,000 2008 14,250,000 2009 16,275,000 2010 18,235,000 2011 21,234,000 2012 24,345,000 2013 28,255,000 2014 37,340,000 2015 54,670,000 Paramount Paper Inc. 1 2014 2015 2 Statement of Cash Flows 1,080,360 2,915,000 1,782,660 3,513,000 3 Net Income Available for Paying Dividends Add Depreciation 4 Sources of Cash 5 6 Increase in Accounts Payable 53,000 40,000 127,000 7 Increase in Accruals 72,000 Uses of Cash 8 Increase in M/S (80,000) (300,000) (1,233,000) (1,100,000) (1,063,000) (98,000) 10 Increase in A/R 11 Increase in Inventories 12 13 Operating Cash Flow 14 2,640,360 3,068,660 15 Cash Flow From Investments (3,616,000) (6,505,000) 16 17 Cash Flow From Financing 18 Notes Payables 19 Long-Term Debt 30,000 1,464,140 400,000 (750,000) (136,500) (5,000) 2,271,840 500,000 20 Preferred Stock 21 Common Stock 1,000,000 (171,500) 22 Preferred Dividends Paid 23 24 Csh Flow From Financing 1,007,640 3,595,340 25 26 27 Change in Cash 28 Beginning Cash Balance 29 Ending Cash Balance 32,000 396,000 428,000 159,000 428,000 587,000 30 31
