Global Chemical Company Global Chemical Co., located in Norfolk, Virginia, manufactures basic chemicals such as ethylene, vinyl chloride, and propylene: Although it is approximately 10 percent the size of its major competitors such as Du Pont, Dow Chemical, Monsanto, and Union Carbide, it still maintains a competitive position in the marketplace. Roland Olsen, the CEO, had aggressively brought new products to the marketplace. These activities necessitated heavy new investment in plant and equipment. At the same time, Olsen thought it necessary to reduce the firm's amount of debt financing to present a better picture to the investment community. Net income had been increasing at a rate of five to 10 per year in the past few years and was expected to do so in the future. However, Olsen was upset that the stock was only trading at a P/E ratio of 7 times 2015 earnings per share. As Olsen was beginning the process of financial planning for 2016, he received an E-mail message from Drake Matthews, the firm's vice president of finance. The message said, "Roland I'm concerned about the dividend payment for 2016. Can we get together for a discussion at lunch on Tuesday?" Drake Matthews had recently been hired away from Longshot Chemical Co. where he served as assistant corporate controller for two years and senior vice president for long-term planning for the three most recent years. Drake had a bachelor's degree in finance from the University of Minnesota CEO Roland Olsen's initial strength had been in the laboratory. He received a Ph.D. in chemistry from the Tulane University 20 years ago. He began his career as a lab assistant at Eastern Chemical Corp. in Richmond, Virginia. As he progressed through the corporate ranks, he began to develop business skills and attended summer executive programs at the University of Virginia and Northwestern University. He eventually rose to the rank of executive vice president of Eastern Chemical Corp. When an executive recruiter contacted him about an open CEO position at Global Chemical Co., he decided to listen. He accepted a job offer at $500,000 a year (double his previous salary) and also received 200,000 stock options at an exercise price of $5 per share. The Meeting At the meeting, Drake brought along the financial statements for year-end 2015. Figure 1 is the income statement, Figure 2, the balance sheet; and Figure 3, the statement of cash flows. Drake was quick to point out that despite a profit of S106 million as shown in Figure 1. cash and marketable securities were only at $35 million in total as presented in Figure 2. Furthermore, there was a net decrease in cash and marketable securities of $59 million in 2015 as shown near the bottom of Figure 3. He once again emphasized a change in dividend policy might be necessary in 2016 due to cash flow considerations. Liz Harris, a financial analyst at Global Chemical Co. who also joined the meeting, thought Drake made some good points, but also might be missing other important considerations related to financial analysis. Case 29 Figure 1 GLOBAL CHEMICAL COMPANY Income Statement For the Year Ended December 31, 2015 (in thousands) Sales Cost of goods sold Gross profit.. Selling and administrative expense...... Depreciation expense............. Operating profit. Interest expense. Earnings before taxes Taxes Earnings after taxes Shares outstanding Earnings per share Other information: Total dividends Dividends per share $942.000 490,000 452,000 104,000 60.000 288,000 126,000 $162,000 56,000 106,000 100,000 $1.06 $ 65,000 5.65 m Mail - Carl Randall - Outlook X mx Er Class FINANCE 3090 - Fall 20 x M MHE Reader e.php/1716092/mod_resource/content/O/Final%20Case%20Analysis%20Fall%202020.pdf A Road aloud Draw Global Chemical Company GLOBAL CHEMICAL COMPANY Statement of Financial site (anche) December 31, 2015 in thousand Asses Cuenta $5.000 30.000 155.000 190.000 SINO 3000 410000 Marble securities Accounts receivable Inventory Total cu Other A Investments long-term securities). Fixed Assets Plant and equipments STO Les Acted depreciation 110.000 Net plant and equipment Total Liabilis and Stockholders Equity Current liabilities Accounts payable Wages payable Accrued expenses Total went liabilities Laten bites Bonapayahle, 2026 (reduced by $120,000 during 2013)... Total liabilities Stockholders equity Common leck, St par value. 100.000 shares Capital is exces of par Reained in Total stockholders' equity Totallibilities and stockholders guity S130,000 15.000 25.000 $120,000 $370,000 100.000 110.000 300,000 SS00.000 520.000 ORI CE W Case 29 S106,000 Figure 3 GLOBAL CHEMICAL COMPANY Statement of Cash Flows For the Year Ended December 31, 2015 (in thousands) Cash flows from operating activities: Net income (Earnings after taxes)... Adjustments to determine cash flow from operating activities: Add back depreciation......... $ 60,000 Increase in accounts receivable. (10,000) Decrease in inventory..... 20,000 Decrease in accounts payable.. (15,000) Increase in wages payable.. 5,000 Increase in accrued expense 15,000 Total adjustments Net cash flows from operating activities Cash flows from investing activities: Increase in investments (long-term securities).......... (5,000) Increase in plant and equipment... (50.000) Net cash flows from investing activities Cash flows from financing activities: Decrease in bonds payable, retired part of debt due in 2028.... ($120,000) Common stock dividends paid...... ($ 65,000) Net cash flow from financing activities... Net increase (decrease) in cash flows. Cash and marketable securities (beginning of year) Cash and marketable securities (end of year) 75,000 S181.000 (S 55,000) ($185.000 ($ 59,000) S 94.000 $ 35,000 Global Chemical Company Required 1. Based on the information presented in Figures 1, 2, and 3, do you think that a change in the dividend policy will be necessary in 2016? 2. Regardless of your answer to question 1, assume that the firm has $30 million in funds that it is considering using for the repurchase of shares in the marketplace. The firm is currently trading at a low P/E ratio of 7 times 2015 earnings of $1.06 per share. The shares will be purchased in the open market and no premium will be paid over current price (as is sometimes the case). How many shares will be repurchased? (Round the final answer to the nearest whole number). 3. With the number of shares repurchased, what will be the recomputed value for 2015 earnings per share? (Round to two places to the right of the decimal point). 4. Assume the increased demand for the stock as a result of the share repurchase drives the P/E ratio up to 10, what will be the new stock price based on the earnings per share you computed in question 3? 5. Assume tha Roland Olsen decides to use 50,000 of his stock options to purchase shares of common stock and he resells them in the market at the price you computed in question 4. What will his total before tax gain be? 6. What do you think the stock market's reaction will be to Roland Olsen exercising 50,000 of his options? Global Chemical Company Global Chemical Co., located in Norfolk, Virginia, manufactures basic chemicals such as ethylene, vinyl chloride, and propylene: Although it is approximately 10 percent the size of its major competitors such as Du Pont, Dow Chemical, Monsanto, and Union Carbide, it still maintains a competitive position in the marketplace. Roland Olsen, the CEO, had aggressively brought new products to the marketplace. These activities necessitated heavy new investment in plant and equipment. At the same time, Olsen thought it necessary to reduce the firm's amount of debt financing to present a better picture to the investment community. Net income had been increasing at a rate of five to 10 per year in the past few years and was expected to do so in the future. However, Olsen was upset that the stock was only trading at a P/E ratio of 7 times 2015 earnings per share. As Olsen was beginning the process of financial planning for 2016, he received an E-mail message from Drake Matthews, the firm's vice president of finance. The message said, "Roland I'm concerned about the dividend payment for 2016. Can we get together for a discussion at lunch on Tuesday?" Drake Matthews had recently been hired away from Longshot Chemical Co. where he served as assistant corporate controller for two years and senior vice president for long-term planning for the three most recent years. Drake had a bachelor's degree in finance from the University of Minnesota CEO Roland Olsen's initial strength had been in the laboratory. He received a Ph.D. in chemistry from the Tulane University 20 years ago. He began his career as a lab assistant at Eastern Chemical Corp. in Richmond, Virginia. As he progressed through the corporate ranks, he began to develop business skills and attended summer executive programs at the University of Virginia and Northwestern University. He eventually rose to the rank of executive vice president of Eastern Chemical Corp. When an executive recruiter contacted him about an open CEO position at Global Chemical Co., he decided to listen. He accepted a job offer at $500,000 a year (double his previous salary) and also received 200,000 stock options at an exercise price of $5 per share. The Meeting At the meeting, Drake brought along the financial statements for year-end 2015. Figure 1 is the income statement, Figure 2, the balance sheet; and Figure 3, the statement of cash flows. Drake was quick to point out that despite a profit of S106 million as shown in Figure 1. cash and marketable securities were only at $35 million in total as presented in Figure 2. Furthermore, there was a net decrease in cash and marketable securities of $59 million in 2015 as shown near the bottom of Figure 3. He once again emphasized a change in dividend policy might be necessary in 2016 due to cash flow considerations. Liz Harris, a financial analyst at Global Chemical Co. who also joined the meeting, thought Drake made some good points, but also might be missing other important considerations related to financial analysis. Case 29 Figure 1 GLOBAL CHEMICAL COMPANY Income Statement For the Year Ended December 31, 2015 (in thousands) Sales Cost of goods sold Gross profit.. Selling and administrative expense...... Depreciation expense............. Operating profit. Interest expense. Earnings before taxes Taxes Earnings after taxes Shares outstanding Earnings per share Other information: Total dividends Dividends per share $942.000 490,000 452,000 104,000 60.000 288,000 126,000 $162,000 56,000 106,000 100,000 $1.06 $ 65,000 5.65 m Mail - Carl Randall - Outlook X mx Er Class FINANCE 3090 - Fall 20 x M MHE Reader e.php/1716092/mod_resource/content/O/Final%20Case%20Analysis%20Fall%202020.pdf A Road aloud Draw Global Chemical Company GLOBAL CHEMICAL COMPANY Statement of Financial site (anche) December 31, 2015 in thousand Asses Cuenta $5.000 30.000 155.000 190.000 SINO 3000 410000 Marble securities Accounts receivable Inventory Total cu Other A Investments long-term securities). Fixed Assets Plant and equipments STO Les Acted depreciation 110.000 Net plant and equipment Total Liabilis and Stockholders Equity Current liabilities Accounts payable Wages payable Accrued expenses Total went liabilities Laten bites Bonapayahle, 2026 (reduced by $120,000 during 2013)... Total liabilities Stockholders equity Common leck, St par value. 100.000 shares Capital is exces of par Reained in Total stockholders' equity Totallibilities and stockholders guity S130,000 15.000 25.000 $120,000 $370,000 100.000 110.000 300,000 SS00.000 520.000 ORI CE W Case 29 S106,000 Figure 3 GLOBAL CHEMICAL COMPANY Statement of Cash Flows For the Year Ended December 31, 2015 (in thousands) Cash flows from operating activities: Net income (Earnings after taxes)... Adjustments to determine cash flow from operating activities: Add back depreciation......... $ 60,000 Increase in accounts receivable. (10,000) Decrease in inventory..... 20,000 Decrease in accounts payable.. (15,000) Increase in wages payable.. 5,000 Increase in accrued expense 15,000 Total adjustments Net cash flows from operating activities Cash flows from investing activities: Increase in investments (long-term securities).......... (5,000) Increase in plant and equipment... (50.000) Net cash flows from investing activities Cash flows from financing activities: Decrease in bonds payable, retired part of debt due in 2028.... ($120,000) Common stock dividends paid...... ($ 65,000) Net cash flow from financing activities... Net increase (decrease) in cash flows. Cash and marketable securities (beginning of year) Cash and marketable securities (end of year) 75,000 S181.000 (S 55,000) ($185.000 ($ 59,000) S 94.000 $ 35,000 Global Chemical Company Required 1. Based on the information presented in Figures 1, 2, and 3, do you think that a change in the dividend policy will be necessary in 2016? 2. Regardless of your answer to question 1, assume that the firm has $30 million in funds that it is considering using for the repurchase of shares in the marketplace. The firm is currently trading at a low P/E ratio of 7 times 2015 earnings of $1.06 per share. The shares will be purchased in the open market and no premium will be paid over current price (as is sometimes the case). How many shares will be repurchased? (Round the final answer to the nearest whole number). 3. With the number of shares repurchased, what will be the recomputed value for 2015 earnings per share? (Round to two places to the right of the decimal point). 4. Assume the increased demand for the stock as a result of the share repurchase drives the P/E ratio up to 10, what will be the new stock price based on the earnings per share you computed in question 3? 5. Assume tha Roland Olsen decides to use 50,000 of his stock options to purchase shares of common stock and he resells them in the market at the price you computed in question 4. What will his total before tax gain be? 6. What do you think the stock market's reaction will be to Roland Olsen exercising 50,000 of his options