Greg, the board of directors meeting is scheduled two weeks from today, and Im depending on you to come up with a realistic and honest appraisal of our companys position, said Warren, to his assistant Greg Chapman. Im sure that theres more to us than meets the eye! he quipped. But those darn analysts are still punishing us for Roberts accounting jugglery, he said with a frown. Why dont 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, Id like you to prepare a 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 Roberts 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 firms 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 firms past reporting practices. Warren had a hunch that the company could save a bundle in interest costs if the markets were convinced that the firms accounting and reporting practices were clearly within the Sarbanes-Oxley guidelines. He knew that an upgrade in the firms 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. Ill get on it right away, Warren, promised Greg. Well show those dumb analysts just how wrong they are! Greg had the folks in accounting send him the firms financial statements for the past three years, along with the aggregate financial statements for the select group of six firms that were their main competitors. In addition, he collected data regarding the firms sales history, its beta estimate, and other market information. Greg was fully aware that the firms stock price and capital cost structure depend on his analysis, and he was determined to present a comprehensive, convincing appraisal of the firms performance to the board. Questions:

1. Develop the statement of cash flow for the most recent two years and explain how Greg would sum up the companys cash position.

2. Perform a trend analysis on the companys liquidity, leverage, turnover, and profitability ratios. Help Greg present an appraisal of the companys financial ratios compared with its key competitors.

3. Using common size financial statements, help Greg present an appraisal of the companys performance and financial condition vis--vis its key competitors.

4. What would Greg discover after performing a DuPont analysis (both in trend and in comparison with its key competitors) on the companys key profitability ratios?

5. How much additional sales can the company support without having to add fixed assets?

6. Will Paramount Paper have to raise external capital over the next 12 months? If so how much? If not, why not? (Note: 10% increase from the base for optimistic scenario and 10% decrease from the base for pessimistic scenario)

7. Is Warren correct in saying there is more to us than meets the eye? Explain.

8. If you are Warren, explain how you would attempt to convince the rating agencies that the firms debt rating should be raised