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Chared O.

Goodwin Case #1
MBA 692 Financial Forecasting Padgett
Ms. Lilly:
!on re"iew o# o$r co%!any&s 2'''(2'') #inancial state%ents and $sing that
in#or%ation to !re!are 2''*(2''6 #orecasted state%ents+ it a!!ears we will contin$e to
generate !ro#its #ro% o!erations ,$t will ha"e a dire need o# cash #lows o"er the ne-t
three years. One o# the %a.or reasons #or the de!letion o# cash is that we are now
re/$ired to re!ay 02.2 %illion to 1indsor Ban2 ,y 3ece%,er )4+ 2''*. 5n A!ril 2'')
1indsor increased o$r credit line ,y 0).6 %illion allowing $s to ac/$ire 6ri(7tate 6a,let
Co%!any. 8owe"er+ this additional loan ,ro$ght o$r total ,alance with 1indsor to 09.2
%illion+ which e-ceeded o$r original agree%ent+ and was only te%!orarily a$thori:ed
with the e-!ectation that the loan wo$ld ,e #or%ally str$ct$red ,e#ore ;an$ary 2''*.
5n addition to the 02.2 %illion loan re!ay%ent+ we antici!ate that i%!ro"ing %ar2et
conditions will allow sales to grow at a rate o# 4'< !er year. 7o%e o# o$r #acilities will
,e e-!anding and so%e o# o$r e/$i!%ent will ,e $!dated to acco%%odate #or that
growth. 6he costs o# these increased assets total ro$ghly 04 %illion. For the year 2''*+
o$r o"erall #orecasted cash need a%o$nts to 0).2 %illion. 5n order to %eet the needs o#
the #ir% and to satis#y the ,an2&s credit co%%ittee+ 5 a% reco%%ending we %a2e so%e
o!erational changes along with reco%%endations o# how to #inance o$r de,t o,ligations.
First+ we sho$ld consider red$cing the a%o$nt o# in"entory we 2ee! on hand ,y 9<
=#ro% 69< to >?< o# sales@ in 2''*. Prior year&s a"erage in"entory t$rno"er is 2.4>
ti%es !er year. B$ying additional in"entory and ha"ing that %erchandise sit in o$r
wareho$ses is a !oor $se o# cash. 1e 2now when o$r !ea2 !rod$ction %onths are =early
Fall ,eca$se o# ,ac2(to(school sales@+ there#ore there is no need to ha"e large /$antities
o# !rod$ct on hand at all ti%es thro$gho$t the year. 6he draw,ac2s o# this change is that
o$r !ro.ected C$rrent Aatio and Assets to B/$ity ratio slightly dro! to 2.>4 and 4.>2
res!ecti"elyC ,$t e"en with the lower n$%,ers+ these ratios still highlight o$r #ir%&s solid
li/$idity and le"erage !ositions. Ma2ing the ,$l2 o# o$r !$rchases d$ring the Fall and
1inter %onths will not only #ree $! additional cash ,$t will also i%!ro"e the n$%,er o#
days it ta2es #or o$r in"entory to t$rno"er =#ro% 49' days to 4>9 days@. 5n addition+ ,y
red$cing the a%o$nt o# in"entory !$rchases in 2''* we will ,e i%!ro"ing all !ro#ita,ility
ratios+ i%!ro"ing Gross Margin ratio which shows e##ecti"e cost control+ and i%!ro"ing
o$r credit rating with o$r creditors ,y increasing o$r 6i%es 5nterest Barned ratio. 1ith
.$st this one change+ we sho$ld ,e a,le to %ore e##ecti"ely generate !ositi"e cash #lows
#ro% o$r o!erations and will ,e in great !osition to grad$ally increase o$r in"entory
!$rchases o"er the #ollowing years to acco%%odate #or the antici!ated sales growth.
Please see the incl$ded sched$les as a re#erence.
7econd+ and !ossi,ly %ore $rgent+ is how to #inance 0).2 %illion dollars o# de,t in one
year. 5 s$ggest two "ent$res: 1. 7ec$ring a loan #ro% o$r Canadian s$,sidiary and 2.
Posting o$r Philadel!hia general(!$r!ose wareho$se as collateral #or a %ortgage loan.
O$r s%all Canadian o!eration+ with net c$rrent assets o# 04.? to 02.' %illion to o##er as
collateral+ co$ld raise 04 %illion #ro% Canadian ,an2s. 6hose ,an2s re/$ire a #loating
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charge against all c$rrent assets. 6he c$rrent !ri%e rate is at *.2>< and since analysts
e-!ect that interest rates will re%ain #lat o"er the ne-t 42(4? %onths+ this is a great
o!!ort$nity to ,orrow %oney at a reasona,le cost.
6he Philadel!hia wareho$se&s a!!raisal "al$e is 0) %illion. 5 reco%%end collaterali:ing
it with 1indsor&s real estate de!art%ent which wo$ld generate another 02.* %illion =?'<
o# the 0) %illion a!!raisal "al$e@. 6his is a ,$ilding that was ac/$ired thro$gh the
ac/$isition o# a s%aller co%!etitor ,$t has no !lans to ,e $sed. Beca$se o$r i%%ediate
need is to #inance o$r de,t+ ac/$iring a %ortgage loan on this !ro!erty will ,e a ,igger
,ene#it to the #ir% than trying to #ig$re o$t ways to $se it. 5 en"ision this !ro!erty ,eing
sold so%eti%e a#ter 2''> #or an e"en greater "al$e as that ind$strial area o# Philadel!hia
contin$es to de"elo!.
6o s$%%ari:e+ o$r ac/$isition o# 6ri(7tate 6a,let Co%!any in 2'') has ta2en o$r credit
line ,alance with 1indsor Ban2 o"er the !re"io$sly agreed $!on li%it o# 0> %illion. 5 a%
reco%%ending that we %a2e a change in o$r o!erations ,y red$cing the a%o$nt o#
!$rchased in"entory and that we #inance 0).2 %illion o# de,t with a %ortgage loan on an
$n$sed wareho$se and with a #loating rate loan #ro% o$r Canadian s$,sidiary. Padgett
has %an$#act$red a "ariety o# stationary !rod$cts #or o"er 4'' years. 5%!le%enting
these reco%%endations and #ollowing thro$gh on the% will allow Padgett to s$ccess#$lly
%an$#act$re those sa%e !rod$cts #or another 4'' years.
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