• Author / Uploaded
• Prashil Raj Mehta

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Palmer Limited Case Study a) Size up the economy, industry based on the information provided. Economy:     

  

City of Saskatoon economy is closely tied to the resource Consumer Price index(CPI) inflation rate had remained low, below 1.5 percent over the past year Prime interest had increase slightly to 7 percent (increase of 0.75 Percent) Overall Canadian economy had shown strong growth over the past years City of Saskatoon acted as transportation and servicing hub for variety of industries in Northern Saskatchewan , including government, farming, oil, potash, uranium and light manufacturing) Saskatchewan economy were compounded by the Canada-wide recession in 1990-1991 In Saskatoon , due to a heavy snowfall farmers are optimistic about the coming farm season Uncertainty in the local economy

Industry:     

Fluctuations- Building Activity varies greatly from year to year Residential Construction has decreased since, 1997, last quarter of 98 slight rose Commercial construction down from previous years Flat business activity and decline in the construction industry has caused chartered banks to carefully review construction loans Competitive Industry

C) Prepare a projected Balance Sheet and Income Statement for the year ended December 31, 1999.

Palmer Limited Budgeted Income Statement For the Year that Ended December 31, 1999. Sales

$

2,057,400

Cost of Goods Sold: Materials Labour Depreciation Overhead(Manufacturing) Total Cost of Goods Sold

$ $ $ $ $

778,425 777,825 24,100 110,285 1,690,635

$

223,115

$

223,115

$

143,650

Selling and Admin. Expenses: ManagementCompensation Other (including Interest) Total Selling & Admin. Expenses Net Operating Income Plus: Other Income Less: Other Expenses Net Income Before Taxes

$

$143, 650

Taxes Net Income After Taxes

$

143,650

Palmer Limited Budgeted Balance Sheet For the Year that Ended December 31, 1999. Assets Cash Accounts Receivable (net) Inventory Prepaid Expenses Total Current Assets

$ $

$

388,575 149,500 44,700 58,500 641,275

Investments Fixed Assets Other Assets

22,100 204,500 1,600

TOTAL ASSETS

869,475

LIABILITIES AND EQUITY Bank Loan Accounts Payable Other Current Liabilities Total current liabilities

368,600 86,250 89,100 543,950

Long Term Debt due to Officers TOTAL LIABILITIES

68,175 612,130

Preferred stock Common Stock Retained Earnings TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

39,000 8,100 $210,250 257,350 869,475

d) How much Financing is required and when will it be repaid? Scenario 1: Palmer Limited makes no cash repayments on the loan, and only needs financing when it needs cash 

Based on the cash budget (Part B) the company would only need to $93,750, which could be paid off the following month.

Scenario 2: Palmer Limited tries to pay off outstanding loan $368,600, and Borrows for periods where the company needs cash.(Information from Exhibit A).It will need to borrow an additional $126,370.

Month Beginning Balance January February March April May June July August September October November December

Borrow

Repayment 93,750

$32,620

Total $212,215 250,135

$368,800 $462,350 $250,135 $0

18,330 13,790

$32,60 13,790 $0

e) As Melynk, what would you do? Option 1: Bank continues financing, but changes some terms on the agreement such as:     

Restriction on Debt to Equity(no more than 2 after the proceeds of the loan are incorporated into the balance sheet) Have a mandatory positive Working Capital Finance the loan with additional collateral from the business Maintain a minimum cash balance Maintain a minimum liquidity of 1

Advantages:  

The Confederation Banks Investment will be better protected and will decrease the risk of Palmer Limited on defaulting on the loan Keeps Palmer Limited as a customer

Disadvantages:   

Company is highly leveraged Palmer Limited may focus on paying the Long term debt, and not leave enough cash to cover other items(Ex. Short term liabilities) Estimates are highly speculative since there are many uncertainties in their line of business (Billing and expenses)used may be incorrect(Building activity varies greatly from year to year)

Option 2: Offer Palmer Limited Short Term Financing, such as Line of Credit Advantages:  

Additional Revenue (from interest)to the bank Maintain a good relationship with Palmer Limited

Disadvantages: 

Increases Commitment to Palmer Limited

Option 3: Have Palmer pay off the Loan because of the uncertainty of collection due to increase in interest rate, downward trend in construction industry, and poor financials. Advantages:  

Decreasing risk for the Confederation Bank Will have cash from outstanding loans within 3 months

Disadvantages:  

May lose Palmer Limited as a customer May not get the full portion of the loan, if estimates are incorrect

Items taken into account for alternatives:     

   

Confederation current commitment to Palmer Limited$368,600 vs. Net worth $162, 500(Personal effects, less $200,000 in outstanding mortgage loans) Lack of skills- Palmer brothers have no experience running a business Construction Industry is intertwined with the Saskatchewan economy 1998- the firm had expanded(grew workforce, leased new plant and invested in a major fixed asset Most of Palmer Limited came from acting as a subcontractor on construction projects o If material, labour or overhead cost vary from estimates they can earn a profit or have a loss o 90% of billings collected 30 days after the billing, 10% collected ,4 months after billing Previous gross margin 20% Had extraordinary expenses of $164, 200($44,600-bankruptcy of Blue Water Limited, investment, $111,800-bankruptcy of major customer, $7,800 bad debt) Company plans to downsize Estimate Labour and material costs to be 75% of billings

Liquidity Ratios CR=CA/CL QR=CA-Inv./CL Asset Management Ratios Inv. T.=Sales/Inventory DSO=Rec./Avg. Daily Sales APP=Payables/Avg. COGS per day Fixed Asset=Sales/Fixed Assets TAT=Sales/Total Assets Debt Management Ratios Debt Ratio=Total Liability./Total Assets

Debt to Equity=D/E Profitability Ratio Net Profit Margin=NI/Sales BEP=EBIT/Total Assets ROA=NI/Total Assets ROE= NI/Common Equity

1999 1.18 1.10

1998 0.96 0.78

1997 0.91 0.82

1996 1.09 0.97

1995 1.20 1.08

1993 1.05 1.01

46.03 17.13 35.95 16.78 38.27 45.29 71.66 26.52 81.91 70.03 150.40 81.69 60.74 121.07 18.62 55.03 57.99 127.99 47.09 40.87 95.77 10.06 11.87 8.65 12.05 17.84 13.60 15.59 2.37 2.49 2.38 1.49 2.84 3.06 2.26 70.40% 2.379

88.32% 7.558

70.91% 2.437

76.52% 3.258

61.68% 1.610

63.56% 1.744

81.35% 4.363

6.98% 16.52% 16.52% 55.82%

-4.50% 2.35% -11.21% -95.95%

-2.79% 6.76% -6.65% -22.85%

4.87% 18.54% 7.25% 30.87%

3.84% 31.41% 10.92% 28.49%

3.11% 36.20% 9.53% 26.16%

2.13% 19.86% 4.82% 25.83%

Palmer Limited-Common Size balance Sheet 1999

1994 1.10 0.99

1998

1997

1996

1995

1994

1993

Assets Cash

44.69 % 17.19 %

Fixed Assets

5.14% 6.73% 73.75 % 2.54% 23.52 %

0% 55.98 % 14.56 % 6.01% 76.55 % 2.27% 21.02 %

Other Assets

0.18%

TOTAL ASSETS LIABILITIES AND EQUITY

Accounts Receivable Inventory Prepaid Expenses Total Current Assets Investments

Bank Loan Accounts Payable Other Current Liabilities Total current liabilities L/T Debt due to Officers Total Liabilities Preferred stock Common Stock Retained Earnings Total Equity Total Liabilities and Equity

0% 46%

0%

4%

64%

51%

7% 3%

7% 5%

74% 10%

68% 9%

16% 0.34 % 100 %

23%

3.15% 1.19% 79.69 % 5.51% 14.50 %

0.43%

0.30%

100%

100%

17.51 % 27.98 % 15.97 % 61.46 % 2.10% 63.56 % 10.50 % 2.18% 23.75 % 36.44 %

18.20 % 48.04 %

28%

8.87% 3.46% 82.80 % 4.71% 12.36 %

0.16%

0.21%

0.14%

100%

100%

100%

100%

42.39 %

37.88 % 32.33 %

26.03 % 33.10 % 10.59 % 69.72 % 1.19% 70.91 %

24.54 % 41.80 % 9.76% 76.10 % 0.41% 76.52 %

12%

3.35% 0.69% 19.44 % 23.48 %

8% 2%

100%

9.92% 10.25 % 20.17 % 7.84% 28.01 %

9.16% 79.36 % 8.95% 88.32 %

7% 11%

9.12% 61.35 %

64% 9%

4.49% 0.93% 24.18 % 29.60 %

4.01% 0.83% 6.84% 11.68 %

5.09% 1.06% 22.94 % 29.09 %

100%

100%

100%

19% 30%

62% 0% 62%

29% 38% 100 %

100%

0.37% 74.97 %

9.46% 75.70 % 5.66% 81.35 % 7.28% 1.51% 9.85% 18.65 % 100%

Palmer Limited-Common Size-Income Statement

Exhibit A