Case Assignment
You are responsible for determining the future financing requirements for Premier Paper Company. The firm's financial statements are posted on Isidore as Case Financials.
1) Complete a DuPont analysis for each of the three years and identify any issues/concerns.
2) The firm has experienced rapid sales growth over the past several years. However, with increased competition, sales growth is expected to slow. At the end of 2015, Premier took out a new long-term loan in the amount of $9,000,000. Proceeds from this new loan were used principally to retire the existing long-term debt, although some was used to fund asset purchases. The new loan carries an annual interest rate of 9 percent (consistent with the rate on the short-term notes payable), and must be repaid in four equal annual installments beginning at the end of 2016. Premier Paper's management has provided the forecast assumptions below. Using these assumptions, create pro forma income statements and balance sheets for each of the next four years (2016-2019). Based on this analysis, are you concerned about Premier Paper's ability to repay?
|
|
2016
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2017
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2018
|
2019
|
|
Sales growth rate (%)
|
20
|
20
|
15
|
15
|
|
Gross margin (%)
|
37
|
37
|
38
|
38
|
|
SG&A (% of sales)
|
19
|
19
|
18
|
18
|
|
Depreciation (% of sales)
|
6
|
6
|
5
|
5
|
|
Cap. Exp. (% of sales)
|
10
|
8
|
6
|
6
|
|
Inventory Turns
|
6.0
|
6.0
|
6.5
|
6.5
|
|
DSO
|
22
|
22
|
20
|
20
|
|
DPO
|
10
|
10
|
12
|
12
|
|
Accruals (% of sales)
|
1
|
1
|
1
|
1
|
|
Cash (% of sales)
|
3
|
3
|
2
|
2
|
|
Dividends (% of net income)
|
25
|
25
|
25
|
25
|
3) As an experienced loan officer, you know that firms can be overly optimistic in their forecast assumptions. Taking into account the firm's historical performance, do you believe the projections Premier Paper has provided are reasonable? Why or why not? How would this assessment affect your confidence in the loan repayment?
The DuPont analysis and the pro formas may be completed in Excel. Your written responses (questions 1 & 3) combined should not exceed three pages. Please use 12-point text, double-spacing and 1-inch margins.
Cases may be completed in groups no larger than three. Each case must represent the work of the individual or individual group. No sharing of spreadsheets is allowed. I will be available to answer questions about the assignment.
Attachment:- Case_Financials.xls