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This solution is set-up in the order if you were to present this case.
Case Solution Outline
-Summary
-Company
-Market
-Product
-Projections
-Options
-Current Capital Structure
-Proposed Capital Structure
-Review
Summary
Objective: To find a mutually acceptable debt structure that will
minimize lender risk while increasing company value.
Constraints: 1) realistic cash flow projections, 2) Bank safety levels
Situation for each Business Group
Bank: Over extended and is in a bad situation. Lending exceeds reasonable levels and is not
collateralized or subject to convenants.
A $8 million loan is abnormal for the bank. The companies management does not appear to understand
the unrealistic debt
situation, the impact on firm value and impact on the upcoming audit report.
Management: Has unrealistic expectations and a lack of understanding of impact of current structure of
firm value.
Company: The company has considerable levels of equity and is not maximizing its financial
structure. It is capable of taking on
considerably more debt, however, the debt needs to be more appropriately structured.
Ownership: Closely-held company with owner having little interest in management. Owned for
dividend distribution.
The Company Background
1. Closely held public company (OTC)
2. MFG stationery including notebooks, loose leaf binders, filler paper
3. 100 years old
4. Management is professional but not finance savvy
5. Customers: 5,000 wholersalers and retailers in US & Canada (not subject to concentrations)
6. Seasonal cash needs - back to school push
7. Minor acquisitions, until recent purchase of Tri-Star
The Market
-Consolidations
Factor Receivables
Pros: Increase cash flow, payroll savings in collections and credit departments, reduces risk to bank and
bank's required
due-dillegence in regards to collateralized receivables.
Cons: Additional costs associated with factoring
Recommendations: Not advised as a first tier method, but we recommend the company pursue a
relationship with a factoring firm to
allow for as needed.
Collateralize Assets
Pros: Longer maturity schedule, reduce risk to bank and company
Cons: Restricts management's flexibility
Recommendation: Will be a required option
Mortgage General Purpose Building
Pros: Longer maturity schedule, reduces risk to bank and company, use of previously untapped funds
Cons: Management is against this option due to restrictive covenants and interest rate uncertainty
Recommendation: Company should use this option as a first tier of debt
Independent Canadian Financing
Pros: Risk reduction; foreign exchange risk reduction, untapped source of leverage.
Cons: Uncertainty related to Canadian compliance and different laws and practice.
Recommendation: This option should be used in first tier.
Payment Terms - Accelerate Receipt
Pros: Increase cash flow
Cons: Not something to depend on
Recommendation: Absolutely strive for, but we do not recommend structuring current debt based on
this
Flat Dividends
Pro: Flat dividend provides additional cash to shore up debt situation
Cons: Ownership may be unhappy, negative signalling in market place
Recommendation: This should not be necessary given the strong equity situation of the
company. Better payable and receivables
management should be acheived first.
LIFO / FIFO
Pros: $0.5 million tax deferral
Cons: Difficult to implement and administer
Recommendation: This option should be used
Summary of Recommendations
Collateralize Assets and add convenants
Mortgage on general purpose building
Independent Canadian financing
Shift from FIFO to LIFO method for inventory
http://www.mbacasestudysolutions.com/Fin/Cases/Padgett_Paper_Products_Company.html