Chared Goodwin-Padgett Case Project

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    Chared O. Goodwin Case #1MBA 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 %aor reasons #or the de!letion o# cash is that we are now

    re/$ired to re!ay 02.2 %illion to 1indsor Ban ,y 3ece%,er )4+ 2''*. 5n A!ril 2'')

    1indsor increased o$r credit line ,y 0).6 %illion allowing $s to ac/$ire ri(7tate a,let

    Co%!any. 8owe"er+ this additional loan ,ro$ght o$r total ,alance with 1indsor to 0.2

    %illion+ which e-ceeded o$r original agree%ent+ and was only te%!orarily a$thoried

    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 %aret

    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. he 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 ,an&s credit co%%ittee+ 5 a% reco%%ending we %ae 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$nt o# in"entory we ee! on hand ,y 9?< o# sales@ in 2''*. Prior year&s a"erage in"entory t$rno"er is 2.4>

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    ti%es !er year. B$ying additional in"entory and ha"ing that %erchandise sit in o$r

    wareho$ses is a !oor $se o# cash. 1e now when o$r !ea !rod$ction %onths are =early

    Fall ,eca$se o# ,ac(to(school sales@+ there#ore there is no need to ha"e large /$antities

    o# !rod$ct on hand at all ti%es thro$gho$t the year. he draw,acs o# this change is that

    o$r !roected C$rrent atio and Assets to /$ity ratio slightly dro! to 2.>4 and 4.>2

    res!ecti"ely ,$t e"en with the lower n$%,ers+ these ratios still highlight o$r #ir%&s solid

    li/$idity and le"erage !ositions. Maing the ,$l 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 taes #or o$r in"entory to t$rno"er =#ro% 4' 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 i%es 5nterest arned 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$ld raise 04 %illion #ro% Canadian ,ans. hose ,ans re/$ire a #loating

    2

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    charge against all c$rrent assets. he c$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.

    he Philadel!hia wareho$se&s a!!raisal "al$e is 0) %illion. 5 reco%%end collateraliing

    it with 1indsor&s real estate de!art%ent which wo$ld generate another 02.* %illion =?' #or an e"en greater "al$e as that ind$strial area o# Philadel!hia

    contin$es to de"elo!.

    o s$%%arie+ o$r ac/$isition o# ri(7tate a,let Co%!any in 2'') has taen o$r credit

    line ,alance with 1indsor Ban o"er the !re"io$sly agreed $!on li%it o# 0> %illion. 5 a%

    reco%%ending that we %ae 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.

    )