Garden State Container Corporation - Financial Analysis and Forecasting

Case 36  Garden State Container Corporation  Financial Analysis and Forecasting  

CASE  INFORMATION  

Purpose  

The case is relatively straightforward, yet it provides a comprehensive illustration of the use of ratios and other analytical techniques in evaluating a firm’s existing and potential financial positions.  This case is almost identical to Case 35, Mark X Company (A).      

Time Required  

Depending on the student’s efficiency, 3 to 4 hours should be sufficient to work the case by hand.  If students are given our Lotus model, the time required is significantly less.  

Complexity  

B--intermediate complexity.  

Flexibility  

In addition to illustrating the concepts of financial analysis, this case can also be used as a vehicle to discuss the topic of forecasting, the impact of the assumptions used, and the use of scenario analysis in planning.  

MODEL INFORMATION  

Description  

The Lotus model which accompanies this case (filename CASE-36I) is relatively straightforward, but it is rather large because it generates a number of financial statements.  The INPUT DATA and KEY OUTPUT sections are shown on the next page:  

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    INPUT DATA:                        KEY OUTPUT:

                       1993     1994     1992 Net cash flow           ($812)

                                         1992 Current ratio            1.79

    Sales growth      10.00%   15.00%    1992 Quick ratio              0.72

    As a % of sales:                     1992 Debt ratio              59.59%

     CGS              82.50%   80.00%

     Admin expenses    8.00%    7.50%

     Misc expenses     1.75%    1.25%    1993 Current ratio            1.77

    ST int rate       12.00%   12.00%    1993 Quick ratio              1.13

    Federal-plus-                        1993 Debt ratio              57.62%

     state tax rate   40.00%   40.00%

    Dividend payout    0.00%    0.00%

    Target DSO        32.00    32.00     1994 Current ratio            1.99

    Target inventory                     1994 Quick ratio              1.32

     turnover (CGS)    5.70     5.70     1994 Debt ratio              52.31%

    P/E ratio            12       14

    New ST loan     $12,750       $0     Altman’s Z score, 1992        3.04

    ST loans repaid      $0       $0     Altman’s Z score, 1993        3.95

    % sales made     100.00%  100.00%    Altman’s Z score, 1994        5.42    

Model Use  

As noted above, this model can be used to reduce the amount of time spent on calculations.  There is some danger, however, that beginning students will not really understand the basic logic underlying the model if they are not required to do some calculations by hand.  For this reason, we ask questions in class which are designed to test students’ knowledge of basic relationships.  

 The model is particularly well-suited for determining the effects of forecast errors and changing forecast assumptions.  Extensive "what if" analysis can be performed with the model and, on the basis of such an analysis, it is possible to form contingency plans and to set control ranges for critical variables that are the basis for a control system.  

CASE  SOLUTION  

Summary of Numerical Answers  

1. Selected 1992 financial figures:  

 1992 Net cash flow = -$812.  1992 Current ratio = 1.79.  1992 Quick ratio   = 0.72.  1992 Debt ratio    = 59.59%.  

4. Selected 1993/1994 financial figures:  

                               1993         1994

                                    ____         ____  Current ratio                 1.77         1.99  Quick ratio                   1.13         1.32  Debt ratio                   57.62%       52.31%                                    1993         1994                                   ______       ______  5. Excess funds invested in                    marketable securities    $51,387      $69,781  

6. Excess funds invested in                    marketable securities     $3,943      $25,880  

9. Current ratio                 2.48         2.75  Quick ratio                   1.22         1.50  Debt ratio                   45.57%       41.78%  

Question 1  

The completed tables are given below.  They include the pro forma statements called for in later questions.    

Historical  and  Pro  Forma  Balance  Sheets

                                                               Pro Forma

                                                         -------------------

                                1990      1991      1992     1993      1994

    ASSETS

    Cash and marketable

     securities               $9,930    $7,363    $6,550  $73,456   $95,160

    Accounts receivable       34,196    36,924    58,714   39,233    45,118

    Inventory                 39,791    69,361    97,984   63,883    71,240

                             -------   -------   -------  -------  --------

      Current assets         $83,888  $113,647  $163,249 $176,573  $211,518  

    Land, buildings, plant,

     and equipment           $34,634   $39,195   $44,604  $57,036   $58,746

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