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Palmer Limited Case Study

Essay by   •  October 13, 2017  •  Case Study  •  2,752 Words (12 Pages)  •  2,318 Views

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Table of Contents

Economy & Industries…………………………………………………………………………………………………Page 2 Palmer   Operations………………………………………………………………………………………………………Page  2

Financial Ratios……………………………………………………………………………………………………………Page  3 Cash Budget & Key Assumption..………………………………………………………………………………..Page 4 Income   Statement………………………………………………………………………………………………………Page  5

Balance       Sheet……………………………………………………………………………………………………………..Page      6

Comparison Financials………………………………………………………………………………………………..Page 7 Financial Needs   and   Options……………………………………………………………………………………….Page 9


State of Economy and Local industry conditions

  • City of Saskatoon acted as a transportation and servicing hub for variety of industries in northern Saskatchewan. (Government, farming, oil, potash, uranium and light manufacturing).
  • Saskatchewan economy were compounded by Canada-wide recession of 1990-1991.
  • Saskatoon economy was closely tied to the resource sector.
  • Building activity in Saskatoon varied greatly from year to year.
  • Residential construction in 1998 was down modestly from 1997 levels, but had shown a slight upwards trend in the last quarter of 1998.
  • Commercial construction was down as well in 1998 from 1997.
  • The consumer Price Index (CPI) inflation rate had remained low, below 1.5 percent over the past year.
  • The prime interest rate had increased slightly to 7.00 percent, 0.75 percent higher than a year earlier.
  • In December, Saskatoon area had a heavy snowfall, making farmers more optimistic about the coming farm season.
  • Overall, the Canada economy had shown a strong growth over the past years.

Operation, Marketing, Management and Finance

  • Prior to 1998, the Palmer Brothers spent more time administering the company and less time working at their trades.
  • In 1998, they spent all of their time in administration.
  • Michael Palmer supervised the manufacturing operations and a small portion of the outside work.
  • Andrea quoted on jobs and supervised the major portion of the outside work.
  • The firm has 32 production employees (10 in metal shop and 22 in the field), plus two administrative personnel in addition to Palmer brothers.
  • Palmer lease a new plant with a floor area of 10,00 square feet (9,500 for manufacturing operations and 500 feet for the office.
  • The major fixed assets investments of the company were the basic tools of the manufacturing operation (small tools, welding equipment, and an immovable metal-bleeding press), three trucks and two cars.
  • In 1996, Palmer had bid aggressively for jobs and cause the gross margins previously averaging 20 percent to reduce.
  • Flat business activity and a decline in house construction were causing the chartered banks to carefully review all of their construction loans.


Analysis of Financial Ratios

Profit Margin:

  • The profit margin is decreasing for year 1997 and 1998 as the net income is negative.
  • The manufacturing and administrative expenses are increasing over times.
  • The high extraordinary expense in income statement, which amounted $164,200.
  • This amount was due to the bankruptcy of major customers and minor bad debt losses.
  • Due to insufficient details in the architect’s original drawings, the incurred costs higher than expected in meeting the original specifications.
  • The estimate for future expenses are highly speculative since there were many uncertainties in the line of business.
  • Hence, it is hard to estimate the labor and material expense for new jobs.
  • In order to gain a foothold in the mechanical contracting business, Palmer had bid aggressively for jobs in 1996 and this results the gross margin to reduce.
  • However, Palmer expected to return to smaller contracts with a greater emphasis on metal working and higher profit margin.
  • Besides, Palmer also anticipate substantial cuts in the workforce, probably down to a crew of 12 to 20, in order to reduce the labor cost.

Debt-to-equity ratio

  • The debt-to-equity ratio had increasing significantly from year 1997 to 1998.
  • The bank loan in year 1998 is $368,600, which is much higher compared to year 1997 of

$199,300.

  • The account payable had increasing from $253,500 to $314,600 in 1998.
  • Although there is no interest apply, the high long term debt due to officer of $87,100 had increase the current liabilities of Palmer.
  • Due to the slowdown of economy, the retain earning of Palmer reduce to $66,600 in 1998.
  • Since the interest rate is going to increase to 7%, it do have some negative impact on the high debt of Palmer.
  • Palmer may have to pay more interest on their debt.
  • Based on this high debt-equity ratio, we can conclude that most of the Palmer’s assets are financed through the shareholder’s equity and debt.

Current ratio

  • As we can see from the graph, Palmer is having a liquidity issue for the past 6 years.
  • As its current ratio is too low, this indicates that the company is not in a good health and more likely to default on short-term obligations.
  • With the current ratio lower than 1, Palmer has more current liabilities than current assets in year 1997 and 1998.
  • There is no cash on hand for Palmer in year 1997 and 1998.


  • Inventory and account receivable had reduced significantly in year 1997.
  • Overall, Palmer has facing a tough time in year 1997 and 1998 due to the economy downturn.

Palmer’s Cash Budget

Month by Month Cash Budget (in $000s)

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Inflows

Billings from Previous Month

329.40

392.90

277.70

249.60

103.50

103.50

103.50

103.50

103.50

103.50

103.50

103.50

Holdbacks

0.00

0.00

178.80

36.60

43.70

30.90

27.70

11.50

11.50

11.50

11.50

11.50

Total Cash Inflows

329.40

392.90

456.50

286.20

147.20

134.40

131.20

115.00

115.00

115.00

115.00

115.00

Outflows

Supplier Payments **

100.50

145.00

69.10

155.40

137.90

43.10

43.10

43.10

43.10

43.10

43.10

43.10

Labor Expense

189.00

104.70

96.00

43.10

43.10

43.10

43.10

43.10

43.10

43.10

43.10

43.10

Overhead

13.70

9.10

8.80

13.40

8.20

12.50

6.80

6.80

6.80

6.30

6.30

11.70

Selling and Admin Expense

19.50

22.40

18.90

17.10

18.20

16.80

16.80

21.90

16.50

17.10

18.20

19.90

Repaymnet of Loan

200.00

Total Cash Outflow

322.70

281.20

192.80

229.00

207.40

115.50

109.80

114.90

109.50

109.60

110.70

317.80

Cash Excess/(Deficit)

6.70

111.70

263.70

57.20

-60.20

18.90

21.40

0.10

5.50

5.40

4.30

-202.80

** Supplier payments consisted of 90 days payment period for January till May. Jun till Dec it changed to 60 days

[pic 1]        [pic 2]        [pic 3]        [pic 4]        [pic 5]        [pic 6]        [pic 7]        [pic 8]

Key Assumptions Used:

  • Billings would be approximately $115,000 a month starting in April, per the owners estimates.
  • Materials and labor were known for the first three months, then each were estimated to be 37.5% of billings.
  • Overhead and selling and administrative expenses were estimated by the owners on a month to month basis.
  • Other income was $1,550, with investments of $22,100 yield the market average of 7%.
  • $10,000 worth of fixed assets became obsolete during the year.
  • Management compensation was 7% of sales.
  • The “other” selling and admin expenses is the remainder from subtract management compensation for the total projected expenses.
  • Accounts Receivable consists of the December billings along with holdbacks from September- December.
  • Accounts Payable consists of November and December supplier purchases.
  • Palmer is focusing on paying off short term debt rather than long term debt. They pay off

$200,000 of the bank loan at year end.

  • No income taxes will be paid because previous losses will offset any taxes from this year.

Income Statement and Balance Sheet generated using the key assumptions from above:


Income Statement for Palmer for year ended Dec 31, 1999

Palmer Limited

Pro Forma Income Statement For Year Ended Dec. 31, 1999

Sales

$ 2,057.4

Cost of Goods Sold:

Materials

778.4

Labor

777.8

Depreciation

22.1

Overhead

 _        110.3

Total Cost of Goods Sold

 _        1688.7

Gross Margin

$        368.7

Selling & Admin. Expenses

Management  Compensation

144.0

Other

 _        79.1

Total Selling and Admin Expenses

 _        223.1

Net Operating Income

$        145.6

Plus: Other Income

1.6

Less:  Other Expenses

 _        10.3

Net Income Before Taxes

 _        136.9

Taxes

 _        0.0

Net Income After Taxes

$        136.9

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