Padgett Paper Products Case Study Solution

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

-Larger companies begin to dominate

-Thinning margins

-Price of paper increases

-Increased international competitors

Key Operating Ratios

1993 1994 1995 1996

Operating Expenses 22.1 25.6 26.4 26.5

Gross Profit % 40.3 39.1 38.7 38.8

Pre-Tax Margin 17.9 13.5 11.8 11.5

After Tax Margin 7.6 6.6 5.8 6.3

-Operating margins have declined due to competition and rising