Palmer Limited Case Study

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

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