Palmer Limited Case Study

a) Size up the economy, industry based on the information provided.

Economy:
City of Saskatoon economy is closely tied to the resource
Consumer Price index(CPI) inflation rate had remained low, below 1.5 percent over the past
year
Prime interest had increase slightly to 7 percent (increase of 0.75 Percent)
Overall Canadian economy had shown strong growth over the past years
City of Saskatoon acted as transportation and servicing hub for variety of industries in
Northern Saskatchewan , including government, farming, oil, potash, uranium and light
manufacturing)
Saskatchewan economy were compounded by the Canada-wide recession in 1990-1991
In Saskatoon , due to a heavy snowfall farmers are optimistic about the coming farm season
Uncertainty in the local economy

Industry:
Fluctuations- Building Activity varies greatly from year to year
Residential Construction has decreased since, 1997, last quarter of 98 slight rose
Commercial construction down from previous years
Flat business activity and decline in the construction industry has caused chartered banks
to carefully review construction loans
Competitive Industry

C) Prepare a projected Balance Sheet and Income Statement for the year ended December 31,
1999.
 Palmer Limited
Budgeted Income Statement
For the Year that Ended December 31, 1999.

Sales $ 2,057,400

Cost of Goods Sold:

Materials $ 778,425
Labour $ 777,825
Depreciation $ 24,100
Overhead(Manufacturing) $ 110,285
Total Cost of Goods Sold $ 1,690,635

Selling and Admin.

Expenses:
Management-
Compensation $ 223,115
Other (including Interest)
Total Selling & Admin. Expenses $ 223,115

Net Operating Income $ 143,650

Plus: Other Income

Less: Other Expenses
Net Income Before Taxes $ $143, 650

Taxes

Net Income After Taxes $ 143,650

 Palmer Limited
Budgeted Balance Sheet
For the Year that Ended December 31, 1999.

Assets
Cash $ 388,575
Accounts Receivable (net) $ 149,500
Inventory 44,700
Prepaid Expenses 58,500
Total Current Assets $ 641,275

Investments 22,100
Fixed Assets 204,500
Other Assets 1,600

TOTAL ASSETS 869,475

LIABILITIES AND EQUITY

Bank Loan 368,600
Accounts Payable 86,250
Other Current Liabilities 89,100
Total current liabilities 543,950

Long Term Debt due to Officers 68,175

TOTAL LIABILITIES 612,130

Preferred stock 39,000

Common Stock 8,100
Retained Earnings $210,250
TOTAL EQUITY 257,350

TOTAL LIABILITIES AND EQUITY 869,475

d) How much Financing is required and when will it be repaid?
Scenario 1: Palmer Limited makes no cash repayments on the loan, and only needs financing when it
needs cash
Based on the cash budget (Part B) the company would only need to $93,750, which could be paid
off the following month.

Scenario 2: Palmer Limited tries to pay off outstanding loan $368,600, and Borrows for periods where
the company needs cash.(Information from Exhibit A).It will need to borrow an additional $126,370.

Month Borrow Repayment Total

Beginning Balance $368,800
January 93,750 $462,350
February $212,215 $250,135
March 250,135 $0
April
May $32,620 $32,60
June 18,330 13,790
July 13,790 $0
August
September
October
November
December

e) As Melynk, what would you do?

Option 1: Bank continues financing, but changes some terms on the agreement such as:
Restriction on Debt to Equity(no more than 2 after the proceeds of the loan are incorporated
into the balance sheet)
Have a mandatory positive Working Capital
Finance the loan with additional collateral from the business
Maintain a minimum cash balance
Maintain a minimum liquidity of 1

Advantages:
The Confederation Banks Investment will be better protected and will decrease the risk of
Palmer Limited on defaulting on the loan
Keeps Palmer Limited as a customer
Disadvantages:
Company is highly leveraged
Palmer Limited may focus on paying the Long term debt, and not leave enough cash to cover
other items(Ex. Short term liabilities)
Estimates are highly speculative since there are many uncertainties in their line of business
(Billing and expenses)used may be incorrect(Building activity varies greatly from year to year)

Option 2: Offer Palmer Limited Short Term Financing, such as Line of Credit
Advantages:
Additional Revenue (from interest)to the bank
Maintain a good relationship with Palmer Limited

Disadvantages:
Increases Commitment to Palmer Limited

Option 3: Have Palmer pay off the Loan because of the uncertainty of collection due to increase in
interest rate, downward trend in construction industry, and poor financials.
Advantages:
Decreasing risk for the Confederation Bank
Will have cash from outstanding loans within 3 months

Disadvantages:
May lose Palmer Limited as a customer
May not get the full portion of the loan, if estimates are incorrect
 Items taken into account for alternatives:
Confederation current commitment to Palmer Limited$368,600 vs. Net worth $162,
500(Personal effects, less $200,000 in outstanding mortgage loans)
Lack of skills- Palmer brothers have no experience running a business
Construction Industry is intertwined with the Saskatchewan economy
1998- the firm had expanded(grew workforce, leased new plant and invested in a major fixed
asset
Most of Palmer Limited came from acting as a subcontractor on construction projects
o If material, labour or overhead cost vary from estimates they can earn a profit or have a
loss
o 90% of billings collected 30 days after the billing, 10% collected ,4 months after billing
Previous gross margin 20%
Had extraordinary expenses of $164, 200($44,600-bankruptcy of Blue Water Limited,
investment, $111,800-bankruptcy of major customer, $7,800 bad debt)
Company plans to downsize
Estimate Labour and material costs to be 75% of billings

Liquidity Ratios 1999 1998 1997 1996 1995 1994 1993

CR=CA/CL 1.18 0.96 0.91 1.09 1.20 1.10 1.05
QR=CA-Inv./CL 1.10 0.78 0.82 0.97 1.08 0.99 1.01
Asset Management Ratios
Inv. T.=Sales/Inventory 46.03 17.13 35.95 16.78 38.27 45.29 71.66
DSO=Rec./Avg. Daily Sales 26.52 81.91 70.03 150.40 81.69 60.74 121.07
APP=Payables/Avg. COGS per day 18.62 55.03 57.99 127.99 47.09 40.87 95.77
Fixed Asset=Sales/Fixed Assets 10.06 11.87 8.65 12.05 17.84 13.60 15.59
TAT=Sales/Total Assets 2.37 2.49 2.38 1.49 2.84 3.06 2.26
Debt Management Ratios
Debt Ratio=Total Liability./Total Assets 70.40% 88.32% 70.91% 76.52% 61.68% 63.56% 81.35%
Debt to Equity=D/E 2.379 7.558 2.437 3.258 1.610 1.744 4.363
Profitability Ratio
Net Profit Margin=NI/Sales 6.98% -4.50% -2.79% 4.87% 3.84% 3.11% 2.13%
BEP=EBIT/Total Assets 16.52% 2.35% 6.76% 18.54% 31.41% 36.20% 19.86%
ROA=NI/Total Assets 16.52% -11.21% -6.65% 7.25% 10.92% 9.53% 4.82%
ROE= NI/Common Equity 55.82% -95.95% -22.85% 30.87% 28.49% 26.16% 25.83%

Palmer Limited-Common Size balance Sheet

1999 1998 1997 1996 1995 1994 1993
Assets
44.69
Cash % 0% 0% 9.12% 0% 4% 0.37%
17.19 55.98 61.35 74.97
Accounts Receivable % % 46% % 64% 51% %
14.56
Inventory 5.14% % 7% 8.87% 7% 7% 3.15%
Prepaid Expenses 6.73% 6.01% 11% 3.46% 3% 5% 1.19%
73.75 76.55 82.80 79.69
Total Current Assets % % 64% % 74% 68% %
Investments 2.54% 2.27% 9% 4.71% 10% 9% 5.51%
23.52 21.02 12.36 14.50
Fixed Assets % % 28% % 16% 23% %
0.34
Other Assets 0.18% 0.16% 0.21% 0.14% % 0.43% 0.30%
100
TOTAL ASSETS 100% 100% 100% 100% % 100% 100%
LIABILITIES AND
EQUITY
42.39 37.88 26.03 24.54 17.51 18.20
Bank Loan % % % % 19% % %
32.33 33.10 41.80 27.98 48.04
Accounts Payable 9.92% % % % 30% % %
10.25 10.59 15.97
Other Current Liabilities % 9.16% % 9.76% 12% % 9.46%
20.17 79.36 69.72 76.10 61.46 75.70
Total current liabilities % % % % 62% % %
L/T Debt due to Officers 7.84% 8.95% 1.19% 0.41% 0% 2.10% 5.66%
28.01 88.32 70.91 76.52 63.56 81.35
Total Liabilities % % % % 62% % %
10.50
Preferred stock 4.49% 4.01% 5.09% 3.35% 8% % 7.28%
Common Stock 0.93% 0.83% 1.06% 0.69% 2% 2.18% 1.51%
24.18 22.94 19.44 23.75
Retained Earnings % 6.84% % % 29% % 9.85%
29.60 11.68 29.09 23.48 36.44 18.65
Total Equity % % % % 38% % %
Total Liabilities and 100
Equity 100% 100% 100% 100% % 100% 100%
Palmer Limited-Common Size-Income Statement
Exhibit A