Padgett Paper

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Kimberly Davis

Case Study

Padgett Paper Products

Baker College

Abstract

This paper will explore Padgett Paper Products current condition, and move into the

the future condition. We will explore the obstacles that this company needs to

investigate, and further build on it in order to be successful. Padgett Paper wants to

borrow money from current financial institution, and we will also look at the

alternatives available for this company. The objective is to find an acceptable debt

structure that will minimize lender risk, and increase the company value.

Padgett Paper is a closely held public company, which manufactures items such as

stationary, notebooks, file paper. There is also a seasonal demand for their products.

Padgett Paper Company is 100 years old, and the ownership remained primarily

With the descendants of the founders.

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Padgett Paper Case Analysis

There seems to be some issues with Management with Padgett Paper.

The Management has a lack of understanding regarding the current structure of the

the business, and knowledge of the firm value. This company has high levels of equity

equity, and is not maximizing the financial possibilities. Management wants to take on

more debt, but the management needs to find a way to have the lender structure the debt.

Diversification is a risk management technique that mixes wide variety of investments

within a portfolio in order to minimize the impact that any one security will have on an

overall performance portfolio. Diversification is the most important component in

helping the company reach long range financial goals while they minimize the risk.

The current structure of the business, and knowledge of the firm value. This

company has high levels of equity, and is not maximizing the financial possibilities.

Management wants to take on more debt, but the management needs to find a way to

have the lender structure the debt. They need to sit down and discuss options that

would be beneficial to the company as a whole. Caslon Trust has been Padgett's

only lending bank and was the only lending bank early 1997. Padget

maintained a small deposit relationship with Phoenix bank, and a major

North Carolina bank. The bank Caslon Trust is currently overextended, and

overall is not in a good situation. Borrowing 8 Million is a very high amount to

ask for. The management of the company does not understand the debt situation

completely. By borrowing this kind of money, would impact Padgett's firm value,

and the upcoming audit report. Padgett has equity, and is not taking advantage of a good financial structure. They are able to take on more debt, but it has to be

structured better. Management needs to focus on new terms. The current long

term fixed rates are too high, and that needs to be negotiated.

Padgett’s current Capital structure is poor; they have too much short debt.

Customers are paying in 90 day terms, and they have a significant level of equity

that is not being maximized. Padgett needs to increase levels of financing to optimize

their debt to equity levels, so they will achieve greater tax shield benefits. They should

reduce their Short term debt of 8M and $5M Long term debt with Calson trust.

Padgett needs to eliminate all Short Term debt, and another proposal would be to

secure $1M Canadian financing and 66% loan to value mortgage on the general

purpose warehouse. The impact of this new capital structure would eliminate the

growing concern, and increase their tax shield value. It would provide the flexibility

to grow, and would decrease risk to bank, and increase their revenue.

Padgett is looking at different alternatives. One alternative is using

property as collateral for a mortgage loan. Using this option does reduce risk

to the bank, but would not be recommended because of the...
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