Case Study for Padgett Paper Products Company- analysis for the options
Options:-Portion of debt through insurance company-Continue at 90 day terms-Factor receivables-Collateralize assets-Mortgage general purpose building-Independent Canadian Financing-Flat dividends-Payment Terms - accelerate receipt-LIFO / FIFOEvery available option has a positive and a negative aspect to it. Here we will decipher what option gives Padgett Paper Products the best financial structure, provides the most flexibility for continued growth, and reduces the risk for all parties involved.
It is preferred by Padgett Paper Product's management to continue at 90 day terms, however this may not be the best choice for the company or for Caslon. There is a chance that the company may be audited after the 1997 fiscal year and Calson would prefer that new terms would be worked out and shown on the financial reports in a more favorable outcome for Padgett. Another problem with the 90 day terms is that there are no covenants or collateral set in place because Padgett's management did not want to lose direct control over the company. They also felt that the fact that the notes can be called in 90 days was appealing to the note holders as protection; however this could be a huge disadvantage to Padgett if too many people called their loans at one time.
By factoring their receivables Padgett Paper Products could increase their cash flow in a short amount of time. A factoring firm would give Padgett a percent of their sales right away and the factoring firm would have to wait the payment term to get their money and collect it as well. (The Smart Choice) By letting someone else deal with collecting their receivables Padgett could decrease the amount they were paying employees in the collections department, if not remove this department completely. Padgett has a higher average collection period versus that of the industry. Meaning, since sales are taking so long to be turned into cash they have less cash on hand to reinvest. (Brigham) By factoring out receivables Padgett
It is preferred by Padgett Paper Product's management to continue at 90 day terms, however this may not be the best choice for the company or for Caslon. There is a chance that the company may be audited after the 1997 fiscal year and Calson would prefer that new terms would be worked out and shown on the financial reports in a more favorable outcome for Padgett. Another problem with the 90 day terms is that there are no covenants or collateral set in place because Padgett's management did not want to lose direct control over the company. They also felt that the fact that the notes can be called in 90 days was appealing to the note holders as protection; however this could be a huge disadvantage to Padgett if too many people called their loans at one time.
By factoring their receivables Padgett Paper Products could increase their cash flow in a short amount of time. A factoring firm would give Padgett a percent of their sales right away and the factoring firm would have to wait the payment term to get their money and collect it as well. (The Smart Choice) By letting someone else deal with collecting their receivables Padgett could decrease the amount they were paying employees in the collections department, if not remove this department completely. Padgett has a higher average collection period versus that of the industry. Meaning, since sales are taking so long to be turned into cash they have less cash on hand to reinvest. (Brigham) By factoring out receivables Padgett
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