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$$Greg$,$ the board of directors$$ meeting is scheduled two weeks from today, and I$$m depending

on you to come up with a realistic and honest appraisal of our company$$s position,$$ said Warren, to his

assistant Greg Chapman. $$I$$m sure that there$$s more to us than meets the eye!$$ he quipped. $$But those

darn analysts are still punishing us for Robert$$s accounting jugglery,$$ he said with a frown.

$$Why don$$t you prepare a detailed financial performance analysis of the firm for the most

recent three years, complete with industry comparisons and a DuPont analysis? It will help me make

the case to the rating agencies that they need to raise our rating.

$$After that, I$$d like you to prepare a $12-$month pro$-$forma forecast using a scenario analysis. Use

our current average compound growth rate in sales as the base estimate and vary that up and down by

$10\%$ for the best$-$case and worst$-$case scenarios respectively. This will help us figure out how much

additional funds we are going to have to acquire over the next year. The production folks tell me that

we are currently operating at $90\%$ of capacity, so we should be able to support some growth without

additional plant and equipment,$$ he added looking rather stressed.

Warren Badges, the new CFO of Paramount Paper Inc., was hired last year to replace Robert

Malnight. Robert was fired because the firm had come under Federal investigation for noncompliance

of the Sarbanes$-$Oxley Act $(2002).$ Under Robert$$s watch, the stock had plummeted to its all$-$time low

despite reasonably strong sales and income growth.

Warren implemented various measures to bring the firm in compliance with the $2002$ Act. The

firm$$s sales had been increasing steadily due to its excellent commitment to quality. However, stock

market analysts had been unforgiving because the stock price was still hovering around its all$-$time low

of $$12.$

The significant growth rate that the firm had been experiencing had necessitated the infusion of

more capital. But lenders were reluctant to lower interest rates due to their suspicions about the firm$$s

past reporting practices. Warren had a hunch that the company could save a bundle in interest costs if

the markets were convinced that the firm$$s accounting and reporting practices were clearly within the

Sarbanes$-$Oxley guidelines. He knew that an upgrade in the firm$$s credit rating would help expedite the

process.

Moreover, when he took over from Robert, Warren realized that there was no formal policy of

conducting long$-$term planning and forecasting in place. Most of what Robert did was based on his gut

feelings regarding the economy. Being an industry veteran, Warren was fully aware that haphazard

growth could be a recipe for disaster. He was determined to set things straight and he knew that the

market would take note.

One of the first things that Warren did upon joining paramount was to lure his assistant, Greg

Chapman, away from their prior employer, Holland Paper. Greg had been working for Holland Paper for

over $10$ years. When the opportunity came up$,$ Greg initially hesitated. He was enjoying a fairly

comfortable lifestyle, and the city had a lot to offer. But Warren made him an offer that he found very

hard to refuse. The remuneration package included a very attractive stock option plan and a signing

bonus. Moreover, Greg knew that Warren was an honest, ethical person and he enjoyed working for

him.

$$I$$ll get on it right away, Warren,$$ promised Greg. $$We$$ll show those dumb analysts just how

wrong they are!$$

Greg had the folks in accounting send him the firm$$s financial statements for the past three

years, along with the aggregate financial statements for the select group of six firms that were their

main competitors. In addition, he collected data regarding the firm$$s sales history, its beta estimate, and

other market information. Greg was fully aware that the firm$$s stock price and capital cost structure

depend on his analysis, and he was determined to present a comprehensive, convincing appraisal of the

firm$$s performance to the board.

Questions:

$1.$ Develop the statement of cash flow for the most recent two years and explain how Greg would

sum up the company$$s cash position.

$2.$ Perform a trend analysis on the company$$s liquidity, leverage, turnover, and profitability ratios.

Help Greg present an appraisal of the company$$s financial ratios compared with its key

competitors.

$3.$ Using common size financial statements, help Greg present an appraisal of the company$$s

performance and financial condition vis$--$vis its key competitors.

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