Sealed Air Corporation’s Leveraged Racialization (Team 1)
5. Was the constraint imposed on capital expenditures under the bank lending agreement good or bad for the company? Do you think managers will be able to successfully renegotiate this covenant?
Having a limitation on the investment in fixed assets when the company was planning a drastic change of their manufacturing system could be very harmful. Even though Dunphy and Cruiskshank tried to look on the bright side and consider this an expenditure prioritizing opportunity, our team believes that this covenant was not good for the company, and had the new manufacturing system not showed results so quickly, the company would have run into trouble. Therefore, our team does not
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They based the bonus plan for managers on EBIDTA, inventory turns, receivables and working capital instead of EPS. It caused that managers focus on cash flow from operation which gives better understanding about performance. They also placed more focus and emphasis on stock ownership for employees after recap because Dunphy felt that it improves company performance. Before the recap, the stock was stagnant and after the recap Dunphy thought that there is a conviction that the stock will go up and it is possible by younger generation.
8. Why did Sealed Air’s investor base turnover completely after the recap? Is this something managers should be concerned about?
The main investor base of Sealed Air are institutional investors such as mutual fund, pension fund which focus on sustainable return and long term investment. However, after Sealed Air chose to lever up, the financial structure of the company was totally changed from the very strong company to the weak company. This made the institutional investors had to sell the stock because it was against the fund’s policy. Moreover, it could affected the manager performance if they use market cap for evaluation. In addition, we also agree with team3 in the point that Seal Air should be concerned about its new type of investors, speculators, because they just interested in short term return. This
5. As one of BW/IP’s bankers, would you approve of the company’s request for a waiver of covenants
2. What do you think are the motives of Harnischfeger's management in making the changes in its financial reporting policies? Do you think investors will see through these changes?
3. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures?
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why of why not?
4. Should Lincoln go ahead with its investment in Indonesia? If so, what should be its entry strategy with respect to partnerships? Which compensation option would you recommend to Mike Gillespie as he considers the advisability of implementing the company’s incentive management system?
3. Considering your response to questions 1 and 2, do you believe that the going- concern uncertainty was warranted? Do you believe that Deloitte & Touche should have issued a going- concern opinion prior to 2008?
Based on your analysis above, make at least two (2) recommendations as to how each company could improve its working capital positions. Provide support for your recommendations.
2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not
1. From a strategic management standpoint, why do you think that corporate management at Alcoa delayed taking action for five years as the plant continued to lose money and deteriorate in other operational measures?
5. Should the company seriously consider any other options besides doing a spin-off or issuing targeted stock?
5. If Marriott used a signle corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?
The second compensation package was not well designed nor did it help define what the corporate strategy would be. For a second time the compensation package focused on maximizing shareholder’s wealth and didn’t take into consideration the stakeholder’s position at all. Dunlap’s package was deeply weighted in company options ($3.75M). In fact it was weighted heavier than before. The stock grants were
The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.
4. Consider the Worldcom-MCI merger and the Qwest-US West merger. Trying to avoid hindsight bias, should the board of MCI and US West have accepted these offers? What is the obligation to shareholders? Was that obligation fulfilled? What about WorldCom and Qwest? Did their shareholders benefit?
d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.