Graphic Packaging’s Operational and Financial Details

📄 Words:	2418
📝 Subject:	Company Analysis
📑 Pages:	20
✍️ Type:	Essay

Introduction

These financial statements predict the future position and performance of Graphic Packaging based on the historical financials and some assumptions of growth. In this case, the growth rate for year 2013 is assumed to be 15% while that of 2012 is assumed 20 %.

	INCOME STATEMENT
Period Ending		Projected 2014	Projected 2013	Dec 30, 2012
Total Revenue		5,985,198	4,987,665	4,337,100
Cost of Revenue		4,992,150	4,160,125	3,617,500

Gross Profit			827,540	719,600


	Research Development			–
	Selling General and Administrative	511,704	426,420	370,800
	Non Recurring	36,432	30,360	26,400
	Others			–

	Total Operating Expenses			–


Operating Income or Loss		444,912	370,760	322,400


	Total Other Income/Expenses Net		– 12,650	– 11,000
	Earnings Before Interest And Taxes	444,912	370,760	322,400
	Interest Expense	153,318	127,765	111,100
	Income Before Tax	291,594	242,995	211,300
	Income Tax Expense	113,850	94,875	82,500
	Minority Interest	3,450	2,875	2,500

	Net Income From Continuing Ops	169,188	140,990	122,600


	Discontinued Operations			–
	Extraordinary Items			–
	Effect Of Accounting Changes			–
	Other Items			–


Net Income		169,188	140,990	122,600
Preferred Stock And Other Adjustments				–

Net Income Applicable To Common Shares		169,188	140,990	122,600

STATEMENT OF FINANCIAL POSITION
Period Ending	Projected 2014	Projected 2013	Dec 30, 2012



Cash And Cash Equivalents	71,070	59,225	51,500
Short Term Investments			–
Net Receivables	830,760	692,300	602,000
Inventory	733,056	610,880	531,200
Other Current Assets	25,392	21,160	18,400

Total Current Assets	2,165,580	1,804,650	1,203,100
Long Term Investments			–
Property Plant and Equipment	2,355,108	1,962,590	1,706,600
Goodwill	1,607,424	1,339,520	1,164,800
Intangible Assets	688,896	574,080	499,200
Accumulated Amortization			–
Other Assets	64,998	54,165	47,100
Deferred Long Term Asset Charges			–

Total Assets	6,376,704	5,313,920	4,620,800

Accounts Payable	928,878	774,065	673,100
Short/Current Long Term Debt	110,124	91,770	79,800
Other Current Liabilities	–		–

Total Current Liabilities	1,039,002	865,835	752,900
Long Term Debt	3,109,830	2,591,525	2,253,500
Other Liabilities	682,134	568,445	494,300
Deferred Long Term Liability Charges	189,060	157,550	137,000
Minority Interest	– 2,346	– 1,955	– 1,700
Negative Goodwill			–

Total Liabilities	5,017,680	4,181,400	3,636,000


Misc Stocks Options Warrants	14,904	12,420	10,800
Redeemable Preferred Stock			–
Preferred Stock			–
Common Stock	4,692	3,910	3,400
Retained Earnings	– 873,816	– 728,180	– 633,200
Treasury Stock			–
Capital Surplus	2,642,838	2,202,365	1,915,100
Other Stockholder Equity	– 429,594	– 357,995	– 311,300

Total Stockholder Equity	1,344,120	1,120,100	974,000

Net Tangible Assets	– 952,200	– 793,500	– 690,000

CASH FLOW STATEMENT
Period Ending	Projected 2014	Projected 2013	Dec 30, 2012
Net Income	169,188.00	140,990.00	122,600


Depreciation	327,060	272,550	273,000
Adjustments To Net Income	127,788	106,490	92,600
Changes In Accounts Receivables			–
Changes In Liabilities			–
Changes In Inventories			–
Changes In Other Operating Activities	– 23,598	– 19,665	– 17,100

Total Cash Flow From Operating Activities	431,250	359,375	468,600


Capital Expenditures	-280554	-233795	-203,300
Investments			–
Other Cash flows from Investing Activities	-125166	-104305	-90,700

Total Cash Flows From Investing Activities	-405720	-338100	-294,000


Dividends Paid			–
Sale Purchase of Stock	-428766	-357305	-310,700
Net Borrowings	-97842	-81535	-70,900
Other Cash Flows from Financing Activities	18216	15180	13,200

Total Cash Flows From Financing Activities	-546618	-455515	-396,100
Effect Of Exchange Rate Changes	1656	1380	1,200

Change In Cash and Cash Equivalents	304014	253345	-220,300

Determination of the Cost of Debt

Debt capital refers to what a company has borrowed to help finance its investments. In the case of Graphic Packaging, for the year 2012, it is the $ 2,253,500 shown on the balance sheet under long-term debt. Debt issuers expect returns in the form of interest. This is the charge to the company for using their funds. Interest is quoted in percentage form.

However, since interest is a deductible expense for taxation purposes, debt reduces the amount of tax a company effectively pays. Therefore, to determine the cost of Graphic Packaging’s debt, we must consider both the interest rate charged by the lenders and the corporate tax rate charged by the government. The formula that connects these two items to give the cost of debt is:

Cost of Debt = YTM * (1-T)

Where:

YTM- Yield to Maturity
T – Corporate Tax Rate

The average YTM of the debt carried by Graphic Packaging is approximately 8%. The corporate tax of its mother company, USA, is approximately 35%. These are the two figures necessary for computing the company’s theoretical cost of debt.

Cost of Debt = 8% * (1-0.35)

=8% * 0.65

=5.2%

This means that the debt providers require an approximate return of 5.2% from Graphic Packaging in return for financing their projects.

Determination of the Cost of Equity

The cost of equity refers to the returns expected by the owners of a company. Shareholders are the owners of the company and they expect compensation for providing capital. Compensation is usually in the form of dividends. Graphic Packaging shows stockholders’ equity of $ 974,000 on its Statement of Financial Position for the year 2012.

The most acceptable method of determining a company’s cost of equity is the CAPM method. This method considers several variables in order to arrive at the cost of equity. The variables include Risk Free Rate, Expected Rate of Return on the security, Beta Coefficient, and Expected Rate of Return on the Market (Bloomberg par. 1).

Capital Assets Pricing Model

This financial model is used to compute the expected returns on a security. In the case of Graphic Packaging, CAPM can be used to determine the cost of its shares, hence equity. CAPM incorporates both the risk created by investing over a period of time and investing in a specific security. The CAPM formula incorporates all these elements. It is:

r_a= r_f+ ß_a(r_m–r _f)

Where:

r_a – Expected Returns on a Security
r_f – Risk Free Rate
ß_a – Asset Beta
r_m– Expected Returns on the Market.

This paper discusses the elements of this formula further.

Expected Rate of Return on a Security

This is the result of the CAPM formula. It represents the compensation expected by shareholders for investing in certain shares. It is composed of the risk-free rate, asset beta and expected market returns. In this case, shareholders of Graphic Packaging would expect the returns for their investment of $ 974,000.

Risk Free Rate

This is the expected return on a security with no inherent risk such as a government bond. Government bonds are taken as the proxy for risk-free securities because the risk of default in payment is very low. This is unlike corporate bonds, which are prone to default depending on the company’s financial status.

Beta Coefficient

This is a measure of the riskiness of a security. It is determined by the business risks facing a company and its environment of operation. Graphic Packaging operates in an environment that is prone to change. The beta coefficient incorporates such risks. Any beta coefficient higher than one indicates that the security in question is more risky than the market. Conversely, coefficients lower than one indicates securities less risky than the market.

Expected Return on the Market

Every stock market has an average return it is expected to produce in a year. This return depends on the portfolio of securities in the market. In the case of Graphic packaging, the expected return on the New York Stock Exchange where it is listed is used in the CAPM formula.

Market Risk Premium

This is the difference between the risk free rate and expected rate of return on the market. It represents the amount an investor expects to be compensated for putting funds into that particular securities exchange (NewYorkStockExchange par. 6).

Calculation of Cost of Capital

In this section, we use the CAPM model and data specific to Graphic Packaging to compute the company’s cost of equity.

r_a= r_f+ ß_a(r_m–r _f)

r_f –1.84%

ß_a – 2.17

r_m– 12.9%

r_a= 1.84% + 2.17(12.9%-1.84%)

=1.84%+(2.17*11.06%)

=24.8402%

The above figure represents the approximate reward in percentage form that shareholders expect from Graphic Packaging. It is evident that this cost of equity is significantly higher than the cost of debt calculated earlier. This is because equity is considered more risky than debt hence demanding higher returns (GraphicPackaging par.5).

Determination of the Weighted Cost of Capital

The weighted average cost of capital incorporates both equity and debt capital. Each type is considered depending on its proportion in the total capital mix. Graphic Packaging has significantly more debt than equity. This could be attributed to the high cost of equity.

Per Share Market Value of the Firm

This is a figure determined by the market in which a firm’s securities trade. In the case of Graphic Packaging, it is the New York Stock Exchange. This figure indicates how the investors value a company’s securities. Graphic Packaging has a Per Share Market Value of $7.42. This figure changes frequently due to market activity.

Market Value of the firm’s Equity

Market value of the firm’s equity represents how highly or low market participants rate a company’s shares. It is useful in computing the weighted cost of capital.

Market Value of the Firm’s Debt

Market value of the firm’s debt represents how highly or low market participants rate a company’s long-term loans. It is useful in computing the weighted cost of capital. This is because it enables analysts to compute the proportion of a company’s capital constituted of loans.

Calculation of Cost of Capital

The Weighted Average Cost of Capital is computed by substituting the relevant figures into the formula. We assume the market value of equity and debt to be the values presented in the 2012 financial statements. The Value of debt excludes short-term borrowing. The Cost of debt and equity has already been computed earlier in this paper. Since tax was incorporated in computing the cost of debt, we ignore the final part of the WACC formula (Wall Street, Journal par.2).

WACC= (E/V)Re + (D/V)Rd *(1-t)

Where:

E- Market Value of Equity
D-Market Value of Debt
V- Total Value of capital
Re- Cost of Equity
Rd- Cost of Debt

For Graphic Packaging:

E-974,000
D- 2,883,100
V-3,857,100
Re- 24.84 %
Rd -5.2 %
WACC = (974,000/3,857,100)*24.84% + (2,883,100/3,857,100)* 5.2%
WACC = 6.27% + 3.88%
WACC = 10.15%

Investment Decision

Discounted Cash Flow Assumptions

DCF is one of the methods used to estimate whether or not an investment is worthy. This method takes into account the money that will be available to investors in the future from the specific investment (Yahoo par. 3). Graphic Packaging Holding Company can be valued using DCF. Dividends are considered as the free cash flow that will be obtained by an investor. The growth rate of these dividends is also useful in DCF valuation. The cash flow obtained is adjusted for the effect of time on money. This is important since money depreciates over time.

The formula for DCF is:

DCF =( (CF1)/(1+r)¹)+ ( (CF2)/(1+r)²)…….. ( (CFn)/(1+r)ⁿ)

Internal Rate of Return

IRR is an interest rate. The cash inflows from a project will exactly equal the cash outflows at this interest rate. It is used in investment decisions to eliminate undesirable projects. Projects with higher IRR are considered more desirable. Investors compare the IRR with the cost of capital. An acceptable project should have an IRR higher than the set cost of capital.

In the case of a company such as Graphic packaging, the set cost of capital is most likely the WACC.

Net Present Value

This is a method of investment appraisal that considers both cash inflows and outflows of a project. The difference between the inflows and outflows at their present values is the NPV. Projects with positive NPV are desirable as this implies that investors will gain from engaging in them. Projects with negative NPV suggest that investors will lose the amount equal to NPV if they were to engage in the projects.

Cash Inflow Determination

The cash inflow in a project is usually taken to be the revenue received from the project’s customers.

Investment Choices

Top management approves investments after careful consideration of different risk analysis. This helps to reduce chances of losing investors’ money.

Final Pro-Forma Ratio Analysis

	PROFITABILITY ANALYSIS

1	Gross Profit Margin	Projected 2013

	Sales – COGS (Gross Profit)	827,540.00
	Sales Revenue	4,987,665.00
	GPM	0.17


2	Net Profit Margin

	Net Profit After Tax	140,990.00
	Sales	4,987,665.00
	NPM	0.03

3	Return on Total Assets
	Net Income after Tax	140,990.00
	Total Assets	5,313,920.00
	ROTA	0.03

4	Return on Total Equity
	Net Income after taxes	140,990.00
	Total Equity	1,120,100.00
	ROTE	0.13

	LIQUIDITY ANALYSIS



7	Inventory Turnover Period

	Average inventory	610,880.00
	Cost of Sales (Operating Expenses)	4,160,125.00
	Inventory turnover	0.15



	LEVERAGE ANALYSIS

8	Assets :Debt Ratio

	Assets	5,313,920.00
	Debts	4,181,400.00
	Debt Ratio	1.27

	ACTIVITY ANALYSIS


10	Sales/Total Asset Ratio

	Sales	4,987,665.00
	Total Assets	5,313,920.00
	Ratio	0.94

Dividend Policy

Divided policy refers to the procedure used by a company to share its profits with shareholders. There are several types of dividend policies employed by companies. They include:

Constant Dividend Per Share– Such a policy entails issuing a fixed amount of dividend for every share held. It can be a disadvantage to shareholders in times of rising inflation.
Constant payout ratio– Such a policy requires a company to set the ratio of Dividends to net earnings. This ratio determines the amount of dividend to be paid out. Thus, a company pays out only what dividend they can afford.
Irregular Policy– A company can fail to have a set dividend policy and instead issue dividends randomly each year. This is common in companies that have variable earnings and operate in uncertain environments.
No dividends– A company can fail to pay out dividends all together. This policy may be adopted in the early years when growth is a priority and all available funds are being channelled towards expansion.

Unfortunately, information about Graphic Packaging’s dividend policy is not available publicly.

Sensitivity Analysis

This is a means of checking how variable returns from an investment are likely to be. It is used to check how risky an investment is likely to be. There are several types of sensitivity analysis depending on the project at hand and determining variables.

Summary and Conclusion

This paper has analysed Graphic Packaging’s operational details in part one and its financial details in part two. The major operational issues faced by the company are innovation and sustainability. It is evident from the ratio analysis in part one that the company is doing well compared to the industry statistics. Additionally, the ratio analysis on the pro-forma financials indicates that it will continue to do well. Therefore, I would recommend Graphic Packaging as a worthy company in which to invest.

Bibliography

Bloomberg. Government Bond Rates. 2012. Web.

GraphicPackaging. Press Releases. 2012. Web.

NewYorkStockExchange. Market Information. 2013. Web.

WallStreet, Journal. Graphic Packaging Holding Company Reports Fourth Quarter and Full Year 2012 Results. 2013. Web.

Yahoo, Finance. Graphic Packaging Holding Company. 2013. Web.

Introduction

Determination of the Cost of Debt

Determination of the Cost of Equity

Capital Assets Pricing Model

Expected Rate of Return on a Security

Risk Free Rate

Beta Coefficient

Expected Return on the Market

Market Risk Premium

Calculation of Cost of Capital

Determination of the Weighted Cost of Capital

Per Share Market Value of the Firm

Market Value of the firm’s Equity

Market Value of the Firm’s Debt

Calculation of Cost of Capital

Investment Decision

Discounted Cash Flow Assumptions

Internal Rate of Return

Net Present Value

Cash Inflow Determination

Investment Choices

Final Pro-Forma Ratio Analysis

Dividend Policy

Sensitivity Analysis

Summary and Conclusion

Bibliography

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