Graphic Packaging’s Operational and Financial Details

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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 %.

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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)

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=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:

ra = rf + ßa (rm –r f )

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Where:

  • ra – Expected Returns on a Security
  • rf – Risk Free Rate
  • ßa – Asset Beta
  • rm – 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).

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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.

ra = rf + ßa (rm –r f )

rf –1.84%

ßa – 2.17

rm – 12.9%

ra = 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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BusinessEssay. (2022, November 27). Graphic Packaging’s Operational and Financial Details. Retrieved from https://business-essay.com/graphic-packagings-operational-and-financial-details/

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