Financial Distress

& Restructure:
Paramount
Equipment,
Inc.
 Presented by: Group-2 (Section-B)

SL No. Name ID

01 Samia Alam 43004

02 Ashika Mahmudi 20232011

03 Md. Imtiaj Iqbal Razib 20232004

04 Md Johaed Hoque 20221042

Financial Distress and Restructuring

When a company doesn’t

have enough cash flow to
pay its debts, it is said to
be in financial distress.

And restructuring is the

process of rearranging
the financial condition to
put the company in the
best position financial
position.
 Financial Restructuring

Debt Restructuring Equity Restructuring

• Debt restructuring is a • Equity restructuring is the process
strategy that permits firms to of
bargain with or reduce their current issuing new shares or
debts. repurchasing shares.
 Case Background
Paramount Equipment Inc. is suffering from net losses, high
debt, low demand and currency fluctuations

Long term debt $2,096 million

Net loss $300M

Interest obligation $350M

Principal Payment $200M

Default Possibility of $5.5B

Fixed Interest rate 3.8% to 7.9%

 Porter’s Five Forces Analysis

Rivalry among Bargaining Bargaining Threat of

Threat of power of substitute
existing power of
new suppliers products
competitors buyers
entrants
 Rivalry Among existing competitors

Industry Concentration
Number of Competitors (Construction
High Barriers to exit
(T-Rex & Mckale) Equipment & Food
Service Equipment)
 Threat of New Entrants

Time & Cost of Entry Economies of Scale High Barriers to entry

 Threat of substitute products

Unfortunately, there is no substitute product in this heavy equipment industry

 Bargaining power of Buyers

Numbers of customers Price sensitivity Buyers ability to

(Bargaining power is (Bargaining power is substitute (Bargaining
low) low) power is low)

Switching cost
(Bargaining power is low)
 Bargaining power of suppliers

Uniqueness of each
Numbers and size of Switching cost is high
suppliers product
suppliers (Bargaining (Bargaining power is
(Bargaining power is
power is high) high)
high)
 Product Market Strategy
Paramount T-Rex Mckale

P P M

P P

T
 PESTLE Analysis

Political Economic Social

Technological Environmental Legal

 POLITICA
L

Government friendly
Regulatory Environment Political Stability Trade policy
relationship

1st 2nd 3rd 4th

 Economic

Downward economic
Volatile exchange policy High interest rate Growing inflation
growth

1st 2nd 3rd 4th

Technological
Adapting new
technology

Achieve
intellectual safety
Environmental

Raw material
availability

Climate
change

Environmental
regulation
Legal

Labor Law

Intellectual
property Laws
 STRENGTHS
WEAKNESSES

OPPORTUNITIES THREATS
 Strong Brand
reputation

Global
Skilled workforce Strength Reach

Exchange
Rates
Appropriate location
strategy
Weakness
High Production Cost 01

Dependency on
02
Suppliers

Risk Taking tendency 03

Multi-layered organizational
04 system

Weak Financial Strategy

Exchange 05
Rates
 Government
Assistance

Adopting new Market

technology Opportunity Expansion

Exchange
Rates
Appropriate location
strategy
Threats
Volatile economy
01

Change in Interest rate

02

Strong Competitors
03

Reducing Demand
04

Wrong Timing to inter

Exchange
American Market 05
Rates
 Liquidity Analysis
Year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Current Asset 1105 1937 1990 2870 2886 2988 2821 3434 3259 2737

Current Liability 872 1387 1658 2177 2427 3115 4649 5491 5057 4415

Current Ratio 1.267202 1.396539 1.200241 1.318328 1.189122 0.95923 0.606797 0.625387 0.644453 0.619932

Year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Current Asset 1105 1937 1990 2870 2886 2988 2821 3434 3259 2737

Inventory 208 516 493 511 576 765 912 1257 1156 972

Current Liability 872 1387 1658 2177 2427 3115 4649 5491 5057 4415

Quick Ratio 1.02867 1.024513 0.902895 1.083601 0.951792 0.713644 0.410626 0.396467 0.415859 0.399773
 Liquidity Analysis

Year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cash 632 980 984 1776 1727 1565 1098 687 624 433

Current Asset 1105 1937 1990 2870 2886 2988 2821 3434 3259 2737

Cash Ratio 0.571946 0.505937 0.494472 0.618815 0.598406 0.523762 0.389224 0.200058 0.19147 0.158202
 Leverage Ratio Analysis
Year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Debt 1090 2284 2505 3453 3564 4407 5796 6553 5997 5532

Total Asset 3272 4806 5102 6239 6670 7858 9398 9834 8400 7341

Debt to Total Asset Ratio 0.33313 0.475239 0.490984 0.553454 0.534333 0.56083 0.616727 0.666362 0.713929 0.753576
 Leverage Ratio Analysis
Year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Debt 1090 2284 2505 3453 3564 4407 5796 6553 5997 5532

Shareholders Equity 1864 2025 2062 2057 2208 2325 2308 2023 1542 1267

Total Debt to Equity Ratio 0.584764 1.127901 1.21484 1.678658 1.61413 1.895484 2.511265 3.239249 3.889105 4.366219
 Profitability Analysis
Year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Income 91 97 85 72 130 197 147 -209 -474 -300
Total Asset 3272 4806 5102 6239 6670 7858 9398 9834 8400 7341

Return on Asset (ROA) 0.027812 0.020183 0.01666 0.01154 0.01949 0.02507 0.015642 -0.02125 -0.05643 -0.04087

Year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Income 91 97 85 72 130 197 147 -209 -474 -300
Shareholders Equity 1864 2025 2062 2057 2208 2325 2308 2023 1542 1267

Return on Equity (ROE) 0.04882 0.047901 0.041222 0.035002 0.058877 0.084731 0.063692 -0.10331 -0.30739 -0.23678
 Profitability Analysis
Operating Margin

Year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
EBIT 178 204 242 228 357 466 436 85 -195 34
Net Sales 2033 2531 3105 4321 4438 5459 6510 7205 6015 5575
Operating Margin 0.087555 0.080601 0.077939 0.052766 0.080442 0.085364 0.066974 0.011797 -0.03242 0.006099

Gross Margin
Year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Sales 2033 2531 3105 4321 4438 5459 6510 7205 6015 5575
COGS 1504 1858 2282 3232 3311 4012 4830 5497 4601 4259
Gross Margin 0.260207 0.265903 0.265056 0.252025 0.253943 0.265067 0.258065 0.237058 0.235079 0.236054
 Company Structure Policy
Lemons Principle: Information
asymmetry leads buyers to discount
stock prices.

• Paramount's Capital Funding Challenge (2010)

• Shareholder Perception
• Financial Distress and Default Risk
Equity Financing Decision
• Management Signaling
 Z-score for Paramount Equipment, Inc.
Particulars 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sales 2033 2531 3105 4321 4438 5459 6510 7205 6015 5575
EBIT 178 204 242 348 357 466 436 (95) (65) 74
Total Asset 3272 4806 5102 6239 6670 7858 9398 9834 8400 7341
Net Working Capital 233 550 332 693 459 -127 -1828 -2057 -1798 -1678
Market Value of Equity 2,200 2,733 3,200 3,744 4,429 6,306 6,165 1,808 1,143 542
Book Value of Debt 546 1462 1470 2174 2174 2517 2498 2723 2113 2096
73 78 78 78 80 80 79 79 20 0
Cash Dividend
Accumulated Retained Earnings 18 19 7 (6) 50 117 68 (288) (494) (300)
Z-Score 3.311592 1.931186 2.151242 1.978422 2.157423 2.395074 2.1033 0.867562 0.624836 0.598362

• Altman Z-Score = 1.2(working capital / total assets) + 1.4(retained earnings / total assets) + 3.3(earnings before interest and tax /
total assets) + 0.6(market value of equity / book value of debt) + 1.0 (sales / total assets)
 Z-score for Paramount Equipment, Inc.

• if Z-score<2.675, a 95% chance of becoming bankrupt within 1 year

• For bankruptcy if Z<=1.81 and nonbankruptcy if Z>=2.99.
 Base Case Valuation Particulars

EBIT
2010 2011 2012
1033.093
2013 2014 2015 2016 2017 2018 2019 2020

using FCFF
997.438 01 1053.411 1983.187 2064.499 2135.206 2620.311 2803.074 2998.243 3206.653
Depreciation & Amortization
233.968 198.8728 178.9855 164.667 154.787 157.882 162.619 170.7498 179.2873 188.2517
-
Change in WC 30.61281 6.589548
385 75 -6.61591 -54.7996 -56.608 -58.476 -120.81 -128.785 -137.285 -146.346
• WACC 27% Capex (Net of Sale of PPE)
-835.6 -501.36 -284.104 -204.55 -141.14 44.2248 67.6639 116.1563 121.9642 128.0624

FCFF
• Terminal Growth Rate2% 1687.29 1378.33 1154.42 1713.09 1694.46 1560.02 1918.97 2005.38 2143.47 2290.86

Terminal value 9346.707

284
• Value Per Share 12.36 PV of terminal value
890.744987

PV of FCFF 1333.825 861.3368 570.2867 668.9868 523.0925 380.7029 370.1978 305.8240 258.4055 218.3198
997 778 773 928 407 182 433 696 612 497

Enterprise value
5490.98
Add: Cash
433

Firm value
6381.72
Minus: Debt
2096
Minus: Distress cost
2165.63

Equity value
2553.10
Number of Shares
206.50

Value per share 12.36

 1469.9841 1256.6026 1621.6706
Evaluating Alternatives: Loan Rescheduling FCFF 1763.188973 43 4 75 1605.03 1467.97 2017.51 2106.64 2247.53 2397.82

Terminal value
Total Long Term Debt 1902 9648.04

PV of terminal
859.9033
7

PV of FCFF 1384.5221 608.41669 616.54796

1384.522162 62 1 14 479.168 344.131 371.384 304.508 255.103 213.711

Enterprise value 5483.88

Add: Cash 433

Firm value 6343.78

Minus: Debt
2096

Minus: Distress
cost
2097.15

Equity value
2583.63

Number of
Shares 207.00

Value per share 12.48

 Evaluating Alternatives: Government Grants
FCFF 2079.13718
6 1854.999549 1690.069907 2331.05 2314.58 2731.46 2825.21 2971.18 3127.02 3189.56

Terminal value 13098.8

PV of terminal value 1263.219650

1645.53793
PV of FCFF 9 1161.96572 837.8744168 914.643 718.781 535.241 531.335 434.96 362.036 301.563

Enterprise value 7443.94

Add: Cash 433

Firm value 8707.16

Minus: Debt 2096

Minus: Distress cost 2180.09

Equity value 4864.07

Number of Shares 272.00

Value per share 17.88

 1763.188 1469.984 1605.025
FCFF 97 143 1256.6 1621.67 334 1467.97 2017.51 2106.64 2247.53 2397.82

Evaluating Alternatives: New Security Issue Terminal

value 9847.83

PV of
10$ terminal
Share Price 913.955
value 647
200
New Share Issue 1390.136 913.7545 488.9609 264.565
PV of FCFF 09 774 615.848 626.609 55 352.588 382.053 314.527 222.537
New Equity 3467 Enterprise
value 5571.58

Debt pay Add: Cash 433

896
WACC Firm value 6485.53
26.84%
Minus: Debt 2096

Minus:
Distress cost 2140.31
Equity value
2682.22

Number of
Shares 407.00

Value per
share 6.59
 Evaluating Alternatives
Enterprise value WACC Share Price

Base case
5490.98 27% 12.36

Loan Rescheduling
5483.88 27.35% 12.48

Government Grants
7474.86 26.35% 17.88

New Share Issue

5433.41 12.34% 6.59

Among the three alternatives, Enterprise value government grants

is the highest, Wacc is also the lowest of govt grants and share
price of govt grant is the highest.