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Case 40: Progressive Office Outfitters

Group Assignment Question Analysis

Financial Management II – MAN2102 – Tandelilin Eduardus, Prof., Dr., M.B.A

          

 Anandha Meigatari Gandhi 13/344187/EK/19270

 Gita Intan Carissa 13/342862/EK/19225

 Grace Manuella P 12/327023/EK/18739
1. Discuss the meaning of Francis’ view of the bankruptcy as a “strategic” measure.
The firm had been solvent and operating efficiently for quite some time. If sufficient time
could be obtained so that the firm’s sales and profit could regain their previous level in
keeping with the company’s approximate 10 percent compound growth sales, long term
viability was reasonably certain. In essence, the reorganization was in the hand of company
management and the creditors. The future of the company was much brighter.

2. Of what likely relevance to Progressive during the bankruptcy negotiations is the
following: the news received by Francis concerning the financial situation faced
by the competitor; the strong loyalty of Progressive’s custoemrs. Do these things
matter once a firm has declared bankruptcy? 
Since Progressive company declared that they experienced bankruptcy by the news that
received by Francis concerning the financial situations faced by the competition, this things
will matter. Companies have started to be abandoned by customers because of poor service
quality. , If the customers have no longer trust in the company because of poor performance
(quality of service and poor product), then the company will lose the trust of customers
because of the bad image is formed. Loss of customer confidence can lead to the flight of
customers to a competitor. The company left by the customer will lose a life. Even
Progressive already have the loyal consumer yet if the service is poor caused by the financial
situations, the consumers will move to the competitor.

3. What is the difference between a Chapter 11 filing versus a Chapter 7 filing?
Chapter 7 bankruptcy is sometimes also called liquidation bankruptcy. Firms experiencing
this form of bankruptcy are past the stage of reorganization and must sell off any un-exempt
assets to pay creditors. In chapter 7, the creditors collect their debts according to how they
loaned out the money to the firm (also referred to as the "absolute priority"). A trustee is
appointed, who ensures that any assets that are secured are sold and that the proceeds are paid
to the specific creditors.
Chapter 11 bankruptcies can also be called rehabilitation bankruptcy. It's much more involved
than chapter 7 as it allows the firm the opportunity to reorganize its debt and to try to re-
emerge as a healthy organization. What this means is that the firm will contact its creditors in
an attempt to change the terms on loans such as the interest rate and dollar value of payments.
Like its cousin, chapter 11 requires that a trustee be appointed; however, rather than selling
off all assets to pay back creditors, the trustee supervises the assets of the debtor and allows
business to continue. It's important to note that debt is not absolved in chapter 11: the
restructuring only changes the terms of the debt, and the firm must continue to pay it back
through future earnings.

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4. Discuss Progressive’s debt level in view of an uninterrupted compound increase
insales and earnings 10%. As a creditor of Progressive, would you be willing to
give the time to regain profitability? Why or why not?
When the company can increase your sales then the sales margin is always there, more
turnovers then the company can gain more margins. More sales means more working capital
will be needed to generate the sales margin. And more working capital then the company
have to borrow money to fund the operational in total, that means more investment will be
needed. So, it can be imagined: uninterrupted compound in sales – will generate more margin
but the company have to put more investment to the operational, means more money/fund
required, the company have to inject. If the working capital getting bigger and bigger, and the
company should use the short terms investment and cash to fund the long terms investment
such buying store, stock building and so on, then the company will have problem in shorten
the cash. The growth of the assets too fast and will affect the injection fund bigger and bigger
without any target. Then if the company set the earning margin 10% then the operational
running like the snow ball with limited growth of 10% margin, then the company hold it and
used it to fund the assets growth. As creditor, you have to give them a certain time to regain
the profit, so they can pay the installment or the debt properly. If you did not give them time
so all the operational will be stuck and no movement. No movement in operational means no
earning for the company and then they can not pay the debt.

5. Progressive is referred to as being “insolvent”. How does insolvency differ from
bankruptcy?
Progressive is referred to as being “insolvent”. Many people believe that the term of
insolvency and bankruptcy have the same meaning. However, insolvency differ from
bankcruptcy. Accroding to wikipedia, Bankruptcy means a legal status of a person or other
entity that cannot repay the debts it owes to creditors. While, insolvency is when a person or
company is unable to pay the money it owes on time. Unlike bankruptcy, insolvency is not a
legal process and only describes the debt and financial problems that have occured. There are
two types of insolvency:
 Cash Flow Insolvency – when a person or company has enough assets to pay what is
owed, but does not have the appropriate form of payment
 Balance Sheet Insolvency – when a person or company does not have enough assets
to pay all of their debts.

Being “insolvent” means all the cash flow is stuck – no more cash liquid to pay. All of the
working capital became assets i.e. factory, materials, store, office equipment and stocks. They
cannot pay the salary and also the Account Payable and short terms debts. Insolvency is just
the beginning of bankruptcy. And bankruptcy is the final status of court statement means a
legal status of a person or other entity that cannot repay the debts it owes to creditors

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6. What will Progressive’s income statement look like in one year? (assume sales
and related items return to a level closer to what Francis believes is a normal
level.) Use the following outline to calculate free cash flow.
A. Operating Cash Flow = EBIT + depreciation – current taxes ± changes of net working capital
B. Free Cash Flow = Operating cash flow – capital spending ± changes in cash flow from financing
(Assume additions to net working capital is $50,000 and depreciation is $150,000, current tax rate is 30% and
there is no capital spending and no flows from financing)

Progressive Office Outfitters


Income Statement
31 December, 1995
Normal value
Sales $27,000,000 $35,100,000
Cost of Goods Sold ($22,140,000) -82% ($27,378,000) -78%
Gross Profit $4,860,000 $7,722,000
Selling and General Admin. Expenses ($4,210,000) -16% ($4,914,000) -14%
EBIT $650,000 $2,808,000
Interest ($680,000) ($680,000)
EBT ($30,000) 0% $2,128,000 6%
Tax ($638,000)
Net Income $1,490,000 4%

Operating Cash Flow


EBIT $2,808,000
Depreciation $150,000
Tax ($638,000)
Changes to net working capital $50,000
Operating cash flow $2,370,000
Free cash flow
Operating cash flow $2,370,000
Capital spending -
Change in cash flow from financing -
$2,370,000

7. What is the likely purpose of the “automatic stay” provision in the Chapter 11
bankruptcy code?
Based on table 2 – Progressive Office Outfitters “Bankruptcy Memorandum”, there is an
“automatic stay” provision in Chapter 11 which means that the creditors are not allowed to
foreclose on the firm to collect their individual claims. Based on wikipedia, Chapter 11 is a
chapter of Title 11 of the United States Bankruptcy Code that allows reorganization under the

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bankruptcy laws of the United States. Chapter 11 retains many of the features present in all,
or most of, the process of bankruptcy in the United States. It also afford the debtor in
possession a number of mechanisms to restructure its business. One of the mechanisms is
“debtors are protected from other litigation against the business through the imposition of an
automatic stay”. Therefore, automatic stay requires all creditors to stop collection attempts,
and makes many post – petition debt collection efforts void or voidable. In conclusion,
debtors are asking to restructure the organization, which means the debtors need to issue
stock or sale their stock, so, other investors can inject fund to the company, so, the company
can operate again and pay the debt.

8. In your opinion has Progressive’s management acted ethically in its present
situation? Why or why not? Consider your answer to question 1)
Progressive’s management has acted ethically in its present situation by filling a chapter 11,
as they are having difficulty in paying their long term debt, interest and other liabilites.
Moreover, under Chapter 11, a trustee will be appointed to take over the company if th court
deems current management incompetent or if fraud is suspected. In Progressive’s case, Ted
Francis had arranged a meeting between related parties, in which there are bankruptcy court,
management, and responsible parties: insurance company, BOD, attorney. Even no trustee
was placed in charge of the reorganization; the judge decided that the company management
was deemed competent. The reorganization was in the hands of company management and
creditors. At the same time, they are also experiencing decrease in their profitability, which
adds up to their difficulties. However, Progressive’s management should consider other
options of recovery before filing the chapter 11, such as Informal Reorganization,
Restructuring/extension and composition. Chapter 11 will be the last option to take should
those other options fail, considering how costly it is.
9. Is it reasonable that the laws governing bankruptcy are flexible? Why or why
not?
The Governing Bankruptcy flexibility is very reasonable because it provides scope for
negotiations between a company, its creditors, its labor force and its stockholders. Chances to
workd out Progressive problem of insolvency, and protect it from the ability of creditors
forecolse to collect their individual claims.
10. What might Progressive do in order to lessen the effect of commercial office
construction on its sales level?
In order to lessen the effect of commercial office construction on its sales level, there are
several things that Progressive might do:
1. Applying for DIP (Debtor in Possesion) to the creditor. DIP will acts to control the
property that a crediton las a lien against or retain the power to opeate a business. The
benefits of using a DIP is that it can decrease the risk of delinquen debt, provides a
platform for growth, provides substantial flexibility and restore supplier & customer
confidence.

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2. Replace all the inventory that has already became obsolete, in order to keep up date with
the newest kind of furniture and fulfill customers need.
3. Marketing, promoting, advertising to boost up the sales, since the competitor of the
company seemed to be having some problems. This will tighten up more the competition.