Name Dipti Bharti Roll No.

: P22085 Section: B

1. During 2001-06, the global market was developing quickly, and Paramount’s main focus
was to leverage this development. Its international sales rose from 14% in 1996 to nearly
70% by 2006.
In the 2000s, Paramount’s expansion was the result of aggressive acquisitions of assets and
financing the operations primarily through short-term debt. As given in Exhibit 1, in 2006,
the total short-term borrowings were $1890 million, as compared to $544 million in 2001.
According to Exhibit 5, the DoA Ratio of T-Rex (a major competitor of Paramount), also
increased during the same period due to expansion. Its DoA ratio increased from 30% in
1999 to 33% in 2006. But for Paramount, the DoA Ratio was 33% in 2001 and grew to
56% in 2006.
The main problem with their financial policy was that their expansion was mainly done
through short-term debt in the form of bank borrowings, as they felt it was cheaper to
negotiate separately. The D/E Ratio of the company in 2006 was 1.89 compared to the
industry average of 1.08. And the problem with debt is that it is always risky as the
company will have to pay the interest, which is fixed, burden and as the portion of debt
increases. The Coverage Ratio of the company during 206 changed from 4.68 in 2001 to
1.93 in 2004 to 2.86 in 2006. It improved in the last two years, but compared to the
industry average in 2006; it was 8.24. So, the company should have fully considered the
decrease in Interest Coverage Ratio.
But even after all this, the debt was within manageable limits as the Average Collection
Period reduced from 46 days in 2002 to 36 days in 2010. The cash Conversion period
reduced from 51 days in 2002 to 14 days in 2006, along with a cash balance of $632
million in 2001 to $1565 million in 2006, but it has started to increase in the last two years
significantly.
Paramount has paid the same dividend per share over the past six years, and it is on another
side financing all the new projects through debt which is like paying dividends by taking a
loan from a bank. Either it could have reduced the premium, or it could have financed all
the new projects through equity dilution, via Right issue, Private Placement, or Preferential
 Allotment, which has low issue expenses and equity also acts as a shock absorber in the
company as the company need not pay the dividend in hard times.

2. Usually, the maximum acceptable D/E ratio is 2:1, but it can vary as per the nature of the
business. Here, as Paramount is operating in the manufacturing of food-related equipment,
we will calculate the industry average to compare and then make the decision.
Suppose we calculate the D/E Ratio of Paramount for the last five years, i.e., from 2006-2010.
In that case, it comes out to be 3.18, as compared to the industry average of 1.20, which
shows that Paramount is highly dependent on debt, and it is financing most of its projects as
well as expansion through debt.
So, the D/V Ratio of the company should be near the industry average so that, if there are any
sudden market fluctuations, the company can manage its funds well.