FIN 486 Week 5 An Integrated Financial Strategy Example

Lakeshore Packaging's Five-Year Financial Strategy: One Plan Linking the Georgia Plant, the Custom Line Sale, Financing, Payouts, Risk and the Measures the Board Will Watch

[Student Name]

University of Phoenix

FIN/486: Strategic Financial Management

Week 5 Assignment

[Instructor Name]

[Date]

Lakeshore Packaging and all projections are composites written for a model paper; frameworks and research findings come from the sources listed.

Over four weeks, Lakeshore Packaging diagnosed where it creates value, approved a plant in Georgia with an option to expand, chose how to finance it and manage fiber risk and decided to sell its custom packaging line with protections for workers and customers. Its board asked for a single plan that showed how the pieces fit and how it would know whether the plan was working. A strategy is not a list of good decisions; it is a set of decisions that make one another possible. This paper presents that plan.

The Objective

Lakeshore will maximize long-run value per share by deploying capital where it earns more than its cost, while keeping the trust of customers, employees and communities that its long-run value depends on (Jensen, 2001). In practice, that means growing food service and grocery, exiting custom packaging responsibly, staying investment grade and returning cash the business cannot use well.

How the Decisions Fit Together

The sale of the custom line removes about $190 million of capital earning 4.5 percent and brings $150 million of cash. The Georgia plant adds about $205 million of capital, including working capital, expected to earn about 13 percent over its life. Funding the plant through new notes plus retained cash keeps net debt near 2.2 times EBITDA at its peak, while the sale proceeds bring it back toward the middle of the target range. The payout plan returns part of the proceeds without starving phase two. Each decision relies on the others: the sale makes the payout possible, the financing policy preserves room for phase two and the fiber program protects the internal cash the financing plan assumes.

The Five-Year Projection

After the sale, the remaining business has about $935 million of revenue, $630 million of invested capital and about $83 million of operating profit after tax, a return of about 13.2 percent. Assuming 6 percent annual growth in food service and grocery with capital growing in proportion, and the Georgia plant reaching full output, revenue reaches about $1.47 billion in year five, invested capital about $1.05 billion and operating profit after tax about $128 million. Return on invested capital settles near 12.2 percent, slightly lower than right after the sale because the new plant is still maturing, but well above the 8.5 percent cost of capital.

Economic Profit

Economic profit rises from about $21 million before the strategy to about $39 million in year five, as capital shifts from a line earning below its cost to plants earning well above it. That growth in economic profit, not earnings per share, is the best summary of whether the strategy works (Koller et al., 2020).

The Rule for Phase Two

In year four, the board will approve phase two of the Georgia plant only if the first phase runs above 85 percent of capacity for four consecutive quarters, at least three customers have signed supply agreements covering half of the new capacity and net debt would stay below 2.5 times after the investment. Setting the rule now protects the option's value, since the option is worth having only if it is exercised when, and only when, demand proves strong.

Financing and Payout Policy

Net debt will stay between 1.5 and 2.5 times EBITDA, with investment grade as a firm commitment. The regular dividend will grow with sustainable earnings, and repurchases will absorb excess cash, pausing whenever net debt nears the top of the range.

Measures for the Board

The balanced scorecard of Kaplan and Norton (1992) widens a board's view beyond financial results. Lakeshore's board will track four groups of measures. Financial: return on invested capital by line, economic profit and net debt ratio. Customer: share of supply under multiyear contracts and on-time delivery. Process: plant utilization, fiber cost per ton and safety incidents. People and learning: employee turnover and training hours in the new plant. Executive bonuses will weight economic profit and return on capital more than earnings per share.

Guarding Against Short-Term Pressure

Graham et al. (2005) surveyed financial executives and found that a large majority would give up economic value, for example by delaying a positive investment, to meet a quarterly earnings target. The Georgia plant will reduce earnings per share in its first year because of startup costs. The board will tell investors in advance to expect that dip, and the compensation committee will exclude startup losses from bonus measures for that year so managers are not tempted to slow the ramp.

Risks and Responses

A recession could cut restaurant volumes; the response is to delay phase two and protect the dividend before repurchases. A fiber price spike could squeeze margins; supply contracts and price clauses limit the effect. A larger paper company could enter the Southeast; long-term customer contracts and the regional plant's cost advantage are the defense. Execution problems at the plant could delay the ramp; customer commitments and a staged startup reduce that risk.

What Would Change the Plan

Some developments would justify revisiting the strategy itself rather than adjusting it. A federal or broad state rollback of plastic restrictions could slow demand for molded fiber. A breakthrough in recyclable plastic could change customers' preferences. A sharp, lasting rise in fiber costs that customers refused to absorb could lower returns in every line. The board will ask management each year whether any of these has occurred and what it would mean for the plan, so that the strategy is tested against the world as well as against its own targets.

Review Calendar

The board will review the scorecard quarterly, the plant's ramp monthly in its first year, the capital structure and payout annually and the phase two rule in year four.

Conclusion

Lakeshore's strategy moves capital from a business that destroys value to one that creates it, finances that move without risking its rating, returns surplus cash and protects the cash flow on which everything depends. Projected economic profit nearly doubles in five years. A decision rule for phase two, balanced measures and incentives tied to economic profit give the board early warning when the plan drifts and a basis for changing course.

References

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21. https://doi.org/10.1111/j.1745-6622.2001.tb00434.x

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: Measures that drive performance. Harvard Business Review, 70(1), 71-79.

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). John Wiley & Sons.