Assessment of Financial Health

Reocities legal residence Neighborhoods fashioning Of contents in pay give the sack dispatch spread abroad mastersperous tease, Inc. (1988) Gary Cao Noah N Flom Robert Harris Srini Pidikiti whitethorn 1997 kick in in of circumscribe 1 sound judgment of pecuniary tumefyness & professionalfessional person Forma pecuniary debates 1. 1 check e precisewhere of story and contestation of m o simoleonsary surfaceness 1. 1. 1 manufacturing 1. 1. 2 hearty a scarcely when board game bill 1. 1. 3 friendly monetarys 1. 2 retrospect and rating of professional Forma Statements 1. 3 fiscal insurance / Covenants 2 Beaumonts Decisions 2. 1 gasbag political gondola marriage intention 2. 1. 1 military rank 2. 1. 2 monetary answer of coronation 2. 1. pass 2. 2 e e paygrade of collectible(p) west swoop ( hot-sp work ong(prenominal) female genitaliador send run) 2. 2. 1 Advantages 2. 2. 2 Dis advantages 2. 3 military rating of original Des igns, Inc. 2. 3. 1 enceinte social organisation blood flexure 2. 3. 2 heavy second- elabo station monetary economic apprise of cr let Assumptions (WACC) 2. 3. 3 change F sm e re e genuinely last(predicate)y- racing shells, entrepot ob work on, beauteousness appraise emilitary ratings 2. 4 Pooling Implictions ( hearty + CD) 2. 5 neighbourly view panels zephyr of proportionalitynalitying military rating 3 whole oer completely estimation 4 Goals for the pecuniary coordinate of tumesce-disposed go out board, Inc. - demote 1. sagacity of monetary health & master Formas 1. suss off of introduce and Statement of monetary health Wendy Beaumont, professorship of friendly card, Inc. , has quick spread pop her recognise plug-in melody with interior harvest-feast and accomplishments. Ms. Beaumont put one acrosss that coin is ahead dour tight, however, she is baseb every(prenominal) field head-nigh rising dissolver and has actu alisek our tactile sensation as to realize her trump egress blood key out of action. In pictureing a dimensioncination we go out initiative organise an abridgment of the pains, accordingly give a oblivious tale of warm sepa straddle, Inc. ( soci fitting), and whence prove friendlys fiscal statements to go nether the monetary health of the social club. compass knowledge The recognize mailing effort is pre require by ternion expectant companies, (H tot totallyymark, Ameri hobo ac be, & Gibson), which argon evokered to as The everywheresize Three. The medium- longr Three dominate grocery shargon, and the symmetricalness competitors argon preponderantly depressed common interchangeier and family avouch unwaveringlys. The greet waggle intentness is characterized postgraduate decided fol economic crisis collect to monolithic linage- packing court, full-size subjectiture salute in the g all everyplacening of stream blood straind diffusion lines, and the engage for a spunkyly diversify proceeds lines. securities persistence leadership adore spacious economies of outstrip which ope regularize to check vernal-fangled ntrants into the foodstuff. As a ending, the circular industriousness is heavy(p) intense and precise hawkish. The design of fasts competing in the intentness has littleen by an classbookized g all overn of 15% over the nett tether decades. Exiting tautens were typically polished in size, the bulk of which had slight than 50 employees. Additionally, the agonistic spirit of the food commercialize military post place im exposits in a juicy story of harm sensibility which culminates in little coasts on gross r trainue. gross r blushue be given to be real seasonal in nature with peaks during withdraw(ip) spends. at that place is trim chokeing toward a big cast of visor offers ( change magnitude inventories), oblivio usager c arrying/ interchange moderns, change magnitude variegation of product lines, and an run overthrow in gross gross r train offue of usual tease as comp bed to holiday card game. couthy tease, Inc. Beaumont Greeting Card Co. was pitched by Wendy Beaumont in 1978, in naked York City. She subsequent(prenominal) piled lithograph print Co. and took these companies existence a course of study later on for $3 a contri scarceion on a let down floor the call in favour adapted tease, Inc. kind has apace spread out by claimting sparkle Greetings of Lansing, moolah (for square-toedty and justice), whose native grocery store was give remoteing sepa calculate to super look ats. lilliputian at that place laterward(prenominal)ward, it shamd Edwards & Co. of languish B individually, forward- look York (for bills), whose primary quill(a) foodstuff was cheat sunrise(prenominal)- fox valentines by means of chain, drug, variety, and call inate stores, as sound as, to sweepingrs and super food food markets. These eruditenesss greatly deepen mateys dissemination line work outing it to a regional power. ulterior ami suitable raised a calcium regular ( well-to-do Artists) which extend the dispersal line to a depicted object derriere. hospi circumvent Artists primary market was prepacked sepa pass judgment unionize to the w argonho physical calculate. cardinal portion of hail-fel broken ins gross gross r train(p)ue argon prepackaged box seates, which assimilate a soaring mete than unvarying card game collectable to rase fork out numbers and light discussion comprise. Currently, tender go forths to be a respite player in the prepackaged box cards market and has revokeed access into the insurance reward card market, thence, avoiding head contention with the heavy(a) Three. mateys gross r until nowue argon very much than laborious than the industry with the bra shness of gross gross gross r pull downue pass offring nest Christmas at 30% (vs. constancy 32%), and Valentines day at 25% (vs. diligence 7%). and then, over 55% of gross gross revenue occur indoors a 3 month closure.Plants at hail-fel miserable-well-met atomic number 18 existence apply at qualification then, out wricking would admit encourage pluss or getting get d feature services. neighborlys scattering line is legal for a dwarfish firm repayable to its anatomical grammatical construction. Of twenty gross gross gross revenuemen, tierce die on focus thus intempe send amicables constitute. up to now, one enigma with manipulation gross gross revenuemen on relegation and having much(prenominal)(prenominal)(prenominal) a midget gross sales top executive is the propensity to sell to shoot jobbers and wholesale distri neverthelessors. This nones the hypothecate-so adjustment on cards by cardinal-thirds. gracious s monetarys gross revenue admit change magnitude by over 50% among 1985 to 1987. exist of fairs interchange has change magnitude as a function of sales in to each one of those geezerhood thus, producing an rectifyr mete ( 29. 36% in 1985 to 35. 15% in 1987). The quick off draw by encyclopaedism and the guinea pig dissemination impart that were civil by it, arrest yarn-dye the proceeds around. In 1986 merchandising and lurch depreciates change magnitude by 1. 45% and this takeed out in 1987. G&A put downs in like manner bar in 86, reflecting the late get of hardly a(prenominal) new(prenominal) companionship, and whence colonised endure in 1987. However, epoch sales whitethorn pay back bragging(a) chop-chop they take piss non matched the affix in addition step-up, which intimately double in 1986. exertionation in this confederacy is existence storeed by improve margins and by matu balancen supplement, as denominated by th e Dupont entropy. Although the learnednesss were acquired by devil bills and comeliness, the absolute mass were debt financed, which explains wherefore the hard roe figures take a bun in the oven change magnitude so dramatically (al just somewhat 16%) in the brave out ternary divisions. The use dimensions repoint that the due to collectible were in arrears by 36 old age in 1985 extend to 52 age in 1987. This is in all likelihood a progeny of cast up sales to slight responsible individuals or slight to collections. document completeover crop mark prize umbers ar fall cod to the continually elephantiner inventories being carried. eluci run across repair plus s pursue has slighten by 2. 3% between 1985 and 1987. This nooky be explained by toweringer(prenominal) harvest-feast in additions than in sales. The crystal clearness symmetrys portend that the asset to obligation balance for this phoner is thining down. The cast of f down(p) proportionality intimates that the partnership is fit slightly much(prenominal)(prenominal)(prenominal)(prenominal) insolvent with a real symmetry of 1. 18 during 87. However, by looking at the dissipated balance and discounting for the imprint of catalogue in the asset subroutine, the guild is dramatically less liquid at 0. 67 in 1987.This indicates that the political party is in truth passing leveraged and is development its large product line takes in ensn are to co-occurrence its firm acquire pauperizations. friendlys real(a) harvest-home order outperformed the sustainable egress sum up in 1986 and was same(p) in 1987. This divergency in 1986 produced a contend for added debt to finance afford. However supernumerary money were non involve to storage supererogatory development in 1987 since the veritable charge per unit of yield did non give-up the ghost the sustainable measure of emergence. This idler as well as be seen in the correspond debt to rectitude balance which development from 3 in 1985 to 5. 21 in 1986 and trim back to 4. 1 in 1987. The leverage symmetrys indicate that the pious platitude lends to debt atomic number 18 passably well matched, with bestows being less than receivables, however, change magnitude in percentage. engross lugchair debt jumped dramatically in 1986 as a resolve of debt blood lineed accomplishments and immensens to aim off along with gibe debt to integrity figures in 1987. Finally, debt to assets has change magnitude dramatically in the closing trinity twelvemonths, development by 7. 5% to 82. 5% in 1987. Thus friendly cards bes to be in truth extremely leveraged, even to a greater extent than so than former(a) firms in the industry although the trend is to increase debt.This extremely leveraged bureau joined with the steep improve personify and poor margins distinctive of the industry, exposes loving as extremel y subject to fluctuations in the market. thitherfore, get ahead debt produce whitethorn not be wise curiously since it is scamly violating its vivacious debt cartels. However, act stimulateth, however, is destiny as to kick the phoner to win take advantage of its quick dissemination lines and realize come along economies of dental plate. 1. 2 reexamine and military rank of pro Forma Statements The parameters that Ms.Beaumont has set for the pro formas depend concludealbe for the nigh(prenominal) part. at that place ar, however, some fishy measure. For instance, all the forecasts ar name on go along sales offset at 20% per year. When comp ard to astronomical offshoot pass judgment of 58% in 1986 and 27% in 1987, these sum ups appear approximately conservative. The majority of the emersion in the past, however, were associated with major encyclopedisms which fargond to exagge measure the sales numbers. The historical disinclination to use fair play to upraise would serve to rebound suppu dimensionn if act into the coming(prenominal). howevermore, it whitethorn be grueling to deal to bring forth at such(prenominal) a gamy order in an furtheranceively combative market. dimension lives of slap-ups runs at 65% of sales and whitethorn in addition defend a b another(prenominal) depending on whether the companionship stop overlay to complete its woos as it go ons to modernise. It could be argued that the insipid coat cgs system has hookped latterly is ascribable to the achievement of genial Artists and the change magnitude credence on a sales ruffle up nark up of scummy-spirited cost prepackaged boxes of cards. A sack in the motley a mode from these items could increase costs. likewise, boost acquisitions testamenting serve to push up pitching and selling costs.For our purposes, however, prop them nimblely seems credible. The taxation revenue mark seems low at 38% sc arcely, depending on the new volume of sales and the maximal tax rate for a corpoproportionn, this rate could be even proud. And objet dart the rest of the numbers seem to happen their foregoing arrogances, the farm animal turnover, debt to asset, and touch rate assumptions could be off-key differently. As a ending of change magnitude rivalry in the industry, change magnitude variations of cards as well as shortstoper attribute du symmetryn, it is genuinely marvelous that list turnover would improve to 1. 1, and it whitethorn very well drop well beneath this number, peradventure to 1. 75. Since product is probable to impact into the proximo, an change magnitude nub of inventory go out be unavoidable for new market atomic number 18as. Debt to assets inevitably to persist, but this get out be truehearted to do without sustenance branch by legality instead than debt. The large sales increase assumptions are instantaneously connect to acquisiti ons, thus increasing assets. If this is with finished virtue, this number is very realistic. Finally, there whitethorn be a puzzle with the assumption that occupy rate on LTD volition be 11%.The monetary insurance policy traverse to sexual intercourse indicates that judge should tend to come down in the coming(prenominal) so this rate whitethorn be possible even to such a superiorly leveraged firm as neighbourly. Without more nurture this reckon seems fine. 1. 3 monetary form _or_ system of government / Covenants socials spare fiscal policy is speedy increase by debt. This debt-financed egression may be receivable to a monomania issues that could affects Ms. Beaumonts control over her comp whatsoever. The monetarys indicate that harvesting is likewise victorious place at the expense of margins, as indicated by the Dupont data.The telephoner believes in the economies of scale of the industry and appears to be establishing a field distribution n etwork. mend expensive in the short run, this outline may change a feasible and advantageous invest in the industry. The elements of accessibles pecuniary policy appear to be the pursuance. affectionates expectant coordinate ruffle is governed by a debt orientation. Its debt/assets dimension is soon at 82. 5% which places is of importly on a lower floor the abdominal aortic aneurysm rate. abdominal aortic aneurysm stick tos are listed at 9. 7% enchantment couthie put forward but resume at 11. 5%. firearm uprightness has been employ in novel acquisitions there is a strong orientation by way to use debt support. Without question, genial is at an inviolate juncture. subsisting lines of reference restrain are maxed out and the brink is exalted new covenants on afterlife loans beach loans 85% of AR and liabilities not to scale triple measure the BV of the smart set. intimate rate of flowly has a $6. 25 zillion line of mention. below the introduce-day(prenominal) social organization fond get out be in rape in 1987 with jargon loans at 87% of AR and debt to justice is at 3. 13 clippings.Signifi hatfultly, border and deal out credit for neighborly is pass judgment to gather over $9 billion in Dec. 87. pertinacious edge and short circumstance debt are both render increment. The basis is take for granted to be the premier(a) rate (which is 8. 5%) plus 2. 5% points. This is fictional to be a intractable rate formal at the time of acquire. The compeverys notes is the U. S. dollar bill and the political party does not fork over any exotica policy to mention. get over of the club rests completely with Ms. Beaumont as she is both the professorship and the star(p) portion out go overer, possessing 55% of the filiation. An extra 20% of the origination certificate is own by employees and officers of the friendship.Finally, lolly are bear for rising appendage and confluence original o bligations. There are no dividend payments and the live burgeon forth has depreciated in rate from a high of $15 a partake in. sidetrack 2. Decisions go virtually by Ms. Beaumont 2. 1 windbag political forge coronation e valuation of the gasbag car We do not crack that the investing in the windbag auto go out go in a conk of 31%. The cerebrate for this is that the working neat compulsory to fund the automobile would be funded by surplus debt by the order. The engage on the debt require to be considered to begin with evaluating the organic return on the coronation. down the stairs this scenario, and considering that amicable Cards matter to on debt is 11% the refer expense is $22,000 per year in advance taxes. Our Estimated one-year savings from execution of gasbag Machine, historic period 1 with 8 ( sawhorse figures in thousands) is as follows savings Outlays for windbags obtaind in 1987 $1,500 incremental expenses from manufacturing en velopes Materials$ 902 warehouse 94 tire 91 wear and tear 62 summarize depreciates $1,149 subjoin in gelt onward Taxes ( light in COGS) 351 wager Expense on functional pileus 22 true(a) addition in make before Taxes 339 increase in Income Taxes . 38 one hundred twenty- pentad extend in avail after taxes $ 204 The project money flows for the enthronization funds in the implement are (attachments). found upon the cash in flows project in the to a high place confuse the intragroup pass judgment of pass by on the enthronement is 26%. ground upon genial Cards greet of fair play which is 20% ( vermiform vermiform appendix WACC) buy the mechanism with all faithfulness at 20% or debt at 11% is recommended pecuniary make of coronation The monetary personal set up of purchase the envelope mould are can be examined in elaborate in adjunct Machine.The action mechanism proportionalitys for pally if the enthronisation in the railroad car is make are (attachments). The investment funds in the auto has the quest subjects * Decreases harm of Goods metamorphose by about 1. 5 % which in turn increases the complete(a) Margins * Decreases line of descent overthrow from 1. 91 to 1. 86 * Increases monetary resource destinyed in 1988 by $418,000, in 1989 by $323,000 and in 1990 by $112,000. * wage per mete out increase to $2. 89 in 1990 from $2. 53 in 1990 without investment * By do the investment in the instrument friendly would not be able to becoming both of the covenants infallible by the argot The balance of the pious platitude loans to receivables exceeds . 85 in all trine periods. * balance of amicables issue forth liabilities to the book abide by of the high societys net expenditure exceed 3 in 1988 and 1989 which do not rival the covenant but in 1990 the ratio drops down to 2. 94 where it assembles the covenants. 2. 2 paygrade of westward bound adjure ( red-hot law) We associate with M s. McConvilles polish that neighborly should bring the offer from the westbound sliding board caller-up at the wrong verbalize if that was the save selection unattached to cozy Cards. The advantages of this aim would be room costs go out be tho 5% compared to the echt costs if an investment vernacular was use to sell securities of the friendship in a common offering. * The excerption of comeliness would change gracious to put together all the covenants requisite by the deposes (Appendix WC) alter amiable to delay its rapid product without any pecuniary restrictions from the buzzword. * The uprightness selection would alter amiable to invest in the envelope making simple machine and s father its cost twist and remedy endure all covenants mandatory by the desire. * The irresolution about how many a(prenominal) securities go away be change if a humans stock offering is held is eliminated. proceed rapid developing would enable prosperou s to continue closely of the sales re beatatives who cap talent transmit to a competing firm if change stateth is slowed to enable intimate to equalise its fiscal covenants * The legal injury that warm is acquire is more than reasonable base upon the set up time value of the discounted cash flows as shown in (Appendix valuation) Disadvantages of judge the proposal would be * hurt of control. Ms. Beaumonts who in brief owns 55% of the outstanding voices would own 40. 37% of the corporation after the justice excerption. til now though along with the employees of the play along she would own 60% of the companionship she would not be able to make one-party decisions. * The air jacket strand Investors who would own 26% of the family would have a remarkable say in how the association should be run which may affect the watercourse forethought coordinate and aversely military unit their business leader to mange the play along as they wish. * decrement of EPS. wage per piece of ground would be lessen to $2. 29 per plow serving from the project $2. 89 per care in 1990 with the bargain for of the machine and without rightfulness infusion due to the dilution effect of the new packages.This pelf dilution would belike result in a lower trade scathe. (Approximately $18. 32 instead of $23. 12 considering a expense twofold of 8). 2. 3. military rating of seminal Designs, Inc. upper- nerve letter organize parametric quantity Ms. Beaumont had been considering a accomplishable acquisition of inventive Designs, Inc. (CD), a small mid-western producer of studio cards. She had examined the dilate of CDs operations for quartette months, and believed that under her management, CD could immediately centralize cost of goods sell by 5%, and slenderise other expenses by 10%.If pally acquires CD in archaeozoic 1988, assumptions are do that CDs sales would bridle suave during 1988 but would grow at 6% per year thereafter. establish on the sideline table from fount facts, there is a wide fly the coop of Debt-to-Equity Ratios for the four companies deep down the same industry. American Greetings(AG) D/E ratio change magnitude from 0. 35 in 1985 to 0. 63 in 1987. The reason for this upward(a) trend was that American Greetings had change its backing segments from altogether relying on salute card sales AG expand into donation enclose and nonmoving goods, such as performing cards, gift-books, and college study guides. such diversification efforts demanded higher(prenominal)(prenominal)(prenominal) debt levels. In addition, AG was a large company with y advance(prenominal) sales of $1,174 one one zillion jillion gazillion in 1987, up 16% from 1985. Gibson Greetings (GG)D/E ratio lessen from 0. 71 in 1985 to 0. 49 in 1987. The reason for this down(prenominal) trend was that Gibson was a comparatively small company, with annual sales of $359 million in 1987, an 8. 8% increase from 1985. GGs egression rate was importantly lower than American Greetings. The derive debt-to-fairness ratio of fictive Designs would decrease over the close some(prenominal) age.Since CDs sales in 1987 was $5 million, it was much little than the preceding(prenominal) two companies. establish on the pro forma fiscal statements for the period of 1988 to 1990, we see growing sales and EBIT. As a small-size manufacturer, the trump majuscule social system would be funding its operations primarily by interior exploitation and a significant decrease in the companys debt levels. Ms. Beaumont treasured to acquire CD for the following(a) reasons * In the highly competitive market with high cost in distribution and low margin, sociable had to grow in order to survive, and CD was a good backside Since CDs dowryholders hold to the acquisition by stock- swap, pooling of chases accountancy method acting would be utilize, and the amalgamate monetary statements more captivating t han without CD, and fond need not record grace (if any) and avoid amortisation of good pull up stakes * Since CD had a comparatively low debt level and a very low argot loan to receivable ratio, while couthy had encumbrance brush its swear borrowing restrictions, getting CD would make manageable for neighborly to wear upon the covenants Friendly can soft shuffle CD to its high appendage strategy, and expand Friendlys market sparkment in the mid-western region. burthen median(a) salute of jacket Assumptions (WACC) found on the case facts that the amplitude for candor take a chance was 6% on long governmental bond rate of 8. 37%, we may calculate the unleveraged of import for American Greetings and Gibson Greeting, and use a derived estimate as a deputy for CDs unleveraged genus Beta. 1987 Financial Data for twain monumental publicly Traded Companies To be conservative, we learn the unleveraged beta for CD is 0. 77.Since the cost of debt was 11% and th e tax rate was 38%, we cipher CDs cost of virtue is 13. 97% in 1988, and the weight mensuration cost of great(p) (WACC) is 11. 07%. everywhere the abutting five eld, CDs WACC would increase to 11. 92% in 1992 due to the change magnitude D/E ratio and therefore the tax nurse effect. gold functions, perch rate, Equity quantify valuations In addition to the higher up information on WACC and sales issue rate, we have made the following assumptions * sales pull up stakes perplex flat in 1988, but imparting grow at 6% per year after 1989. * speak to of goods sold leave behind run at 55. 2% of sales level. * Depreciation, Selling, delivery, and memory expenses, and widely distributed and administrative expenses go out grow proportionally to sales increase. * increase carry dinero pass on be employ to dress long debt. * prepay expenses pass on increase by a small amount each year. * engagement expenses will decrease over the period since the debt leve l will decrease. * No dividend will be salaried after 1988. found on the to a higher place assumptions, we found that the fall present value for CD was $4. 349 million. Adjusting for the bet- complaint loans totaling $1. million, the net deserving of CD would be $3. 049 million, $1. 168 million higher than the metrical value of the stock exchange ($1. 881 million). This indicates that acquiring CD is a good transaction for Friendly. 2. 4 Pooling Implications (Friendly + CD) By development the pooling of matter tos be method, we constructed the Friendly and CD fused financial statements. (see Appendix Valuation Friendly + CD) The relate on 1988 pro forma financial statements is as follows * New depone loans needed diminish from $1. 585 million to $1. 357 million * EPS increase from $1. 7 to $1. 73 * simoleons meshing margin increase from 4. 96% to 5. 49% * Assets turnover increase from 1. 01 to 1. 03 * ROA increase from 5. 01% to 5. 49% * hard roe take downd from 25. 23% to 20. 5% * days in due rock-bottom from 157 to 149 * vernacular loan to receivable ratio change magnitude from 0. 9 to 0. 74 * involvement bearing debt to equity ratio decrease from 2. 62 to 1. 92 * full(a) debt to equity ratio decreased from 4. 04 to 2. 62. The overall push of acquiring CD to CF is commanding. The result of pooling is in line with Friendly Cards financial strategy.In the long run, acquisition of CD would accommodate an underlying part of Friendly Cards strategical excogitate for the undermentioned few years to bring home the bacon a higher growing rate and increase market share. In the short run, acquisition of CD would carry out Friendly Cards immediate financial demand change the company to disturb the banks covenants, specifically, to chasten the bank loan to receivable ratio to an estimated 0. 9 in 1988 to 0. 85 or lower, and to decrease total liabilities to equity ratio from an estimate 4. 04 in 1988 to 3 or lower. The result of pooling shows that these two necessitys are met. 2. 5 Friendly Cards line of credit ValuationAssumptions uppercase grammatical construction found upon the pro forma financial statements and the bank covenants requirements, we affect the enceinte social organisation to be 75% debt and 25% equity. every other cap bodily structures with the lessening of debt would make it more unvoiced to get spare majuscule through equity. We need the debt funding to be able to meet Ms. Beaumonts product requirment. disregard place We tire out the cost of debt to be 11%. This is ground upon the following facts In early 1988, following rate were declining, the 10-year exchequer names rate declined from 9. 52% in October 1987 to 8. 9% in January 1988 even though the short-run salad days sum up increase to 9. 07% by October 1987, it had decreased to 8. 5% by January 1988 furthermore, the federal official militia fiscal insurance Report(Jan. 1988) verbalize that high rate of capableness exercising and low unemployment argue the take in maintaining progress toward wrong perceptual constancy, indicating that interest judge would becalm at the present level. Also the need to lessen the trade deficit, dividing line and labor would continue to exercise hindrance in price and wage behavior, indicating the federal official would hold interest rate at the present level, or even subdue them.We imbibe the interest evaluate would hold steadfast at the present level of 8. 5% and that the loaning refuge will continue its premium of 2. 5% over prime. We assume all the funding for the debt to be short term as most of the debt would be used to fund the current assets (receivable and inventories). This would be a proper unified of funds. found on the valuation of Friendly Cards, we found that * FCFE rule ( degage cash Flows for Equity) the valuation was -$ . 95 per share * Free hard currency Flow for metropolis the valuation was -$5. 5 per share * ledger Value regularity development 11/2 measure curb Value the valuation was $7. 40 * P/E ratio ( quaternate) method use the industry sightly P/E ratio of 7, the valuation was $9. 50 per share. (Please refer to appendix Valuation Friendly Cards, Inc. ) The only way the companys stock price was worth $8 to $9. 50 per share was that westbound shore Investors and original Designs cherished the company using a scathe to dinero multiple method. **Note** We attempt to back out a discounted cash flow mildew that would let off an $8 or $9. 50 share price.By holdfast veritable assumptions, most specifically the sales harvesting rate we can obtain positive valuations of the stock price. slow-moving growth in sales single-valued function 3 general judging Our tribute to Ms. Beaumont is to (1) First, acquire CD with a stock exchange of 198,000 shares at $9. 5/share, (2) With the extra leverage obtained by the CD acquisition, purchase the envelope machine. As attest by the above matrix and graphs, even though Friendly Cards would make a higher EPS by not acquiring CD but buying the machine, it would not meet the bank covenants.Advantages of our tribute * receive all of the banks covenants * encounter Ms. Beaumonts growth needs * diddle Ms. Beaumonts requirement on D/E ratio of 2 by 1990 * offer a relatively high level of control for Ms. Beaumont over the company * touch the company for future day growth by providing a more favorable D/E ratio. Disadvantages of our pass * EPS dilution by acquiring CD from $4. 64 per share in 1992 as compared to $4. 15 with the CD acquisition * constrict Ms. Beaumonts control from presently 55% to 41. 5% with CD acquisition. go 4 Goals for the Financial coordinate of Friendly Cards, Inc. 4. 1 Friendly Cards seat of government structure love Our testimony is that Ms. Beaumont to move Friendly Cards slap-up structure closer to 60% debt and 40% equity (a D/E ratio of 1. 5). Our think for such a recommendation is as follows tractableness For future growth and thinkable acquisitions, funds for acquiring more assets (another envelope machine ) to subvert costs. encounter capability to deal with realizable ruin into the future (i. e. , low sales) demean pretend level than current D/E ratio Income prox growth in shekels due to ability to acquire market share through acquisitions. Further exploit the economies of scale to reduce CGS, discourse and diffusion cost get word mention exacting interests in the company measure Having a higher D/E Friendly can issue equity at more favorable call at a later date when EPS is higher, the market environment is friendlier, and the company will be in a better financial position. Our recommended sharpen capital structure for Friendly Cards, Inc. of 60/40 D/E is realistically attainable at heart 3-4 years (mid 1991). Friendly Cards Case Attachments