Financing problems

This report outlines Friendly Cards, Inc’s current financial problems and recommends ways in which they can be alleviated. Friendly Cards is unable to sustain its high debt levels due to loan covenants being imposed by its banks. Therefore equity capital needs to be raised to meet projected growth. She is considering three possible solutions;

• Acquiring Creative Designs (CD)
• Issuing 200,000 new shares at a price of $8 to an investor consortium
• Going public with a stock offering. Creative Designs is a heavily equity funded manufacturer of studio cards.
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The acquisition of CD will provide both operating and financial synergies, and will enable the continuation of Friendly’s high growth in sales. The issuing of new shares to the investor consortium will result in a dilution of Friendly’s share pool, reducing earnings per share and lowering Ms. Beaumont’s share holdings from a controlling 55% to 41%. The offer of $8 represents a significant discount from its current trading price, and will result in a net transfer of wealth from current investors to the investor consortium.

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Due to the October stock market crash it is an especially difficult time for a small firm to raise equity.

Friendly’s investment banker Samuel Hexter predicts that it is very unlikely that the stock will sell at a price above $8. Friendly also has the option of purchasing its own envelope machine, which will generate a positive net present value. However as of 1987 Friendly has neither the sufficient cash nor the borrowing capacity to finance the purchase. This report recommends the acquisition of Creative Designs as the best solution to Friendly Cards’ equity issues, and supports the purchase of the envelope machine.

Friendly Cards Inc. is a capital intensive firm that has never been without financing problems.

Friendly’s bankers have become worried about the extent to which they are dependent on debt to finance their operations, and as a result have imposed certain covenants on any future loans. In order to sustain their projected growth in sales, Friendly must locate sources of equity finance. There are three options available; acquire CD, accept an offer of $8 per share for 200,000 shares from a group of investors, or a public offering of Friendly’s common stock. Friendly also needs to consider whether it will be beneficial to purchase their own envelope making machine.