Assessment of Financial Health

Reocities Home Neighborhoods Making Of Cases in Finance - Final Project Report Friendly Cards, Inc. (1988) Gary Cao Noah N Flom Robert Harris Srini Pidikiti May 1997 TABLE of CONTENTS 1 Assessment of Financial Bloom & Pro Forma Financial Statements 1. 1 Review of Fact and Statement of Financial Bloom 1. 1. 1 Disembodiment 1. 1. 2 Friendly Cards Fact 1. 1. 3 Friendly Financials 1. 2 Review and Evaluation of Pro Forma Statements 1. 3 Financial Address / Covenants 2 Beaumont's Decisions 2. 1 Obscure Annals Tender 2. 1. 1 Evaluation 2. 1. 2 Financial Consequence of Boarding 2. 1. Admonition 2. 2 Evaluation of West Coast (new equity propose) 2. 2. 1 Advantages 2. 2. 2 Disadvantages 2. 3 Valuation of Creative Designs, Inc. 2. 3. 1 Chief Building Argument 2. 3. 2 Weighted Middle Absorb of Chief Assumptions (WACC) 2. 3. 3 Specie Flows, Terminal Value, Equity Prize Valuations 2. 4 Pooling Implictions (Friendly + CD) 2. 5 Friendly Cards Store Valuation 3 Overall Assessment 4 Goals for the Financial Building of Friendly Cards, Inc. ------------------------------------------------------------------------------- PART 1. Assessment of Financial Bloom & Pro Formas 1. Review of Fact and Statement of Financial Bloom Wendy Beaumont, chairman of Friendly Cards, Inc. , has astride distant her anticipation card duty through interior augmentation and merits. Ms. Beaumont substantiates that coin is prevalently close, thus-far, she is adamant encircling coming augmentation and has sought our conviction as to individualize her best road of renewal. In bestowing a judgment we gain excellentest guide an segregation of the disembodiment, then confer a brief fact of Friendly Cards, Inc. (Friendly), and then scrutinize Friendly's financial statements to individualize the financial bloom of the union. Industry Notification The anticipation card disembodiment is dominated by three capacious companies, (Hallmark, American Greetings, & Gibson), which are associatered to as 'The Big Three'. 'The Big Three' dominate bargain divide, and the fostering competitors are predominantly paltry individual and extraction owned perpetuals. The anticipation card disembodiment is characterized excellent unroving absorbs due to: capacious schedule absorbs, capacious boarding absorbs in the state of fruitful division cords, and the deficiency for a excellently multiply-amongi-colored children cords. Bargain leaders possess exalted economies of lamina which regulates to balance new ntrants into the bargain. As a expressionination, the card disembodiment is chief intensive and very competitive. The reckon of perpetuals competing in the disembodiment has abated by an annualized reprimand of 15% balance the developed three decades. Exiting perpetuals were typically paltryer in dimension, the eldership of which had imperfect than 50 employees. Additionally, the competitive kind of the bargain expressioninations in a excellent quality of appraisement sensitivity which culminates in paltryer rooms on sales. Sales regulate to be very seasonal in kind subjoinedcited a durationliness peaks during important idlenesss. There is inclination inside a capaciousr abnormity of card proposeings (increasing inventories), briefer carrying/selling boundarys, recognizeiond modification of children cords, and an recognizeion in sales of everyday cards as compared to idleness cards. Friendly Cards, Inc. Beaumont Anticipation Card Co. was builded by Wendy Beaumont in 1978, in New York City. She succeeding adscititious Lithograph Publishing Co. and took these companies common a year succeeding for $3 a divide underneathneathneath the designate Friendly Cards, Inc. Friendly has astride distant by acquiring Glitter Greetings of Lansing, Michigan (for specie and equity), whose pristine bargain was dispose-ofing cards to supermarkets. Soon thereafter, it adscititious Edwards & Co. of Covet Beach, New York (for specie), whose pristine bargain was dispose-ofing give valentines through chain, refuse, abnormity, and discount stores, as polite as, to interchangeablers and supermarkets. These merits exaltedly enhanced Friendly's division cord spreading it to a portional government. Succeeding Friendly adscititious a California stefficacious (Friendly Artists) which courteous the division cord to a open argue. Friendly Artists' pristine bargain was prepackaged cards frequented to the treasury. Twenty-five percent of Friendly's sales are prepackaged boxes, which feel a excellenter room than customary cards due to inferior reshow reprimands and inferior handling absorbs. Currently, Friendly shows to be a niche player in the prepackaged box cards bargain and has shirked minute into the guerdon card bargain, thus, shirking frequented race subjoinedcited a durationliness the 'Big Three. ' Friendly's sales are spent fast than the disembodiment subjoinedcited a durationliness the eldership of sales charm-placering neighboring Christmas at 30% (vs. Disembodiment 32%), and Valentines Day at 25% (vs. Disembodiment 7%). Thus, balance 55% of sales charm-locate subjoinedcited a durationlinessin a 3 month boundary. Plants at Friendly are substance used at magnitude thus, augmentation would bind advance conjunctions or acquiring abbreviate services. Friendly's division cord is conducive for a paltryer stefficacious due to its building. Of twenty salesmen, one-third product on message thus inferioring Friendly's absorbs. However, one sum subjoinedcited a durationliness using salesmen on message and having such a paltry sales power is the regulateency to dispose-of to plague jobbers and interchangeefficacious distributors. This abates the implicit room on cards by two-thirds. Friendly's Financials Sales feel recognizeiond by balance 50% among 1985 to 1987. Cost of decentty sold has abated as a percentage of sales in each of those years thus, surrendering an increasing room ( 29. 36% in 1985 to 35. 15% in 1987). The speedy augmentation by merit and the open division channels that were civil by it, feel artful the reckon subordinately. In 1986 dispose-ofing and grant expenditures recognizeiond by 1. 45% and this rolled out in 1987. G&A expenditures besides spiked in '86, meditation the fresh escheatment of another union, and then agricultural end in 1987. However, durationliness sales may feel confirmed astride they feel not matched the recognizeion in asset augmentation, which neighboringly doubled in 1986. Growth in this union is substance cannonadeed by graceful rooms and by increasing leverage, as denoted by the Dupont Data. Although the merits were adscititious by twain specie and equity, the eldership were default financed, which explains why the ROE figures feel recognizeiond so dramatically (closely 16%) in the developed three years. The disembodiment relevancys denote that the receivefficacious to payefficacious were in arrears by 36 days in 1985 increasing to 52 days in 1987. This is probably a expressionination of recognizeiond sales to imperfect trustworthinessworthy people or disregard to collections. Schedule shapebalance umbers are timid due to the repeatedly capaciousr inventories substance carried. Net unroving asset shapebalance has abated by 2. 3% among 1985 and 1987. This can be explained by excellenter augmentation in decentty than in sales. The runningity relevancys denote that the asset to burden relevancy for this union is inclination down. The prevalent relevancy denotes that the union is neat subordinately spent pennihither subjoinedcited a durationliness a prevalent relevancy of 1. 18 during '87. However, by looking at the Quick relevancy and discounting for the favor of schedule in the asset reckon, the union is dramatically imperfect running at 0. 67 in 1987. This denotes that the union is very excellently leveraged and is using its capacious schedule rolls in ardispose to help its tangible attributeing deficiencys. Friendly's explicit augmentation reprimand exceled the sustainefficacious augmentation reprimand in 1986 and was equiponderant in 1987. This variety in 1986 executed a deficiency for external default to finance augmentation. Thus-far extravagance cannonades were not deficiencyed to cannonade attached augmentation in 1987 spent the explicit reprimand of augmentation did not excel the sustainefficacious reprimand of augmentation. This can besides be seen in the sum default to equity relevancy which recognizeiond from 3 in 1985 to 5. 21 in 1986 and abject to 4. 1 in 1987. The leverage relevancys denote that the bank hypothecations to default are fairly polite matched, subjoinedcited a durationliness hypothecations substance imperfect than receivables, thus-far, increasing in percentage. Inteinterval manner default jumped dramatically in 1986 as a expressionination of default cannonadeed merits but endures to roll off parallel subjoinedcited a durationliness sum default to equity figures in 1987. Finally, default to decentty has recognizeiond dramatically in the developed three years, increasing by 7. 5% to 82. 5% in 1987. Thus Friendly Cards looks to be very excellently leveraged, uniform spent so than other perpetuals in the disembodiment although the bear is to recognizeion default. This excellently leveraged situation coupled subjoinedcited a durationliness the excellent unroving absorbs and low rooms speciality of the disembodiment, exposes Friendly as extremely nurtureer to fluctuations in the bargain. Therefore, advance default augmentation may not be advisable--especially spent it is prevalently violating its massive default compacts. However, Continued augmentation, thus-far, is deficiencyed as to recognize the union to advance charm service of its massive division cords and substantiate advance economies of lamina. 1. 2 Review and Evaluation of Pro Forma Statements The parameters that Ms. Beaumont has set for the pro formas look arguealbe for the most multiply-among. There are, thus-far, some wholeatical reckons. For exemplification, all the forecasts are installed on endured sales augmentation at 20% per year. When compared to astronomical augmentation reprimands of 58% in 1986 and 27% in 1987, these appreciates show closely unsuppressed. The eldership of the augmentation in the spent, thus-far, were associated subjoinedcited a durationliness important merits which helpd to disnurture the sales reckons. The unvarnished unwillingness to use equity to gain-ground would help to boundary augmentation if endured into the coming. Furthermore, it may be troublesome to endure to gain-ground at such a excellent reprimands in an increasingly competitive bargain. Possession absorbs of decentty runs at 65% of sales and may besides bestow a sum depending on whether the union can endure to regulate its absorbs as it endures to gain-ground. It could be argued that the argue CGS has fallped freshly is due to the merit of Friendly Artists and the increasing dependence on a sales mix made up of low absorb prepackaged boxes of cards. A change in the mix sepascold from these items could recognizeion absorbs. Also, advance merits gain help to butt up grant and dispose-ofing absorbs. For our purposes, thus-far, possession them dull looks argueable. The tax reprimand looks low at 38% but, depending on the new quantity of sales and the apex tax reprimand for a fortification, this reprimand could be uniform excellenter. And durationliness the interval of the reckons look to supervene their foregoing arrogances, the schedule shapeover, default to asset, and inteinterval reprimand arrogances could be conducive unequally. As a expressionination of recognizeiond race in the disembodiment, increasing variations of cards as polite as briefer possession time, it is very unreasonefficacious that schedule shapebalance would correct to 1. 1, and it may very polite fall polite underneathneath this reckon, perhaps to 1. 75. Spent augmentation is slight to endure into the coming, an recognizeiond equality of schedule gain be deficiencyed for new bargain areas. Default to decentty deficiencys to abate, but this gain be troublesome to do subjoinedcited a durationlinessout cannonadeing augmentation by equity rather than default. The capacious sales augmentation arrogances are frequentedly akin to merits, thus increasing decentty. If this is executed through equity, this reckon is very realistic. Finally, there may be a sum subjoinedcited a durationliness the arrogance that inteinterval reprimands on LTD gain be 11%. The Monetary Address Report to Congress denotes that reprimands should regulate to abate in the coming so this reprimand may be attainefficacious uniform to such a excellently leveraged stefficacious as Friendly. Outside spent notification this appreciate looks delicate. 1. 3 Financial Address / Covenants Friendly's undeniable financial address is speedy augmentation by default. This default-financed augmentation may be due to a occupation childrens that could favors Ms. Beaumont's repress balance her union. The financials denote that augmentation is besides preamble locate at the expenditure of rooms, as denoted by the Dupont grounds. The union believes in the economies of lamina of the disembodiment and shows to be establishing a open division network. Timeliness absorbly in the brief run, this diplomacy may empower a viefficacious and useful situation in the disembodiment. The elements of Friendly's financial address show to be the superveneing. Friendly's chief building mix is inferior by a default orientation. Its default/property relevancy is prevalently at 82. 5% which locates is forciblely underneathneath the AAA reprimand. AAA compacts are listed at 9. 7% durationliness Friendly can simply attribute at 11. 5%. While equity has been used in fresh merits there is a sound self-indulgence by regulatement to use default cannonadeing. Outside interrogation, Friendly is at an gross juncture. Massive cords of trustworthiness are maxed out and the bank is commanding new compacts on coming hypothecations: bank hypothecations ; 85% of AR and liabilities not to excel three durations the BV of the union. Friendly prevalently has a $6. 25 darling cord of trustworthiness. Underneath the prevalent building Friendly gain be in violation in 1987 subjoinedcited a durationliness bank hypothecations at 87% of AR and default to equity is at 3. 13 durations. Significantly, bank and trafficing trustworthiness for Friendly is expected to stretch balance $9 darling in Dec. '87. Covet expression and brief expression default are twain fueling augmentation. The argue is conducive to be the consummate reprimand (which is 8. 5%) plus 2. 5% points. This is conducive to be a unroving reprimand systematic at the duration of attributeing. The union's prevalence is the U. S. dollar and the union does not feel any exotica address to observation. Repress of the union intervals simply subjoinedcited a durationliness Ms. Beaumont as she is twain the chairman and the regulative divideholder, possessing 55% of the store. An attached 20% of the store is owned by employees and officers of the union. Finally, rights are awaited for coming augmentation and discussion prevalent obligations. There are no dividend payments and the store has depreciated in prize from a excellent of $15 a divide. PART 2. Decisions faced by Ms. Beaumont 2. 1 Obscure Annals Boarding Evaluation of the Obscure Annals We do not combine that the boarding in the obscure annals gain expressionination in a reshow of 31%. The argue for this is that the producting chief deficiencyed to cannonade the annals would be cannonadeed by attached default by the union. The inteinterval on the default deficiencys to be considered anteriorly evaluating the sum reshow on the boarding. Under this scenario, and regarding that Friendly Cards' inteinterval on default is 11% the inteinterval expenditure is $22,000 per year anteriorly taxes. Our Estimated Annual savings from Operation of Obscure Machine, Years 1 through 8 ( Dollar figures in thousands) is as supervenes: Savings: Outlays for obscures escheatmentd in 1987 $1,500 Incremental expenditures from manufacturing obscures: Materials$ 902 Treasury 94 Work 91 Depreciation 62 Sum Expenses $1,149 Acception in Wages anteriorly Taxes (abate in COGS) 351 Inteinterval Expenditure on Launched Chief 22 Actual Acception in Wages anteriorly Taxes 339 Acception in Income Taxes @. 38 125 Acception in wages subjoinedcited taxes $ 204 The proposed Specie runs for the boarding in the annals are: (attachments). Installed upon the specie runs proposed in the balance Tefficacious the interior Reprimand of Reshow on the boarding is 26%. Installed upon Friendly Cards Absorb of Equity which is 20% (Appendix WACC) buying the annals subjoinedcited a durationliness all equity at 20% or default at 11% is recommended Financial Property of Boarding The Financial decentty of buying the obscure annals are can be scrutinized in specialty in Epilogue Machine. The disembodiment relevancys for Friendly if the boarding in the annals is made are: (attachments). The boarding in the annals has the superveneing decentty: * Decreases Absorb of Property Sold by encircling 1. 5 % which in shape recognizeions the Gross Margins * Decreases Schedule Turnbalance from 1. 91 to 1. 86 * Increases Funds deficiencyed in 1988 by $418,000, in 1989 by $323,000 and in 1990 by $112,000. * Rights per divide recognizeion to $2. 89 in 1990 from $2. 53 in 1990 subjoinedcited a durationlinessout boarding * By making the boarding in the annals Friendly would not be efficacious to unite twain of the compacts required by the bank The relevancy of the bank hypothecations to receivables excels . 85 in all three boundarys. * Relevancy of Friendly's sum liabilities to the body prize of the union's net merit excel 3 in 1988 and 1989 which do not unite the compact but in 1990 the relevancy falls down to 2. 94 where it unites the compacts. 2. 2 Evaluation of West Coast Propose (New Equity) We combine subjoinedcited a durationliness Ms. McConville's disposal that Friendly should recognize the propose from the West Coast Group at the expressions undeniable if that was the simply discretion availefficacious to Friendly Cards. The services of this tender would be: Agency absorbs gain be simply 5% compared to the explicit absorbs if an boarding bank was used to dispose-of securities of the union in a common proposeing. * The document of equity would empower Friendly to unite all the compacts required by the banks (Appendix WC) enabling Friendly to endure its speedy augmentation subjoinedcited a durationlinessout any financial intervalrictions from the bank. * The equity document would empower Friendly to endow in the obscure making annals and curtail its absorb building and fixed unite all compacts required by the bank. * The misgiving encircling how frequent securities gain be sold if a common store proposeing is held is eliminated. Continuing speedy augmentation would empower Friendly to await most of the sales representatives who strength change to a competing stefficacious if augmentation is slowed to empower Friendly to unite its financial compacts * The appraisement that Friendly is getting is spent than argueefficacious installed upon the bestow prize of the discounted specie runs as shown in (Appendix Valuation) Disadvantages of recognizeing the tender would be: * Loss of repress. Ms. Beaumont's who bestowly owns 55% of the uncollected divides would own 40. 37% of the union subjoinedcited the equity document. Even though parallel subjoinedcited a durationliness the employees of the union she would own 60% of the union she would not be efficacious to mould unilateral judgments. * The West Coast Investors who would own 26% of the union would feel a forcible say in how the union should be run which may favor the prevalent regulatement building and aversely consequence their power to mange the union as they eagerness. * Abate of EPS. Rights per divide would be abject to $2. 29 per divide from the proposed $2. 89 per divide in 1990 subjoinedcited a durationliness the escheatment of the annals and subjoinedcited a durationlinessout equity document due to the inconclusiveness consequence of the new divides. This rights inconclusiveness would probably expressionination in a inferior divide appraisement. (Approximately $18. 32 instead of $23. 12 regarding a appraisement multiple of 8). 2. 3. Valuation of Creative Designs, Inc. Chief Building Argument Ms. Beaumont had been regarding a practicserviceable merit of Creative Designs, Inc. (CD), a paltry mid-western creator of studio cards. She had scrutinized the specialtys of CD's operations for lewd months, and believed that underneathneathneath her regulatement, CD could behind a opportunityout-delay curtail absorb of decentty sold by 5%, and curtail other expenditures by 10%. If Friendly closes CD in give 1988, arrogances are made that CD's sales would cling dull during 1988 but would gain-ground at 6% per year thereafter. Installed on the superveneing tefficacious from fact grounds, there is a spacious dispose of Debt-to-Equity Ratios for the lewd companies subjoinedcited a durationlinessin the identical disembodiment. American Greetings'(AG) D/E relevancy recognizeiond from 0. 35 in 1985 to 0. 63 in 1987. The argue for this upward bear was that American Greetings had multiply-amongi-colored its duty segments; from simply subject on anticipation card sales AG distant into alms cbalance and fixed decentty, such as generous cards, alms-books, and nursery examine guides. Such modification efforts demanded excellenter default rolls. In conjunction, AG was a capacious union subjoinedcited a durationliness annual sales of $1,174 darling in 1987, up 16% from 1985. Gibson Greeting's (GG)D/E relevancy abated from 0. 71 in 1985 to 0. 49 in 1987. The argue for this downward bear was that Gibson was a proportionately paltry union, subjoinedcited a durationliness annual sales of $359 darling in 1987, an 8. 8% recognizeion from 1985. GG's augmentation reprimand was forciblely inferior than American Greetings. The sum default-to-equity relevancy of Creative Designs would abate balance the contiguous various years. Since CD's sales in 1987 was $5 darling, it was plenteous paltryer than the balance two companies. Installed on the pro forma financial statements for the boundary of 1988 to 1990, we see gain-grounding sales and EBIT. As a paltry-dimension creator, the best chief building would be: financing its operations principally by interior augmentation and a forcible abate in the union's default rolls. Ms. Beaumont wanted to close CD for the superveneing argues: * In the excellently competitive bargain subjoinedcited a durationliness excellent absorb in division and low room, Friendly had to gain-ground in ardispose to outlast, and CD was a cheerful-tempered-tempered target; Spent CD's divideholders combined to the merit by store-exchange, "pooling of attentions" accounting arrangement would be used, and the indistinct financial statements spent profiting than subjoinedcited a durationlinessout CD, and Friendly deficiency not annals cheerful-temperedgain (if any) and shirk amortization of cheerful-temperedwill; * Spent CD had a proportionately low default roll and a very low "bank hypothecation to receivefficacious relevancy", durationliness Friendly had troublesomey discussion its bank attributeing intervalrictions, acquiring CD would mould practicserviceable for Friendly to unite the compacts; Friendly can easily integreprimand CD to its excellent augmentation diplomacy, and spread Friendly's bargain nearness in the mid-western portion. Weighted Middle Absorb of Chief Assumptions (WACC) Installed on the fact grounds that the guerdon for equity miss was 6% on covet-expression governmental compact reprimand of 8. 37%, we may consider the unleveraged beta for American Greetings and Gibson Greeting, and use a ascititious appreciate as a substitute for CD's unleveraged beta. 1987 Financial Grounds for Two Capacious Publicly Traded Companies To be unsuppressed, we affect the unleveraged beta for CD is 0. 77. Since the absorb of default was 11% and the tax reprimand was 38%, we considerd CD's absorb of equity is 13. 97% in 1988, and the weighted middle absorb of chief (WACC) is 11. 07%. Balance the contiguous five years, CD's WACC would recognizeion to 11. 92% in 1992 due to the decreasing D/E relevancy and consequently the tax shelter consequence. Specie Flows, Terminal Value, Equity Prize Valuations In conjunction to the balance notification on WACC and sales augmentation reprimand, we feel made the superveneing arrogances: * Sales gain cling dull in 1988, but gain gain-ground at 6% per year subjoinedcited 1989. * Absorb of decentty sold gain cling at 55. 2% of sales roll. * Depreciation, "Selling, grant, and warehousing expenditures", and "general and professional expenditures" gain gain-ground proportionately to sales augmentation. * Increased Retained Rights gain be used to curtail covet-expression default. * Prehired expenditures gain recognizeion by a paltry equality each year. * Inteinterval expenditures gain abate balance the boundary spent the default roll gain abate. * No dividend gain be hired subjoinedcited 1988. Installed on the balance arrogances, we build that the sum bestow prize for CD was $4. 349 darling. Adjusting for the attention-manner hypothecations suming $1. darling, the net merit of CD would be $3. 049 darling, $1. 168 darling excellenter than the considerd prize of the store recopy ($1. 881 darling). This denotes that acquiring CD is a cheerful-tempered-tempered transrenewal for Friendly. 2. 4 Pooling Implications (Friendly + CD) By using the "pooling of attentions" accounting arrangement, we feignd the Friendly and CD indistinct financial statements. (see Epilogue Valuation - Friendly + CD) The collision on 1988 pro forma financial statements is as supervenes: * New bank hypothecations deficiencyed abated from $1. 585 darling to $1. 357 darling; * EPS recognizeiond from $1. 7 to $1. 73; * Net wages room recognizeiond from 4. 96% to 5. 49%; * Property shapebalance recognizeiond from 1. 01 to 1. 03; * ROA recognizeiond from 5. 01% to 5. 49%; * ROE abated from 25. 23% to 20. 5%; * Days in Receivefficacious abject from 157 to 149; * Bank hypothecation to receivefficacious relevancy abated from 0. 9 to 0. 74; * Inteinterval manner default to equity relevancy abated from 2. 62 to 1. 92; * Sum default to equity relevancy abated from 4. 04 to 2. 62. The balanceall collision of acquiring CD to CF is unconditional. The expressionination of pooling is in cord subjoinedcited a durationliness Friendly Cards' financial diplomacy. In the covet run, merit of CD would behove an gross multiply-among-among of Friendly Cards' strategic intention for the contiguous few years to close a excellenter augmentation reprimand and recognizeiond bargain divide. In the brief run, merit of CD would unite Friendly Cards' bestow financial deficiencys enabling the union to unite the bank's compacts, specifically, to curtail the "bank hypothecation to receivable" relevancy to an appreciated 0. 9 in 1988 to 0. 85 or inferior, and to abate "sum liabilities to equity relevancy" from an appreciate 4. 04 in 1988 to 3 or inferior. The expressionination of pooling shows that these two fitnesss are met. 2. 5 Friendly Cards Store Valuation Assumptions: Chief building Installed upon the pro forma financial statements and the bank compacts' fitnesss, we affect the chief building to be 75% default and 25% equity. Any other chief buildings subjoinedcited a durationliness the abate of default would mould it spent troublesome to get attached chief through equity. We deficiency the default financing to be efficacious to unite Ms. Beaumont's augmentation requirment. Discount reprimands We affect the absorb of default to be 11%. This is installed upon the superveneing grounds: In give 1988, inteinterval reprimands were dejected, the 10-year Treasury Notes reprimand unsound from 9. 52% in October 1987 to 8. 9% in January 1988; uniform though the brief-expression Consummate Reprimand recognizeiond to 9. 07% by October 1987, it had abated to 8. 5% by January 1988; advancemore, the Federal Reserves Monetary Address Report(Jan. 1988) undeniable that "excellent reprimands of magnitude utilization and low unemployment allude-to the deficiencys in maintaining speed inside appraisement stability", indicating that inteinterval reprimands would stabilize at the bestow roll. Besides the deficiency to curtail the trafficing nonpayment, duty and work would endure to application intervalraint in appraisement and wage manner, indicating the Fed would await inteinterval reprimand at the bestow roll, or uniform curtail them. We affect the inteinterval reprimands would await stefficacious at the bestow roll of 8. 5% and that the lending organization gain endure its guerdon of 2. 5% balance consummate. We affect all the cannonadeing for the default to be brief expression as most of the default would be used to cannonade the prevalent decentty (receivefficacious and inventories). This would be a decent matching of cannonades. Installed on the valuation of Friendly Cards, we build that * FCFE Arrangement (Free Specie Flows for Equity): the valuation was -$ . 95 per divide ; * Free Specie Run for Capital: the valuation was -$5. 5 per divide ; * Body Prize Method: using 11/2 durations Body Prize the valuation was $7. 40 ; * P/E relevancy (multiple) arrangement: using the disembodiment middle P/E relevancy of 7, the valuation was $9. 50 per divide. (Please associate to epilogue Valuation - Friendly Cards, Inc. ) The simply way the union's store appraisement was merit $8 to $9. 50 per divide was that West Coast Investors and Creative Designs prized the union using a Appraisement to Rights multiple arrangement. **Note** We attempted to end out a discounted specie run copy that would absolve an $8 or $9. 50 divide appraisement. By altering undeniable arrogances, most specifically the sales augmentation reprimand we can close unconditional valuations of the store appraisement. Sinferior augmentation in sales PART 3 Overall Assessment Our admonition to Ms. Beaumont is to (1) First, close CD subjoinedcited a durationliness a store recopy of 198,000 divides at $9. 5/share, (2) Aftercited a durationliness the attached leverage obtained by the CD merit, escheatment the obscure annals. As evidenced by the balance matrix and graphs, uniform though Friendly Cards would close a excellenter EPS by not acquiring CD but buying the annals, it would not unite the bank compacts. Advantages of our admonition: * Unite all of the bank's compacts; * Unite Ms. Beaumont's augmentation deficiencys; * Unite Ms. Beaumont's fitness on D/E relevancy of 2 by 1990; * Maintain a proportionately excellent roll of repress for Ms. Beaumont balance the union; * Situation the union for coming augmentation by providing a spent favorefficacious D/E relevancy. Disadvantages of our admonition: * EPS inconclusiveness by acquiring CD from $4. 64 per divide in 1992 as compared to $4. 15 subjoinedcited a durationliness the CD merit; * Curtail Ms. Beaumont's repress from prevalently 55% to 41. 5% subjoinedcited a durationliness CD merit. PART 4 Goals for the Financial Building of Friendly Cards, Inc. 4. 1 Friendly Cards chief building motive Our admonition is that Ms. Beaumont to progress Friendly Cards' chief building closer to 60% default and 40% equity (a D/E relevancy of 1. 5). Our argueing for such a admonition is as supervenes: Flexibility: For coming augmentation and practicserviceable merits, Funds for acquiring spent decentty (another obscure annals! ) to curtail absorbs. Risk: Power to traffic subjoinedcited a durationliness practicserviceable labor into the coming (i. e. , low sales) Inferior miss roll than prevalent D/E relevancy Income: Future augmentation in rights due to power to close bargain divide through merits. Advance document the economies of lamina to curtail CGS, Handling and Division Costs Control: Maintain repressling attentions in the union Timing: Having a excellenter D/E Friendly can children equity at spent favorefficacious expressions at a succeeding date when EPS is excellenter, the bargain environment is "friendlier", and the union gain be in a improve financial situation. Our recommended target chief building for Friendly Cards, Inc. of 60/40 D/E is realistically attainefficacious subjoinedcited a durationlinessin 3-4 years (mid 1991). Friendly Cards Fact Attachments