Page 144 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Sandford Enterprises

Needs $16 million. Crusty management. Stock price depressed but expected to improve.
Excellent growth and profits forecast in the next two year. Low debt-equity ratio, as the
firm has record of retiring debt prior to maturity. Retains bulk of earnings and pays low
dividends. Management not interested in surrendering voting control to outsiders. Money
to be used to finance machinery for plumbing supplies.
Sharma Brothers., Inc.
Needs $20 million to expand cabinet and woodworking business. Started as family business
but now has 1200 employees, $50 million in sales, and is traded over the counter. Seeks
additional shareholder but not willing to stock at discount. Cannot raise more than $12
million with straight debt. Fair management. Good growth prospects. Very good earnings.
Should spark investor’s interest. Banks could be willing to lend money for long-term
needs.
Sacheetee Energy Systems
The firm is well respected by liberal investing community near Boston area. Sound growth
company. Stock selling for $16 per share. Management would like to sell common stock at
$21 or more willing to use debt to raise $ 28 million, but this is second choice. Financing
gimmicks and chance to turn quick profit on investment would appeal to those likely to
invest in this company.

Ranbaxy Industry
Needs $25 million. Manufactures boat canvas covers and needs funds to expand operations.
Needs long-term money. Closely held ownership reluctant surrender control. Cannot
issue debt without permission of bondholders and First National Bank of Philadelphia.
Relatively low debt-equity ratio. Relatively high profits. Good prospects for growth.
Strong management with minor weaknesses in sales and promotion areas.
As George was looking over the folders, Meenda’s secretary entered the office. George
said, “Did Meenda leave any other material here on Monday except for these notes?”.
She responded, “No, that’s it, but I think those notes should be useful. Meenda called early
this morning and said that he verified the facts in the folders. He also said that he learned
nothing new on the trip and he sort of indicated that, he had wasted his week, except of
course, that he was invited to go skiing at the company lodge up there”.
George pondered over the situation. He could always wait until next week, when he could
be sure that he had the right recommendations and some of the considerations that outlined
each client’s needs and situation. If he could determine which firm matched each
recommendation, he could still call the firms by 6:00 P.M. and meet the original deadline.
George decided to return to his office and match each firm with the appropriate financing.

Questions
1. Which type of financing is appropriate to each firm?
2. What types of securities must be issued by a firm which is on the growing stage in
order to meet the financial requirements?

7.6 Summary
 Mix of long-term sources of finance is referred as “capital structure”.
 At optimum capital structure, the cost of capital is minimum and market price per share is
maximum.

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