Page 91 - DMGT409Basic Financial Management

Basic Financial Management

Notes EBIT % change in EPS
(b) Financial leverage = or
EBT % change in Sales

3,50,000 100
= or = 2.333
1,50,000 42.86

Task A fi rm has ` 40,00,000 lakh sales, variable cost is 70 per cent of sales, and fi xed
cost is ` 8 lakh and debt of ` 20 lakh at 10 per cent. Calculate operating and fi nancial
leverages.

Rajart and Associates: Financial Alternatives

his case provides the opportunity to match financing alternatives with the needs of

different companies. It allows the reader to demonstrate a familiarity with different
Ttypes of securities.

George Thomas was finishing some weekend reports on a Friday afternoon in the

downtown office of Wishart and Associates, an investment-banking firm. Meenda, a

partner in the firm, had not been in the New York office since Monday. He was on a trip

through Pennsylvania, visiting five potential clients, who were considering the fl otation

of securities with the assistance of Wishart and Associates. Meenda had called the offi ce
on Wednesday and told George’s secretary that he would cable his recommendations on
Friday afternoon. George was waiting for the cable.
George knew that Meenda would be recommending different types of securities for each

of the five clients to meet their individual needs. He also knew Meenda wanted him to
call each of the clients to consider the recommendations over the weekend. George was
prepared to make these calls as soon as the cable arrived. At 4:00 p.m. a secretary handed
George the following telegramc
George Thomas, Wishart and Associates STOP Taking advantage of offer to go skiing
in Poconos STOP Recommendations as follows: (1) common stock, (2 ) preferred stock,
(3) debt with warrants, (4) convertible bonds, (5) callable debentures STOP. See you
Wednesday STOP Meenda.
As George picked up the phone to make the first call, he suddenly realized that the

potential clients were not matched with the investment alternatives. In Meenda’s offi ce,
George found folders on each of the fi ve fi rms seeking financing. In the front of each folder

were some handwritten notes that Meenda had made on Monday before he left. George
read each of the notes in turn.
APT, Inc, needs $8 million now and $4 million in four years. Packaging firm with high

growth rate in tri-state area. Common stock trades over the counter. Stock is depressed but
should rise in year to 18 months. Willing to accept any type of security. Good management.

Expects moderate growth. New machinery should increase profits substantially. Recently
retired $7 million in debt. Has virtually no debt remaining except short-term obligations.
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
Contd....

84 LOVELY PROFESSIONAL UNIVERSITY