Page 206 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 8: Capital Structure Decision

(3) debt with warrants, (4) convertible bonds, (5) callable debentures STOP. See you Notes
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 office,
George found folders on each of the five firms 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
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”.

Contd...

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