1) I recommend Ms. Beaumont to invest in the envelope machine because it has an IRR value of 41%, it would be a favorable decision by Ms. Beaumont to purchase the machine as it will reduce the cost and will be able to contribute additional income. However, the machine will have to be replaced after every 8 years and Friendly Cards would have to incur the expenditure to acquire the new machine. The excess cash flows generated by the machine will be $80000 in the first year and from there the cash flow generated will be $280,000 per year for the rest of the 8 year life of the machine.
However, the financial situation of Friendly Cards is tough and funding the purchase of the machine can be a problem.The capital for purchasing the machine might be available from an expensive source even though Friendly Cards has good relations with the lending banks, therefore lenders might lend the money on high interest rate while the equity finance is more costly than the debt financing however, the new clauses from the lenders would also create a problem.
Friendly Cards does not have enough cash in its bank to fund the purchase therefore the best option will be to raise the capital through the equity financing or leasing. Financial lease is an attractive way to purchase the machine as Friendly Cards will pay the annual payments through savings and extra income generated by the machine for Friendly Cards.
2) I recommend Ms. Beaumont to acquire the Creative Designs to make a strategy of growth. The purchase price of $1881000 is less than the NPV of the company. However, if the proposed refinements of the sales and cost structure are not achieved, then the value of the company will also suffer and the purchase price paid for the company may be higher than the price, which Ms. Beaumont pay for Creative Designs. The value of the company is $16330000 after all the adjustments.
Creative Design has the business of studio cards, which Friendly Cards is not producing and it would be a great addition to the product line of the Friendly Cards and have the ability to continue the growth through the acquisition like it has done before. Creative design also has the same business as Friendly Cards, which shows that the expertise of Ms. Beaumont in the field will help achieve the projections.
Acquiring Creative Design will also strengthen the financial position of the Friendly Cards and the consolidated financial statement of the company will show a better debt position and will help Friendly Cards in keeping a safe distance from the new clauses, which lenders have added before issuing any new loan. The acquisition should be based on the pooling of interest accounting of both company’s financial statements.
3) I recommend Ms. Beaumont to accept the offer of the West Coast inventors and issue the new equity; however there are many issues to think while considering the issuance of new equity to raise the funds. The issuance of equity will dilute the value of the share previously held and the shares owned by the company will be less.In addition, issuing equity means that the equity holders will also have the influence on the day to day management of the company. Raising the funds through the equity also increases the cost of the finance as it is a more expensive form of the funding. The current price, which Friendly Cards is getting, is also very good deal at the moment because raising equity funds within the current economic condition is also very difficult due to the crash of stock market and as the adviser gas aid it is a very favorable request of $8 per share from the investors.
Increasing the equity finance in the current financial situation of Friendly Cards will be a good way to go. The investors have requested to buy the 200,000 shares for $8 each, which will infuse $1,600,000 into the company. The cash raised from the equity will lift the pressure from Friendly Cards’ debt to equity ratio and will provide flexibility to the firm to pursue the opportunities like envelope making machine or keeping its growth strategy intact by using cash to acquire the Creative Design, which will help in less dilution of the shares of the company and Ms. Beaumont will still be able to keep the control of the company.....................
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