Question No. 2: Should Friendly Cards acquire Creative Designs, Inc., a small Midwestern manufacturer of studio cards?
Answer:
Based on our calculation, estimated and judgements, as shown in the appendices, Friendly Card Inc. could acquire Creative Designs Inc., a small Midwstren manufacturer of studio cards for 198,000 shares at $9.50 per share. This transaction would be considered a tax-free transaction, meaning that both companies' financial statements would be consolidated together and this will show the effect of synergy. What makes this a good decision is the strong balance sheet of Creative Designs. The low financial ratios of the Creative Designs Inc, financial ratios would help lower Friendly Card's ratios. This would also make Friendly Card’s consolidated ratios fall under all of the banks restrictions. But the only concern which would prevent Friendly Cards Inc. to acquire Creative Designs Inc. is the negative NPVof the project mainly due to the high changes in the working capital of the company.
Question No. 3: Should Friendly go to the market to raise additional equity capital in order to relieve the pressure on its financial position?
Answer:
The 3rd option available to Friendly Cards Inc. was to issue a total of 200,000 shares for a discounted price of $8 a share less the $80,000 underwriter’s fee to make $1,520,000. This capital introduction would definitely reduce financial ratios of the company which will help them to meet the restrictions imposed by the company’s bank, but this issue could not be as beneficial in the coming years as it looks because the current market for the shares has dropped rapidly. The share prices of many companies have fallen and in the case of further growth, the company will be in need of more investment. On the other hand, if the sales growth continues to grow in the coming future, the ratio on which the bank has imposed restriction would rise again. If the sales continue to grow at the current rate in the future the ratios could increase again..............................
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