Statement of the problem:
Amy McConville, a friend and financial consultant of Wendy Beaumont, the president of Friendly Cards Inc., needs to come up with some suggestions concerning the financing of Friendly's expansion. Amy has been doing research on the firm and money is tight right now. The cost of financing growth right now is high and Friendly Card's is projecting 20% growth in sales next year and even more the following year. The company has never been without financing problems. The business is capital intensive and has had to rely on its good relations with its banks and suppliers to achieve success. Friendly's bankers have begun to feel uneasy about how much the company is relying on debt capital to finance its operations. They have suggested that they agreed to help finance their growth in the past with the assumption that sales would decrease substantially in the future. The firm's liabilities/equity ratio had peaked to 5.2 in 1986, and was still a couple of years away from returning to historically lower ratios. This scenario has prompted Friendly's bankers to insist on the firm adhering to some new restrictions. The two restrictions, which would apply by the end of 1988, were the following:
1. The bank loans outstanding at any time could not exceed 85% of Friendly's accounts receivable.
2. Friendly's total liabilities could not exceed three times the book value of the company's net worth.
In addition to these restrictions, Wendy has decided to impose an all interest bearing debt/equity ratio of a maximum of 2 to 1 for the firm. This should help with planning and provide some margin of safety for the firm. Wendy has also asked Amy to analyze three other scenarios:
1. Should Friendly Cards purchase an envelope machine that will enable them make their own envelopes?
2. Should Friendly Cards acquire Creative Designs, a small manufacturer of cards?
3. Should Friendly Cards accept the West Coast... [continues]
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