This case provides the opportunity to match financing alternatives with the needs of different companies. It allows the reader to demonstrate a familiarity with different types 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 flotation of securities with the assistance of Wishart and Associates. Meenda had called the office 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 telegram. 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 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.
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.
Needs $25 million. Manufactures boat canvas covers and needs funds to expand operations. Needs longterm 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". George pondered over the situation. He could always wait until next week, when he could be sure that he had the right recommendations and some of the considerations that outlined each client's needs and situation. If he could determine which firm matched each recommendation, he could still call the firms by 6:00 P.M. and meet the original deadline. George decided to return to his office and match each firm with the appropriate financing.
1. Which type of financing is appropriate to each firm?
2. What types of securities must be issued by a firm which is on the growing stage in order to meet the financial requirements?