Case let 1
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 would be 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 there 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
Sand ford Enterprises
Need $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 earning and pays low
dividends. Management not interested in surrendering voting control to outsides. 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
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 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”. 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 6:00P.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?
Case let 2
This case has been framed in order to test the skill in evaluating a credit request and
reaching a correct decision. Perluence International is large manufacturer of petroleum
and rubber-based products used in a variety of commercial applications in the fields of
transportation, electronics, and heavy manufacturing. In the northwestern United States,
many of the Perluence products are marketed by a wholly-owned subsidiary, Bajaj
Electronics Company. Operating from a headquarters and warehouse facility in San
Antonio, Strand Electronics has 950 employees and handles a volume of $85 million in
sales annually. About $6 million of the sales represents items manufactured by Perluence.
Gupta is the credit manager at Bajaj electronics. He supervises five employees who
handle credit application and collections on 4,600 accounts. The accounts range in size
from $120 to $85,000. The firm sells on varied terms, with 2/10, net 30 mostly. Sales
fluctuate seasonally and the average collection period tends to run 40 days. Bad-debt
losses are less than 0.6% of sales. Gupta is evaluating a credit application from Booth
Plastics, Inc., a wholesale supply dealer serving the oil industry. The company was
founded in 1977 by Neck A. Booth and has grown steadily since that time. Bajaj
Electronics is not selling any products to Booth Plastics and had no previous contact with
Neck Booth. Bajaj Electronic purchased goods from Perluence International under the
same terms and conditions as Perluence used when it sold to independent customers.
Although Bajaj Electronics generally followed Perluence in setting its prices, the
subsidiary operated independently and could adjust price levels to meet its own
marketing strategies. The Perluence’s cost-accounting department estimated a 24%
markup as the average for items sold to Pucca Electronics. Bajaj Electronics, in turn
resold the items to yield a 17% marked. It appeared that these percentages would hold on
any sales to Booth Plastics. Bajaj Electronics incurred out-of pocket expenses that were
not considered in calculating the 17% markup on its items. For example, the contact with
Booth Plastics had been made by James, the salesman who handled the Glaveston area.
James would receive a 3% commission on all sales made Booth Plastics, a commission
that would be paid whether or not the receivable was collected. James would, of course
be willing to assist in collecting any accounts that he had sold. In addition to the sales
commission, the company would incur variable costs as a result of handling the
merchandise for the new account. As a general guideline, warehousing and other
administrative variable costs would run 3% sales. Gupta Holmstead approached all credit
decision in basically the same manner. First of all, he considered the potential profit from
the account. James had estimated first-year sales to Booth Plastics of $65,000. Assuming
that Neck Booth took the 3% discount. Bajaj Electronics would realize a 17% markup on
these sales since the average markup was calculated on the basis of the customer taking
the discount. If Neck Booth did not take the discount, the markup would be slightly
higher, as would the cost of financing the receivable for the additional period of time. In
addition to the potential profit from the account, Gupta was concerned about his
company’s exposure. He knew that weak customers could become bad debts at any time
and therefore, required a vigorous collection effort whenever their accounts were
overdue. His department probably spent three times as much money and effort managing
a marginal account as compared to a strong account. He also figured that overdue and
uncollected funds had to be financed by Bajaj Electronics at a rate of 18%. All in all,
slow – paying or marginal accounts were very costly to Bajaj Electronics. With these
considerations in mind, Gupta began to review the credit application for Booth Plastics.
1. How would you judge the potential profit of Bajaj Electronics on the first year of
sales to Booth Plastics and give your?
2. Suggestion regarding Credit limit. Should it be approved or not, what should be
the amount of credit limit that electronics give to Booth Plastics?