While investment banking firms traditionally hire relatively few new graduates (especially those
without advanced degrees), the positions they do fill are highly sought after and are extremely lucrative.
Prime candidates not only need to have knowledge of the financial markets, but also must
have the ability to sell their firmAc€?cs services to some of the most successful members of the financial
community. Quite often, knowledge of oenology, a personAc€?cs ancestry, and a scratch golf game
have just as much persuasive power in obtaining a clientAc€?cs business as do the actual services provided
by a firm such as Julian Eastheimer and Company.
Through an old family contact pulling the right strings, Parker Z. Bentley III was fortunate
enough to obtain the job of assistant to Maria Talbot, a senior partner and managing director at
Julian Eastheimer. Bentley received his bachelorAc€?cs degree in physical education from a very expensive
and prestigious Ivy League school only two weeks ago, and this is his first day on the job. After
a rather pleasant morning spent meeting various people around the office, Bentley was given his first
taskAc€??he was asked to review the financing recommendations that Talbot had recently made for nine
The first thing Bentley did was to pull out the financial analyses and recommendations from
the clientsAc€?c folders and give them to one of the secretaries to type. When the secretary returned the
typed reports, Bentley discovered that he did not know which recommendation belonged to which
company! He had folders for nine different companies and financing recommendations for nine companies,
but he could not match them up. BentleyAc€?cs major was physical education, so he could not
be expected to match the financing recommendations with the appropriate companies.
As a finance student, you should be able to help Bentley by telling him which companies in Section
B should use the financing methods listed in Section A.
1. Leasing arrangement
2. Long-term bonds
3. Debt with warrants
Copyright A?© 1994. The Dryden Press. All rights reserved.
4. Friends or relatives
5. Common stock: nonrights
6. Preferred stock (nonconvertible)
7. Common stock: rights offering
8. Convertible debentures
9. Factoring (Hint: Factoring is the selling of a firmAc€?cs accounts receivable.)
A. BoudoirAc€?cs, Inc.: This company, a retail clothing store with three suburban locations in
Atlanta, Georgia, is incorporated, with each of the three Boudoir sisters owning one-third of
the outstanding stock. The company is profitable, but rapid growth has put it under severe
financial strain. The real estate is all under mortgage to an insurance company, the inventory
is being used under a blanket chattel mortgage to secure a bank line of credit, and the
accounts receivable are all being factored. With total assets of $7 million, the company now
needs an additional $450,000 to finance a building and fixtures for a new outlet.
B. Timberland Power & Light: Since Timberland Power & Light, a major electric utility, is
organized as a holding company, the Securities and Exchange Commission must approve all
of its securities issues. Such approval is automatic if the company stays within conventional
norms for the public utility industry. Reasonable norms call for long-term debt in the range
of 45 percent to 65 percent, preferred stock in the range of 0 to 15 percent, and common
equity in the range of 25 percent to 45 percent. Timberland currently has total assets of $1.5
billion financed as follows: $900 million debt, $75 million preferred stock, and $525 million
common equity. The company plans to raise an additional $37 million at this time.
C. Ripe and Fresh Canning Company: Ripe and Fresh Canning Company is a large operation
located in Valdosta, Georgia, that purchases peaches and other fruits from farmers in Georgia,
Florida, South Carolina, Alabama, and Kentucky. These fruits are then canned and sold
on 60-day credit terms, largely to food brokers and small retail grocers in the same five-state
area. The companyAc€?cs plant and equipment have been financed in part by a mortgage loan,
and this is the only long-term debt. Raw materials (fruits) are purchased on terms calling for
payment within 30 days of receipt of goods, but no discounts are offered. Because of an
increase in the popularity of vegetables and fruits, canned fruit sales have increased dramatically.
To finance a higher level of output to take advantage of this increased demand, Ripe
and Fresh will need approximately $550,000.
D. Piper Pickle Company: Piper Pickle Company is a major packer of pickles and pickled
products (horseradish, pickled watermelon rinds, relishes, and peppers). The companyAc€?cs
stock is widely held, actively traded, and listed on the New York Stock Exchange.
Recently, it has been trading in the range of $18 to $22 a share. The latest 12 monthsAc€?c earnings
were $1.70 per share. The current dividend rate is 64 cents a share, and earnings, dividends,
and the price of the companyAc€?cs stock have been growing at a rate of about 7 percent
over the last few years. Piper PickleAc€?cs debt ratio is currently 42 percent versus 25 percent
for other large pickle packers. Other firms in the industry, on the average, have been growing
at a rate of about 5 percent a year, and their stocks have been selling at a price/earnings
ratio of about 10. Piper Pickle has an opportunity to begin growing its own cucumbers,
which would result in a substantial cost savings and reduce the risk involved in having to
Case: 28 Financing Alternatives
compete for cucumbers in the open market. This vertical integration would require $20 million
in cash for the necessary farms and equipment.
E. Copper Mountain Mining Company: Copper Mountain Mining needs $12 million to
finance the acquisition of mineral rights to some land in south central New Mexico and to
pay for some extensive surveys, core-borings, magnetic aerial surveys, and other types of
analyses designed to determine whether the mineral deposits on this land warrant development.
If the tests are favorable, the company will need an additional $12 million. Copper
Mountain MiningAc€?cs common stock is currently selling at $11, while the company is earning
approximately $1 per share. Other firms in the industry sell at from 8 to 13 times earnings.
Copper MountainAc€?cs debt ratio is 30 percent, compared to an industry average of 35 percent.
Total assets at the last balance sheet date were $120 million.
F. Bull Gator Saloon and Dance Hall: Robert Radcliffe, a professor at the University of
Florida, is an avid country-and-western music fan and a square dancer. He has just learned
that a recently developed downtown shopping and entertainment center still has a lease
available for the original, renovated building of the First National Bank of Gainesville. The
bank outgrew the building in the late 1950s, and the large open spaces and high ceilings
would be ideal for a country-and-western nightclub. Radcliffe knows the market well and
has often noted the lack of a real Ac€A?kicker barAc€?? in Gainesville; the closest being in Starke,
about 25 miles from Gainesville. Radcliffe believes that if he can obtain approximately
$50,000 for a sound system and interior decorations, he can open a small but successful
operation in the old bank building. His liquid savings total $15,000, so Radcliffe needs an
additional $35,000 to open the proposed nightclub.
G. Golden Gate Aircraft Corporation: Golden Gate Aircraft is a medium-sized aircraft company
located just outside San Francisco whose sales distribution is approximately 30 percent
for defense contracts and 70 percent for nonmilitary uses. The company has been growing
steadily in recent years, and projections based on current research-and-development prospects
call for continued growth at a rate of 5 percent to 7 percent a year. Although recent reports of
several brokerage firms suggest that the firmAc€?cs rate of growth might be slowing down because
of the high price of fuel and the softness of the business aircraft market, Golden GateAc€?cs management
believes, based on internal information, that no decline is in sight. The companyAc€?cs
stock, which is traded on the Pacific Stock Exchange, is selling at 15 times earnings. This is
slightly below the 17 times ratio of Standard & PoorAc€?cs aircraft industry average. The company
has assets of $35 million and a debt ratio of 25 percent (the industry average is 23 percent).
Golden Gate needs an additional $5 million over and above additions to retained
earnings to support the projected level of growth during the next 12 months.
H. Schooner Yachts: Schooner Yachts is a closely held company that was founded in 1970 by
Russ Breaker to build a top-quality line of sailboats. The companyAc€?cs debt ratio is 48 percent,
compared to an average ratio of 36 percent for sailboat companies in general. The stock is
owned in equal parts by ten individuals, none of whom is in a position to put additional
funds into the business. Sales for the most recent year were $12 million, and earnings after
taxes amounted to $720,000. Total assets, as of the latest balance sheet, were $9.6 million.
Schooner Yachts needs an additional $4 million to finance expansion during the current fiscal
year. Given the worldwide growth in leisure-time activities and interest in sailing in particular,
the firm can anticipate additional outside capital needs in the years ahead.
Case: 28 Financing Alternatives
I. Teller Pen Corporation: Teller Pen is engaged in the manufacture of mechanical pens and
pencils, porous pens, and a recently developed line of disposable lighters. Since the firm
sells to a great many distributors, and its products are all considered nondurable consumer
goods, sales are relatively stable. The current price of the companyAc€?cs stock, which is listed
on the New York Stock Exchange, is $25. The most recent earnings and dividends per share
are $3.10 and $1.50, respectively. The rate of growth in sales, earnings, and dividends in the
past few years has averaged 5 percent. Teller Pen has total assets of $400 million. Current
liabilities, which consist primarily of accounts payable and accruals, are $28 million; longterm
debt is $83 million; and common equity totals $289 million. An additional $33 million
of external funds is required to build and equip a new disposable-lighter manufacturing complex
in central Ohio and to supply the new facility with working capital.
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