Friendly Cards Inc

In: Business and Management

Submitted By 19900128
Words 731
Pages 3
Friendly Cards
Liu Xing
1. In order to calculate the WACC of Creative Design, we need to estimate the beta first. We can calculate the beta(e) from the weighted beta(e)s of the industry.
According to Exhibit 5: βe of American Greetings=1.07 and the net income is 33.4, βe of Gibson Greetings=0.93 and the net income is 24.1. So we estimate theβe of CD: 1.07*33.4/(33.4+24.1)+0.93*24.1/(33.4+24.1)=1.01
Re of CD=Rf+βe(Rm-Rf)=8.4%+1.01*7%=15.47%
According to Exhibit 7, the Debt of CD=2250 D/V=2250/4500=50%
From Exhibit 6, the interest of 1987 is 100, Rd=100/2250=4.44%, Rtax=95/238=40%
WACC=15.47%*50%+4.44%*50 %*(1-40%)=9.07%
If we consider the CD’s Equity as it’s market value, which is 11 times of it’s 1987 earnings, the Equity=171*11=1881, the D/V will be bigger, and WACC will be smaller.

2. The purpose we do the projection is to determine whether we should acquire CD, so we need to consider the improvements Friendly intends, they are:
Reduce COGS by 5%, other expense by 10%, and sales increase by 6% per year.
Using the COGS/Net Sale and Total Expense/Net Sales of 1987, we can estimate that of 1990.
When estimate the debt, we use the same rate as Interest/(COGS+Expense) in1987,because Debt is more closely related to the COGS and Expense. Then the income statement of 1990 is as follow:

| Income Statement |1987 |1988 |1989 |1990 |
|Net sales |5,000 |5,000 |5,300 |5,618 |
|COGS |3,075 |2,921 |3,097 |3,282 |
| Gross profit |1,925 |2,079 |2,203 |2,336 |
|Expense | | | | |
| Total expense |1,550 |1,395 |1,479 |1,567 |
|EBIT |375 |684 |725 |768 |
| Interest expense |100 |93 |99 |105 |
|EBT |275 |590 |626 |663 |
| Taxes |104 |236 |250 |265 |
|Net income |171 |354 |376 |398 |
| Dividends |96 |199 |211 |223 |
|Retained earnings |75 |155 |165 |175 |

3. Use the ratios as they are in 1987(to net sales or to payout),
The…...

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