fransworth furniture final
TRANSCRIPT
A case analysis of Farnsworth Furniture Industries
Presented by:Anushuya Dahal
Arogya Joshi
Bishal Khanal
Deepti Koirala
Dinesh Adhikari
Erika Shakya
Gyanesh Bajracharya
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About Farnsworth Furniture
Farnsworth Furniture established in 1932 is one of the largest manufacturers in the US.
It is known for providing excellent design, quality craftsmanship at fair prices.
During the mid-1990s, the demand for pine furniture increased due to falling interest rates and willingness of homeowners to spend extra money furnishing their houses.
To meet the increased demand, Farnsworth Furniture Industries is undertaking a major capital expansion program with approximately $45 million in new capital.
$22.5 million has already been borrowed as a long term loan form a group of five insurance companies.
To raise an additional $22.5 million through the sale of common stock.
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P1
• Go for IPO at subscription price of $48 per share where $2.5 will be charged as commission
P2
• Issue rights share to the existing shareholders at a subscription price of $45 where commission will be charges as $1.50 per share and Commission for unsubscribed shares is $3.5
P3
• Issue rights share at a price of $40 per share with underwriting cost of $0.75 for each subscribed and $3.5 for each unsubscribed
P4
• Sell shares to current stockholders at subscription price of $25 with underwriting cost of $0.25 for the subscribed shares and $3.5 per share taken by the investment banker.
P5
• Sell shares to current stockholders at subscription price of $5 per share.
Alternative Proposal for Farnsworth Furniture
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ISSUE: ONE
Proposals Subscription
Price ( Ps)
Flotation
Cost (Pc)
Price per share received by company
(Ps- Pc)
No of new share to raise
1 $ 48 $ 2.5 $45.5 494,505
2 $45 $1.5 $43.5 517,241
3 $40 $0.75 $39.25 573,248
4 $25 $0.25 $24.75 909,091
5 $5 $0 $5 4,500,000
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Graphical Presentation of No of share
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Proposal 1 Proposal 2 Proposal 3 Proposal 4 Proposal 50
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
494505 517241 573248909091
4500000
No of share
No of share
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ISSUE: TWOProposals
No of old share (x)
No of new share (y)
No of right required (α) = (x/y)
2 4,000,000 517,241 7.73
3 4,000,000 573,248 6.97
4 4,000,000 909,091 4.39
5 4,000,000 4,500,000 0.89
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There is positive relation between number of right and subscription price.
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Graphical presentation of no of right required
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Proposal 2 Proposal 3 Proposal 4 Proposal 5
7.736.97
4.39
0.89
No of right requiredNo of right required
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ISSUE: THREEProposals Market Price
of Stock (Po)
Subscription
Price of stock
(Ps)
No of right
required (α)
Value of right
(Vr)
2 $49 $45 7.73 $0.463 $49 $40 6.97 $1.134 $49 $25 4.39 $4.445 $49 $5 0.89 $23.28
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Value of right (Vr) =
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Comparison of subscription price and value of right
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Proposal 2 Proposal 3 Proposal 4 Proposal 50
5
10
15
20
25
30
35
40
45
50
4540
25
50.46 1.13
4.44
23.28
Subscripiton Price value of right
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ISSUE: FOURProposals MPS before right
offeringValue of right MPS after right
offering
2 $49 $0.46 $48.54
3 $49 $1.13 $47.87
4 $49 $4.44 $44.56
5 $49 $23.28 $25.72
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After the right offering the market price per share will decrease by a value of right after rights offering.
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MPS before and after right offering
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Proposal 2 Proposal 3 Proposal 4 Proposal 50
10
20
30
40
50
60
49 49 49 4948.54 47.8744.56
25.72
MPS before and after right offering
MPS before right offering MPS after right offering
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ISSUE: FIVEProposal Market price per share
(P0)MPS (Ex-right)(Pe) Stock Dividend (%)
2 $49 $48.54 0.95%3 $49 $47.87 2.36%4 $49 $44.56 9.96%5 $49 $25.72 90.51%
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Stock dividend (%) = There is a negative relation between
subscription price per share and percentage of stock dividend.
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ISSUE : SIXAssets Amount in
million
Liabilities and Capital Amount in million
Old Assets
Add: New Assets
$141.45
$22.5
Accounts Payable
Bank loan
Total Current Liabilities
Long term debt
Capital Stock
Add: New Common Stock
Retained Earning
Total Equity
$14.65
$20.85
$35.50
$30
$20
$22.5
$55.95
$128.45
Total Assets $163.95 Total liabilities and capital $163.95
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Continue…Proposals Total Earning
(A)Newly issued
additional shares (B)
Number of total outstanding shares C= 4million + (B)
Earnings per share(D) =
A/C
1 $16,400,000 494,505 4,494,505 $3.65
2 $16,400,000 517,241 4,517,241 $3.63
3 $16,400,000 573,248 4,573,248 $3.59
4 $16,400,000 909,091 4,909,091 $3.34
5 $16,400,000 4,500,000 8,500,000 $1.93
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We can see the decreasing trend of EPS as the proposal change from 1ST to 5th. Thus as the subscription price goes on declining EPS also declines consequently, MPs also get declined so there is a positive relationship between them.
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Continue…Proposals P/E ratio EPS MPS = P/E ratio × EPS
1 20 $3.65 $73.002 20 $3.63 $72.603 20 $3.59 $71.804 20 $3.34 $66.805 20 $1.93 $38.60
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From the table we can see that the MPS is in declining trend. As the subscription price decreases EPS and MPS also get decreased. Hence, there is a positive relationship between subscription price, EPS and MPS.
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ISSUE: SEVENProposal Ex-Right MPS as per Question
4
Ex-Right MPS as per
Question 6
2 $48.54 $73.00
3 $47.87 $72.60
4 $44.56 $71.80
5 $25.72 $66.80
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MPS AT QUESTION NO 4 IS MORE REALISTIC THAN QUESTION NO 6
Earning is assumed to be 10% of total assets. The earning might not be 10%, which is not realistic.
Price earnings ratio is assumed to be 20, which might not be true. The amount of liabilities differs as per the operation of the business
hence it cannot be said that liabilities will remain same in 2007 as in 2006.
The assumption of new outside capital will employed be fully may be wrong because it is affected by different factors affect it.
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ISSUE : 8, calculation of maximum and minimum flotation cost
Under proposal 1: The proposal one has single floatation cost i.e. $2.50 per share, So that the
maximum and minimum amount of flotation cost will be the same.
Expected Flotation cost
= No of additional share to be issued * Flotation cost per Share=494,505 * $2.50
=$1,236,262.5
Expected Flotation cost in Percentage =
=
= 5.49 %
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Maximum Flotation costsParticulars Proposal 2 Proposal 3 Proposal 4 Proposal 5
Subscription Price $45 $40 $25 $5
Flotation cost per share ( A) $3.50 $3.50 $3.50 $0.00
Price received per share for
unsubscribed share (B)$41.5 $36.5 $21.5 $5
Fund to be raised (C) $22,500,000 $22,500,000 $22,500,000
$22,500,000
No of shares to be Issued (D)=C/B 542,169 616,438 1,046,512 4,500,000
Total Flotation Cost E= ( D*A) $1,897,591.5 $2,157,533 $3,662,792 $0
Flotation Cost in % (E/C) 8.43% 9.59% 16.28% -
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Minimum Flotation costs
Particulars Proposal 2 Proposal 3 Proposal 4 Proposal 5Subscription Price $45 $40 $25 $5
Flotation cost per share ( A) $1.5 $0.75 $0.25 $0.00
Price received per share for unsubscribed share (B)
$43.5 $39.25 $24.75 $5
Fund to be raised (C) $22,500,000 $22,500,000
$22,500,000 $22,500,000
No of shares to be Issued (D)=C/B
517,241 573,248 909,091 4,500,000
Total Flotation Cost E= ( D*A)
$775,861.5 $429,936 $227,272.75 $0
Flotation Cost in % (E/C) 3.45% 1.91% 1.01% -
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Expected Flotation CostsParticulars Proposal 2 Proposal 3 Proposal 4 Proposal 5Probability of no rights being exercised (A)
0.30 0.20 0.10 0.00
Probability of 100% of the rights being exercised (B)
0.70 0.80 0.90 1.00
Flotation cost if no rights are exercised (C)
$1,897,591.50 $2,157,533 $3,662,792 $0
Flotation cost if all rights are exercised (D)
$775,861.5 $429,936 $227,272.75 $0
Expected Flotation Cost (E)=[(A*C) + (B*D)]
$1,112,380.50 $775,455.40 $570,824.68 $0
Fund to be Raised ( F) $22,500,000 $22,500,000 $22,500,000 $22,500,000
Expected flotation cost in percentage (E/F)
4.94% 3.45% 2.54% 0
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ISSUE: NINERights offering, as opposed to an offering to the general public, would have on “stockholders loyalty” to the company?
Yes,1. Right offering provides first priority to buy share for existing
shareholder.
2. Right offering offers subscription price will be less than the current market price of a stock.
3. Less chance of dilution in share.
4. Control power remain with existing shareholder
5. There is more certainty of getting capital when fresh issue of shares is made to the existing shareholders instead of to the general public.
6. Loyalty to existing shareholders will increase.
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Issue : 10, Proposal 1Advantages: Wider distribution of
stock to throughout the market.
Increase large number of knowledgeable shareholder.
Public awareness towards company will increase.
Disadvantages:
No loyalty to existing shareholders
Floatation cost is highest i.e. 5.49%
Issue could be a failure because subscription price is higher.
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Proposal 2Advantages Loyalty to existing
shareholders will increase. It would also preserve the
control power and ownership of the existing stockholders.
Dilution in earnings per share is less i.e. No. of share outstanding is 517,241
Disadvantages Small shareholders may not
exercise the right because subscription price is $45
Expected Floatation cost is still higher i.e. 4.94%.
Issue could be failure because subscription price is higher.
No wider distribution of stock to throughout the market.
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Proposal 3Advantages Loyalty to existing
shareholders will increase. It would also preserve the
control power and ownership of the existing stockholders.
Expected Floatation cost is relatively low i.e. 3.45%
Disadvantageso Stock dividends is still not
noticeable i.e. 2.36% o Right have low value, here
VR = $ 1.13o Issue could be failure
because subscription price is $ 40
o Small shareholder may not exercise the right.
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Proposal 4Advantageso Subscription price is
considerably lower so chance of exerting right would increase.
o Expected floatation cost is quite low i.e. 2.54%
o Huge discount margin ($ 49 - $ 25 = $ 24) is the major benefit to shareholder.
o Noticeable stock dividend effect i.e. 9.96%
o Loyalty to existing shareholder
Disadvantages Dilution in earnings per
share is more because we are going to issue 909,091 shares which are large in number
No wider distribution of stock to throughout the market.
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Proposal 5Advantages Issue cannot be a failure
because subscription price is lowest i.e. $ 5.
Floatation cost in zero. 90.51% of a large stock
dividend effect from which existing shareholder will largely benefit.
Huge discount margin ($ 49 - $ 5 = $ 44) is the major benefit to shareholder.
Disadvantages The value of each share will
be diluted as a result of the increased number of shares issued.
High value of right i.e. $ 23.28.
Investment bank will become unhappy.
No wider distribution of stock to throughout the market
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DecisionChoose alternative 4• Floatation cost is relatively low. • Offer huge discount margin ($ 49 - $ 25 = $ 24) to
shareholders. • Issue cannot be a failure because subscription price is
considerably lower so chance of ex-right would increase. • No chance to hurt company image and maintain the
stock in a popular trading range. • Lastly, proposal 1 and 5 seems too extreme type of
proposal and proposal 4 is average type of proposal in compare to other offer proposal 2 and 3.
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ConclusionFarnsworth Furniture Industries is facing with the
problem of establishment of additional $22.5 million of funds
While choosing the alternative we need to consider various aspects of the company. like flotation cost, company reputation ,distribution of shares, and loyalty.
There are several alternative to raise this capitalchoosing one alternative on the basis of cost, loyalty
towards the current shareholders, or other factors may be dangerous.
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Continue…o Alternative one may harm existing share holdero Alternative 2 has high subscription price and
flotation cost is still higher. o The alternative 3 and 5 is also not free from
demeritso Eventfully we come to choose alternative 4 due
to low floatation cost; subscription price is lower and no outrage from existing shareholder.
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