Fransworth furniture final

Presented by:
Anushuya Dahal
Arogya Joshi
Bishal Khanal
Deepti Koirala
Dinesh Adhikari
Erika Shakya
Gyanesh Bajracharya

3/24/2015 Farnsworth Furniture Industries 2

 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.3/24/2015 Farnsworth Furniture Industries 3

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.
3/24/2015 Farnsworth Furniture Industries
4

Major Findings

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
6

7
494505 517241 573248
909091
4500000
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
Proposal 1 Proposal 2 Proposal 3 Proposal 4 Proposal 5
No of share
No of share

Propos
als
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
8
 There is positive relation between number of right
and subscription price.

Graphical presentation of no of right
required
9
7.73
6.97
4.39
0.89
Proposal 2 Proposal 3 Proposal 4 Proposal 5

Proposals Market Price
of Stock (Po)
Subscription
Price of stock
(Ps)
No of right
required (α)
Value of right
(Vr)
2 $49 $45 7.73 $0.46
3 $49 $40 6.97 $1.13
4 $49 $25 4.39 $4.44
5 $49 $5 0.89 $23.28
10
Value of right (Vr) =
(𝑃𝑜)− (𝑃𝑠)
𝛂 +1

11
45
40
25
50.46 1.13 4.44
23.28
0
5
10
15
20
25
30
35
40
45
50
Subscripiton Price value of right

Proposals MPS before right
offering
Value 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
12
 After the right offering the market price per share
will decrease by a value of right after rights offering.

13
49 49 49 4948.54 47.87
44.56
25.72
0
10
20
30
40
50
60
MPS before and after right offering
MPS before right offering MPS after right offering

Proposal 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%
14
 Stock dividend (%) =
𝑃𝑜
𝑃𝑒
− 1 ∗ 100
 There is a negative relation between
subscription price per share and percentage of
stock dividend.

Assets 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
15

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
16
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.

Proposals P/E ratio EPS MPS = P/E ratio × EPS
1 20 $3.65 $73.00
2 20 $3.63 $72.60
3 20 $3.59 $71.80
4 20 $3.34 $66.80
5 20 $1.93 $38.60
17
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.

Proposal 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
18

 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.
19

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 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐹𝑙𝑜𝑡𝑎𝑖𝑡𝑜𝑛 𝐶𝑜𝑠𝑡
𝐹𝑢𝑛𝑑 𝑡𝑜 𝑏𝑒 𝑟𝑎𝑖𝑠𝑒𝑑
=
$1,236,262.5
$22,500,000
= 5.49 %
20

Particulars 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% -
17

Subscription 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% -
22

Probability 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 $22,500,00
0
Expected flotation cost in
percentage (E/F)
4.94% 3.45% 2.54% 0
23

Rights 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.
24

Advantages:
 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.
25

Advantages
 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
market.
26

Advantages
 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%
Disadvantages
o Stock dividends is still not
noticeable i.e. 2.36%
o Right have low value, here
VR = $ 1.13
o Issue could be failure
because subscription price
is $ 40
o Small shareholder may not
exercise the right.
27

Advantages
o 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
market.
28

Advantages
 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
market
29

Choose 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.
30

Farnsworth 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 capital
choosing one alternative on the basis of cost, loyalty
towards the current shareholders, or other factors
may be dangerous.
32

o Alternative one may harm existing share
holder
o Alternative 2 has high subscription price and
flotation cost is still higher.
o The alternative 3 and 5 is also not free from
demerits
o Eventfully we come to choose alternative 4 due
to low floatation cost; subscription price is
lower and no outrage from existing
shareholder.
33

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