Cases in Finance - Final Project Report
Friendly Cards, Inc. (1988)

Gary Cao
Noah N Flom
Robert Harris
Srini Pidikiti

May 1997

1 Assessment of Financial Health & Pro Forma Financial Statements
1.1 Review of History and Statement of Financial Health
1.1.1 Industry
1.1.2 Friendly Cards History
1.1.3 Friendly Financials
1.2 Review and Evaluation of Pro Forma Statements
1.3 Financial Policy / Covenants
2 Beaumont's Decisions
2.1 Envelope Machine Proposal
2.1.1 Evaluation
2.1.2 Financial Effect of Investment
2.1.3 Recommendation
2.2 Evaluation of West Coast (new equity offer)
2.2.1 Advantages
2.2.2 Disadvantages
2.3 Valuation of Creative Designs, Inc.
2.3.1 Capital Structure Argument
2.3.2 Weighted Average Cost of Capital Assumptions (WACC)
2.3.3 Cash Flows, Terminal Value, Equity Value Valuations
2.4 Pooling Implictions (Friendly + CD)
2.5 Friendly Cards Stock Valuation
3 Overall Assessment 
4 Goals for the Financial Structure of Friendly Cards, Inc.

PART 1. Assessment of Financial Health & Pro Formas
1.1 Review of History and Statement of Financial Health

	Wendy Beaumont, president of Friendly Cards, Inc., has rapidly 
expanded her greeting card business through internal growth and 
acquisitions.  Ms. Beaumont realizes that money is currently tight, 
however, she is adamant about future growth and has sought our opinion 
as to determine her best course of action.  In presenting a decision we will 
first conduct an analysis of the industry, then give a short history of 
Friendly Cards, Inc. (Friendly), and then examine Friendly's financial 
statements to determine the financial health of the company.

Industry Information
	The greeting card industry is dominated by three large companies, 
(Hallmark, American Greetings, & Gibson), which are referred to as 'The 
Big Three'.  'The Big Three' dominate market share, and the remaining 
competitors are predominantly small private and family owned firms.  The 
greeting card industry is characterized high fixed costs due to: large 
inventory  costs,  large investment costs in the establishment  of efficient 
distribution lines, and the need for a highly diversified product lines.  
Market leaders enjoy great economies of scale which tends to hinder new 
entrants into the market.  As a result, the card industry is capital intensive 
and very competitive.  The number of firms competing in the industry has 
decreased by an annualized rate of 15% over the last three decades.  
Exiting firms were typically smaller in size, the majority of which had less 
than 50 employees.  

	Additionally, the competitive nature of the market results in a 
high degree of price sensitivity which culminates in smaller margins on 
sales.  Sales tend to be very seasonal in nature with peaks during major 
holidays.  There is trending toward a larger variety of card offerings 
(increasing inventories), shorter carrying/selling periods, increased 
diversification of product lines, and an increase in sales of everyday cards 
as compared to holiday cards. 

Friendly Cards, Inc.
	Beaumont Greeting Card Co. was founded by Wendy Beaumont in 
1978, in New York City.  She later acquired Lithograph Publishing Co. 
and took these companies public a year later for $3 a share under the name 
Friendly Cards, Inc.  Friendly has rapidly expanded by acquiring Glitter 
Greetings of Lansing, Michigan (for cash and equity), whose primary 
market was selling cards to supermarkets.  Soon thereafter, it acquired 
Edwards & Co. of Long Beach, New York (for cash), whose primary 
market was selling juvenile valentines through chain, drug, variety, and 
discount stores, as well as, to wholesalers and supermarkets.  These 
acquisitions greatly enhanced Friendly's distribution line expanding it to a 
regional power.  Later Friendly acquired a California firm (Friendly 
Artists) which extended the distribution line to a national basis.  Friendly 
Artists' primary market was prepackaged cards direct to the warehouse.

	Twenty-five percent of Friendly's sales are prepackaged boxes, 
which have a higher margin than regular cards due to lower return rates 
and lower handling costs.  Currently, Friendly appears to be a niche player 
in the prepackaged box cards market and has avoided entry into the 
premium card market, thus, avoiding direct competition with the 'Big 

	Friendly's sales are more concentrated than the industry with the 
majority of sales occurring near Christmas at 30% (vs. Industry 32%), and 
Valentines Day at 25% (vs. Industry 7%).  Thus, over 55% of sales occur 
within a 3 month period.  Plants at Friendly are being used at capacity 
thus, growth would necessitate further additions or acquiring contract 

	Friendly's distribution line is effective for a smaller firm due to its 
structure.  Of twenty salesmen, one-third work on commission thus 
lowering Friendly's costs.  However, one problem with using salesmen on 
commission and having such a small sales force is the tendency to sell to 
rack jobbers and wholesale distributors.  This decreases the potential 
margin on cards by two-thirds.

Friendly's Financials

	Sales have increased  by over 50% between 1985 to 1987.  Cost of 
goods sold has decreased as a percentage of sales in each of those years 
thus, producing an increasing margin ( 29.36% in 1985 to  35.15% in 
1987).  The rapid growth by acquisition and the national distribution 
channels that were accomplished by it,  have affected the number slightly.  
In 1986 selling and delivery expenses increased by 1.45% and this leveled 
out in 1987.   G&A expenses also spiked in '86, reflecting the recent 
purchase of another company, and then settled back in 1987.  However, 
while sales may have grown rapidly they have not matched the increase in 
asset growth, which nearly doubled in 1986.

	Growth in this company is being funded by improving margins 
and by increasing leverage, as indicated by the Dupont Data.  Although the 
acquisitions were acquired by both cash and equity, the majority were debt 
financed, which explains why the ROE figures have increased so 
dramatically (almost 16%) in the last three years.  The activity ratios 
indicate that the receivable to payable were in arrears by 36 days in 1985 
increasing to 52 days in 1987.  This is probably a result of increased sales 
to less creditworthy individuals or inattention to collections.  Inventory 
turnover numbers are shrinking due to the continually larger inventories 
being carried.  Net fixed asset turnover has decreased by 2.3% between 
1985 and 1987.  This can be explained by higher growth in assets than in 

	The liquidity ratios indicate that the asset to liability ratio for this 
company is trending down.  The current ratio indicates that the company is 
becoming slightly more insolvent with a current ratio of 1.18 during '87.  
However, by looking at the Quick ratio and discounting for the affect of 
inventory in the asset number, the company is dramatically less liquid at 
0.67 in 1987.  This indicates that the company is very highly leveraged and 
is using its large inventory levels in order to support its substantial 
borrowing needs.

	Friendly's actual growth rate exceeded the sustainable growth rate 
in 1986 and was equivalent in 1987.  This difference in 1986 produced a 
need for added debt to finance growth.  However excess funds were not 
needed to fund additional growth  in 1987 since the actual rate of growth 
did not exceed the sustainable rate of growth.  This can also be seen in the 
total debt to equity ratio which increased from 3 in 1985 to 5.21 in 1986 
and reduced to 4.71 in 1987.

	The leverage ratios indicate that the bank loans to debt are fairly 
well matched, with loans being less than receivables, however, increasing 
in percentage.  Interest bearing debt jumped dramatically in 1986 as a 
result of debt funded acquisitions but continues to level off along with total 
debt to equity figures in 1987.  Finally, debt to assets has increased 
dramatically in the last three years, increasing by 7.5% to 82.5% in 1987.

	Thus Friendly Cards seems to be very highly leveraged, even more 
so than other firms in the industry although the trend is to increase debt.  
This highly leveraged position coupled with the high fixed costs and low 
margins characteristic of the industry, exposes Friendly as extremely 
susceptible to fluctuations in the market.  Therefore, further debt growth 
may not be advisable--especially since it is currently violating its existing 
debt covenants.  However, Continued growth, however, is needed as to 
allow the company to further take advantage of its existing distribution 
lines and realize further economies of scale.
1.2  Review and Evaluation of Pro Forma Statements

	The parameters that Ms. Beaumont has set for the pro formas 
seem reasonalbe for the most part.  There are, however,  some questionable 
numbers.  For instance, all the forecasts are based on continued sales 
growth at 20% per year.  When compared to astronomical growth rates of 
58% in 1986 and 27% in 1987, these estimates appear almost  
conservative.  The majority of the growth in the past, however,  were 
associated with major acquisitions which served to inflate the sales 
numbers.  The historical reluctance to use equity to grow would serve to 
limit growth if continued into the future.  Furthermore, it may be difficult 
to continue to grow at such a high rates in an increasingly competitive 
market.  Holding costs of goods runs at 65% of sales and may also present 
a problem depending on whether the company can continue to manage its 
costs as it continues to grow.  It could be argued that the reason CGS has 
dropped recently is due to the acquisition of Friendly Artists and the 
increasing reliance on a sales mix made up of low cost prepackaged boxes 
of cards.  A shift in the mix away from these items could increase costs.  
Also, further acquisitions will serve to push up delivery and selling costs.   
For our purposes, however, holding them flat seems reasonable.  The tax 
rate seems low at 38% but, depending on the new volume of sales and the 
maximum tax rate for a corporation, this rate could be even higher.  And 
while the rest of the numbers seem to follow their previous assumptions, 
the inventory turnover, debt to asset, and interest rate assumptions could be 
assumed differently.  

	As a result of increased competition in the industry, increasing 
variations of cards as well as shorter holding duration, it is very unlikely 
that inventory turnover would improve to 1.91, and it may very well drop 
well below this number, possibly to 1.75.  Since growth is likely to 
continue into the future, an increased amount of inventory will be needed 
for new market areas.  Debt to assets needs to decrease, but this will be 
difficult to do without funding growth by equity rather than debt.  The 
large sales growth assumptions are directly related to acquisitions, thus 
increasing assets.  If this is done through equity, this number is very 
realistic.  Finally, there may be a problem with the assumption that interest 
rates on LTD will be 11%.  The Monetary Policy Report to Congress 
indicates that rates should tend to decrease in the future so this rate may be 
attainable even to such a highly leveraged firm as Friendly.  Without more 
information this estimate seems fine.

1.3 Financial Policy /  Covenants

	Friendly's apparent financial policy is rapid growth by debt.  This 
debt-financed growth may be due to a ownership issues that could affects 
Ms. Beaumont's control over her company. The financials indicate that 
growth is also taking place at the expense of margins, as indicated by the 
Dupont data.  The company believes in the economies of scale of the 
industry and appears to be establishing a national distribution network.  
While costly in the short run, this strategy may enable a viable and 
profitable position in the industry.

	The elements of Friendly's financial policy appear to be the 
following.  Friendly's capital structure mix is governed by a debt 
orientation.  Its debt/assets ratio is currently at 82.5% which places is 
significantly below the AAA rate.  AAA bonds are listed at 9.7% while 
Friendly can only borrow at 11.5%.  While equity has been used in recent 
acquisitions there is a strong preference by management to use debt 
funding.  Without question, Friendly is at an integral juncture.  Existing 
lines of credit are maxed out and the bank is imposing new covenants on 
future loans: bank loans < 85% of AR and liabilities not to exceed three 
times the BV of the company. Friendly currently has a $6.25 million line 
of credit.  Under the current structure Friendly will be in violation in 1987 
with bank loans at 87% of AR and debt to equity is at 3.13 times.  
Significantly, bank and trade credit for Friendly is expected to reach over 
$9 million in Dec. '87.

	Long term and short term debt are both fueling growth.  The basis 
is assumed to be the prime rate (which is 8.5%) plus 2.5% points.  This is 
assumed to be a fixed rate established at the time of borrowing.  The 
company's currency is the U.S. dollar and the company does not have any 
exotica policy to mention.  Control of the company rests solely with Ms. 
Beaumont as she is both the president and the leading shareholder, 
possessing  55% of the stock.  An additional 20% of the stock is owned by 
employees and officers of the company.   Finally, earnings are retained for 
future growth and meeting current obligations.  There are no dividend 
payments and the stock has depreciated in value from a high of $15 a 

PART 2. Decisions faced by Ms. Beaumont

2.1  Envelope Machine Investment

Evaluation of the Envelope Machine

	We do not agree that the investment in the envelope machine will 
result in a return of 31%.  The reason for this is that the working capital 
needed to fund the machine would be funded by additional debt by the 
company.  The interest on the debt needs to be considered before 
evaluating the total return on the investment.  Under this scenario, and 
considering that Friendly Cards' interest on debt is 11% the interest 
expense is $22,000 per year before taxes.

	Our Estimated Annual savings from Operation of Envelope 
Machine, Years 1 through 8 ( Dollar figures in thousands) is as follows:


Outlays for envelopes purchased in 1987           	$1,500

Incremental expenses from manufacturing envelopes:
			Materials			$   902
			Warehouse			     94
			Labor				     91
			Depreciation			     62
			           Total Expenses 	 $1,149	

	Increase in Profit before Taxes (decrease in COGS)   351       
	Interest Expense on Working Capital		      22
	Actual Increase in Profit before Taxes		     339
	Increase in Income Taxes @.38			     125
	Increase in profit after taxes			 $   204

	The projected Cash flows for the investment in the machine are: 

	Based upon the cash flows projected in the above Table the 
internal Rate of Return on the investment is 26%.  Based upon Friendly 
Cards Cost of Equity which is 20%  (Appendix WACC) buying the 
machine with all equity at 20% or debt at 11% is recommended
Financial Effects of Investment

	The Financial effects of buying the envelope machine are can be 
examined in detail in Appendix Machine.  The activity ratios for Friendly 
if the investment in the machine is made are: (attachments).

	The investment in the machine has the following effects:
* Decreases Cost of Goods Sold by about 1.5 %  which in turn increases 
the Gross Margins
* Decreases Inventory Turnover from 1.91 to 1.86
* Increases Funds needed in 1988 by $418,000, in 1989 by $323,000 and 
in 1990 by $112,000.
* Earnings per share increase to $2.89 in 1990 from $2.53 in 1990 without 
* By making the investment in the machine Friendly would not be able to 
meet both of the covenants required by the bank
* The ratio of the bank loans to receivables exceeds .85 in all three periods.
* Ratio of  Friendly's total liabilities to the book value of the company's net 
worth exceed 3 in 1988 and 1989 which do not meet the covenant but in 
1990 the ratio drops down to 2.94 where it meets the covenants.
2.2  Evaluation of West Coast Offer (New Equity) 

	We agree with Ms. McConville's conclusion that Friendly should 
accept the offer from the West Coast Group at the terms stated if that was 
the only option available to Friendly Cards.

	The advantages of this proposal would be: 
* Agency costs will be only 5% compared to the actual costs if an 
investment bank was used to sell securities of the company in a public 
* The infusion of equity would enable Friendly to meet all the covenants 
required by the banks (Appendix WC) enabling Friendly to continue its 
rapid growth without any financial restrictions from the bank.
* The equity infusion would enable Friendly to invest in the envelope 
making machine and reduce its cost structure and still meet all covenants 
required by the bank.
* The uncertainty about how many securities will be sold if a public stock 
offering is held is eliminated.
* Continuing rapid growth would enable Friendly to retain most of the 
sales representatives who might shift to a competing firm if growth is 
slowed to enable Friendly to meet its financial covenants
* The price that Friendly is getting is more than reasonable based upon the 
present value of the discounted cash flows as shown in (Appendix 

	Disadvantages of accepting the proposal would be: 
* Loss of control.  Ms. Beaumont's who presently owns 55% of the 
outstanding shares would own 40.37% of the company after the equity 
infusion.  Even though along with the employees of the company she 
would own 60% of the company she would not be able to make unilateral 
* The West Coast Investors who would own 26% of the company would 
have a significant say in how the company should be run which may affect 
the current management structure and aversely effect their ability to mange 
the company as they wish. 
* Reduction of EPS.  Earnings per share would be reduced to $2.29 per 
share from the projected $2.89 per share in 1990 with the purchase of the 
machine and without equity infusion due to the dilution effect of the new 
shares.  This earnings dilution would probably result in a lower share 
price.  (Approximately $18.32 instead of $23.12 considering a price 
multiple of 8). 

2.3.  Valuation of Creative Designs, Inc. 

Capital Structure Argument

	Ms. Beaumont had been considering a possible acquisition of 
Creative Designs, Inc. (CD), a small mid-western manufacturer of studio 
cards.  She had examined the details of CD's operations for four months, 
and believed that under her management, CD could immediately reduce 
cost of goods sold by 5%, and reduce other expenses by 10%.  If Friendly 
acquires CD in early 1988, assumptions are made that CD's sales would 
stay flat during 1988 but would grow at 6% per year thereafter.

	Based on the following table from case facts,  there is a wide 
range of Debt-to-Equity Ratios for the four companies within the same 

	American Greetings'(AG) D/E ratio increased from 0.35 in 1985 
to 0.63 in 1987.  The reason for this upward trend was that American 
Greetings had diversified its business segments; from solely relying on 
greeting card sales AG expanded into gift wrap and stationary goods, such 
as playing cards, gift-books, and college study guides. Such diversification 
efforts demanded higher debt levels.  In addition, AG was a large company 
with annual sales of $1,174 million in 1987, up 16% from 1985.

	Gibson Greeting's (GG)D/E ratio decreased from 0.71 in 1985 to 
0.49 in 1987.  The reason for this downward trend was that Gibson was a 
relatively small company, with annual sales of $359 million in 1987, an 
8.8% increase from 1985.  GG's growth rate was significantly lower than 
American Greetings.

	The total debt-to-equity ratio of Creative Designs would decrease 
over the next several years.  Since CD's sales in 1987 was $5 million, it 
was much smaller than the above two companies.  Based on the pro forma 
financial statements for the period of 1988 to 1990, we see growing sales 
and EBIT.  As a small-size manufacturer, the best capital structure would 
be: financing its operations mainly by internal growth and a significant 
reduction in the company's debt levels.

	Ms. Beaumont wanted to acquire CD for the following reasons: 
* In the highly competitive market with high cost in distribution and low 
margin, Friendly had to grow in order to survive, and CD was a good 
*  Since CD's shareholders agreed to the acquisition by stock-exchange, 
"pooling of interests" accounting method would be used, and the 
consolidated financial statements more attractive than without CD, and 
Friendly need not record goodwill (if any) and avoid amortization of 
* Since CD had a relatively low debt level and a very low "bank loan to 
receivable ratio", while Friendly had difficulty meeting its bank borrowing 
restrictions, acquiring CD would make possible for Friendly to meet the 
* Friendly can easily integrate CD to its high growth strategy, and expand 
Friendly's market presence in the mid-western region.

Weighted Average Cost of Capital Assumptions (WACC)

	Based on the case facts that the premium for equity risk was 6% 
on long-term governmental bond rate of 8.37%, we may calculate the 
unleveraged beta for American Greetings and Gibson Greeting, and use a 
derived estimate as a proxy for CD's unleveraged beta.

1987 Financial Data for Two Large Publicly Traded Companies

	To be conservative, we assume the unleveraged beta for CD is 
0.77.  Since the cost of debt was 11% and the tax rate was 38%, we 
calculated CD's cost of equity is 13.97% in 1988, and the weighted average 
cost of capital (WACC) is 11.07%.   Over the next five years, CD's WACC 
would increase to 11.92% in 1992 due to the decreasing D/E ratio and 
therefore the tax shield effect. 

Cash Flows, Terminal Value, Equity Value Valuations

	In addition to the above information on WACC and sales growth 
rate, we have made the following assumptions: 
* Sales will stay flat in 1988, but will grow at 6% per year after 1989.  
* Cost of goods sold will stay at 55.12% of sales level.  
* Depreciation, "Selling, delivery, and warehousing expenses", and 
"general and administrative expenses" will grow proportionately to sales 
* Increased Retained Earnings will be used to reduce long-term debt. 
* Prepaid expenses will increase by a small amount each year.
* Interest expenses will decrease over the period since the debt level will 
* No dividend will be paid after 1988.

	Based on the above assumptions, we found that the total present 
value for CD was $4.349 million.  Adjusting for the interest-bearing loans 
totaling $1.3 million, the net worth of CD would be $3.049 million, $1.168 
million higher than the calculated value of the stock exchange ($1.881 
million).  This indicates that acquiring CD is a good transaction for 

2.4 Pooling Implications (Friendly + CD) 

	By using the "pooling of interests" accounting method, we 
constructed the Friendly and CD consolidated financial statements. (see 
Appendix Valuation - Friendly + CD)

	The impact on 1988 pro forma financial statements is as follows:
* New bank loans needed decreased from $1.585 million to $1.357 million;
* EPS increased from $1.67 to $1.73;
* Net profit margin increased from 4.96% to 5.49%;
* Assets turnover increased from 1.01 to 1.03;
* ROA increased from 5.01% to 5.49%;
* ROE decreased from 25.23% to 20.5%;
* Days in Receivable reduced from 157 to 149;
* Bank loan to receivable ratio decreased from 0.9 to 0.74;
* Interest bearing debt to equity ratio decreased from 2.62 to 1.92;
* Total debt to equity ratio decreased from 4.04 to 2.62.
	The overall impact of acquiring CD to CF is positive.  The result 
of pooling is in line with Friendly Cards' financial strategy.  

	In the long run, acquisition of CD would become an integral part 
of Friendly Cards' strategic plan for the next few years to achieve a higher 
growth rate and increased market share.

	In the short run, acquisition of CD would meet Friendly Cards' 
immediate financial needs enabling the company to meet the bank's 
covenants, specifically, to reduce the "bank loan to receivable" ratio to an 
estimated 0.9 in 1988 to 0.85 or lower, and to decrease "total liabilities to 
equity ratio" from an estimate 4.04 in 1988 to 3 or lower.  The result of 
pooling shows that these two requirements are met.

2.5 Friendly Cards Stock Valuation


Capital structure

	Based upon the pro forma financial statements and the bank 
covenants' requirements, we assume the capital structure to be 75% debt 
and 25% equity.  Any other capital structures with the reduction of debt 
would make it more difficult to get additional capital through equity.  

	We need the debt financing to be able to meet Ms. Beaumont's 
growth requirment.

Discount rates
	We assume the cost of debt to be 11%.  This is based upon the 
following facts:  In early 1988, interest rates were declining, the 10-year 
Treasury Notes rate declined from 9.52% in October 1987 to 8.39% in 
January 1988; even though the short-term Prime Rate increased to 9.07% 
by October 1987, it had decreased to 8.5% by January 1988; furthermore, 
the Federal Reserves Monetary Policy Report(Jan. 1988) stated that "high 
rates of capacity utilization and low unemployment suggest the needs in 
maintaining progress toward price stability", indicating that interest rates 
would stabilize at the present level.  Also the need to reduce the trade 
deficit, business and labor would continue to exercise restraint in price and 
wage behavior, indicating the Fed would hold interest rate at the present 
level, or even reduce them.

	We assume the interest rates would hold stable at the present level 
of 8.5% and that the lending institution will continue its premium of 2.5% 
over prime.  We assume all the funding for the debt to be short term as 
most of the debt would be used to fund the current assets (receivable and 
inventories).  This would be a proper matching of funds.

	Based on the valuation of Friendly Cards, we found that 
 * FCFE Method (Free Cash Flows for Equity): the valuation was -$ .95 
per share ;
* Free Cash Flow for Capital:  the valuation was -$5.75 per share ;
* Book Value Method: using 11/2 times Book Value the valuation was 
$7.40 ; 
* P/E ratio (multiple) method:  using the industry average P/E ratio of 7, 
the valuation was $9.50 per share.  (Please refer to appendix Valuation - 
Friendly Cards, Inc.)

	The only way the company's stock price was worth $8 to $9.50 per 
share was that West Coast Investors and Creative Designs valued the 
company using a Price to Earnings  multiple method.

We attempted to back out a discounted cash flow model that would justify 
an $8 or $9.50 share price.  By altering certain assumptions, most 
specifically the sales growth rate we can achieve positive valuations of the 
stock price.  Slower growth in sales

PART 3  Overall Assessment

	Our recommendation to Ms. Beaumont is to 

(1)  First, acquire CD with a stock exchange of 198,000 shares at 
(2)  With the additional leverage obtained by the CD acquisition, purchase 
the envelope machine.

	As evidenced by the above matrix and graphs, even though 
Friendly Cards would achieve a higher EPS by not acquiring CD but 
buying the machine, it would not meet the bank covenants.

	Advantages of our recommendation:
* Meet all of the bank's covenants;
* Meet Ms. Beaumont's growth needs;
* Meet Ms. Beaumont's requirement on D/E ratio of 2 by 1990;
* Maintain a relatively high level of control for Ms. Beaumont over the 
* Position the company for future growth by providing a more favorable 
D/E ratio.

	Disadvantages of our recommendation:
* EPS dilution by acquiring CD from $4.64 per share in 1992 as compared 
to $4.15 with the CD acquisition;
* Reduce Ms. Beaumont's control from currently 55% to 41.5% with CD 

PART 4 Goals for the Financial Structure of Friendly Cards, Inc. 

4.1 Friendly Cards capital structure consideration

	Our recommendation is that Ms. Beaumont to move Friendly 
Cards' capital structure closer to 60% debt and 40% equity (a D/E ratio of 

	Our reasoning for such a recommendation is as follows:


	For future growth and possible acquisitions,  Funds for acquiring 
more assets (another envelope machine!) to reduce costs.


	Ability to deal with possible adversity into the future (i.e., low 
sales) Lower risk level than current D/E ratio


	Future growth in earnings due to ability to acquire market share 
through acquisitions.  Further exploit the economies of scale to reduce 
CGS, Handling and Distribution Costs


	Maintain controlling interests in the company


	Having a higher D/E Friendly can issue equity at more favorable 
terms at a later date when EPS is higher, the market environment is 
"friendlier", and the company will be in a better financial position. 

	Our recommended target capital structure for Friendly Cards, Inc. 
of 60/40 D/E is realistically attainable within 3-4 years (mid 1991).

Friendly Cards Case Attachments