Nursing Temps Inc. was founded by Tiffany Radcliffe in 1985. The firm experienced rapid growth via expansion in different cities across the Southwest U. S. as well as franchising in other parts of the country. The concept of Nursing Temps originated from the demand for nurses by many health care providers, especially hospitals, who had difficulty in hiring and retaining permanent nurses. Temporary nurses were viewed as savings in fixed costs and were usually hired by institutions with staffing requirements that were not permanent in nature.
In other cases, temporary nurses filled in vacant positions till the time permanent nurses were sought. This fuelled the business model of Nursing Temps Inc. which granted exclusive rights to use its name to the franchisees. As a franchisor, Nursing Temps Inc. provided marketing and management support to its franchisees as well as office supplies at substantial savings from retail prices. Tiffany staunchly supported equity financing as opposed to debt financing.
Tiffany used the company’s excess cash flow to retire the debt. The practice of franchising has served as a mode of capital injection for the company nullifying the need for outside capital for several years. However, due to competition in the business, Tiffany envisages slow growth in her business resulting in reduced earnings before interest and taxes (EBIT). Tiffany’s financial manager, Paul Duncan, has been working toward persuading her to employ debt in the capital structure of the firm.
Paul’s idea is based on the premise that an underleveraged company is more prone to a hostile takeover since the company’s excess debt capacity can be taken advantage of in terms of financing the bid. Debt into the capital structure can be used to repurchase stock in the absence of any need for business expansion. Tiffany has given Paul a chance to prove his proposition on the basis of financial analysis of the company.