Q1 what are the annual cash outlays associated with the bond issue? The common stock issue? Bond Issue
Q2 Analyze and respond to each director’s assessment of the financing decision.
Leo Staumpe believes that MPIS is an excellent buy that will offer tremendous revenue synergy and cost reduction opportunities. Board of directors also agrees with the assessment; the only decision is on the mode to secure funding for the acquisition. Two options available to secure a funding of125 million are for the funds are:
1. Issue bonds for 125 million at 6.25% interest rate and 15 year maturity. Annual principal repayment will be 6.25 million, leaving 37.5 million outstanding at maturity.
2. Issue 7.5 million additional common stocks at the
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The same value has been captured in the form of increase in the EPS. Hence the shareholders will be better served with raising funds through debt.
James Gitanga
James opinions that all major players in the industry rely on long term debt in their capital structure. James’s observation seems to be true based on the exhibit 1 where all the player are showing long-term debt to equity ratio. Based on the industry insight, James questions the Winfield’s policy against debt.
We agree with James analysis based on the industry insight. It is a relatively stable industry with steady forecasts. Probably that is the reason that all other major players do not hesitate in taking long-term debt. We also do not see any reason to avoid long term debt in Winfield.
Q3 How should the acquisition of MPIS be financed, taking into account the issues of control, flexibility, income, and risk?
Let’s look into both the options (debt vs stock) on all the 4 parameters: control, flexibility, income, and risk.
Control
Winfield is a publicly traded company however, majority of the stocks (79%) are held by Winfield management. Winfield management will continue to hold 79% stocks if they are raising funds through debt however, their share will drop to 54% if they decide to raise the money through common stocks. 54% is still majority of the stocks so Winfield management will continue to control the
Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually, there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First, it could continue or expand its market-repurchase program. Secondly, Intel could declare dividends to its shareholders on existing stocks. The last strategy is to put together a package of two unique securities: 1) A distribution of a two-year put warrant to its existing shareholders. 2) A distribution of 10-year convertible subordinated debentures to new
I would worry that the firm might be decreasing the size of the operations. Also the firm has relied more on debt funding in the past but the incoming cash from taking on debt is going down over the last three years; however, payments for long term debt maintains. I wonder if they are struggling to obtain new debt and are reaching their limit.
In case they finance with debt, Winfield (the company) would be able to enjoy the tax shield as a result of tax deductible interest expense, hence their effective cost of debt will be 4.225%. However, when financed with stock, the new stockholders will be entitled to perpetuity of $7.5M in dividends. Working out the net present values of the two scenarios as shown in the tables above, Debt financing becomes a favorable option to stock since it yields a higher NPV.
Three interrogations were thus to answer. Should the company provide investors with classic bonds or give them the opportunity to convert them into equity? Should they structure the offer with a fixed or a floating coupon rate? And last but not least, where should they locate the operation?
However, significant risks are prevalent in acquiring PTI. First, more one-third of PTI’s sales originated from five companies and it is uncertain that without Harry Elson’s personal efforts if their patronage will continue. Secondly, the bank valuation of PTI ($600K) appears inflated as the bank’s valuation is notably more than PTI’s book value ($292K), calculated with an inflated price/earnings multiple for a company with no proprietary
b) What will be the total equity value and equity price per share after the issuance is completed?
As shown in the ratios chart, working capital has increased by $13M. Maturities of short-term investments and cash flow from operations are projected to be sufficient to sustain the company’s overall financing needs, including capital expenditures. The following corporate strategic plan identifies a project that needs financial backing.
Referring to Vice President of Finance, he want to pursue the current approach because they are in profitable based on contribution margin by 35 percent. The company just needs to monitor their margin in control their cost well.
Winfield’s net income was $27million. With the Acquisition of MPIS and its $15 million net income, the business can expect a $42 million net income. The company’s current debt-to-equity ratio is 50:50. First option is to issue debt with an annual 6.5% interest
With this, we can then find each of the costs for equity by averaging them within each of the bond rating categories. This showed a very flat performance in cost of equity. I we compare that to the market beta, our answer for CAPM would change from the 9.89% to the 11.03%. According to exhibit 8 in the case, a cost of equity of 11.03% is between a BBB and BB bond rating. Therefore, if they were to repurchase stock from investors, there share prices would in theory go up because they are investing more and more money into the company.
We … believe Deluxe is underleveraged. We believe our steady cash flows put us in a position to increase our debt level up to $700 million and still maintain a strong investment-grade rating. The use of debt will lower our overall cost of capital and as a result increase returns on capital invested. We expect that the debt will be a combination of both long- and short-term borrowings.
By 2015, Pacific Grove (hereafter referred as "PG") will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2.77 which is consistent with Peterson's expectation. I must be noted that over the next 4 years, PG's interest coverage is forecasted to increase suggesting that they will gradually be building up more earnings to cover its debt payment which is a good sign for the banks.
However, I believe the market will see this change too little leverage. Although Blaine is facing considerable competition from imports, the industry as a whole as well as Blaine do not have a high degree of business risk. Blaine, with a 21.8% LTD/Equity ratio and an 18.95 Times Interest Earned ration, would have the ability to take more leverage and to pay off debt. I also believe that there might be some concerns about the cash position of the firm. With only 21M remaining cash that is required for operating activities, I would doubt if the company would be able to maintain a steady dividend payout as well as to react to emergencies.
Jan. 1 Purchased 50 8%, $1,000 Choate Co. bonds for $50,000 cash plus brokerage fees of