Continental Carriers Inc. Case Analysis Essay

839 Words Nov 30th, 2010 4 Pages
Continental Carriers, Inc

Continental Carriers, Inc is a regulated general commodities motor carrier who had shipping routes up and down the Pacific Coast and to parts of the Midwest. They sought to acquire Midland Freight, Inc to expand its operations and were deliberating about which method to finance the acquisition. The purchase of Midland Freight, Inc would cost $50 million in cash. CCI would gain $8.4 million to its earnings before interest and tax. There were three options that the board of directors debated over: issuing new common stock, issuing preferred stock or selling bonds.

As Ms. Thorp, evaluate the impact of the bond issue and of the stock issue on the EPS. What are the risks in each alternative?

The bond
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There can also be a loss of control because stockholders are effectively owners of the company. The volatility of the stock price can be greatly affected if there is one large equity holder. Also taxes would be greater because tax shield would not be applicable with this option.

Should the firm use preferred stock?

Preferred stock has a par value of $100, which arranges to sell 500,000 shares at a dividend rate of $10.50 per share. However, this option will not be a good idea because it has preference over common stock in the payment of dividend. One positive element is preferred shareholders would not have any voting rights. It is also could be callable by the issuer which may be unattractive to investors. There is no guarantee that investors would even want to purchase preferred stock because of the high premium to obtain it and the subpar performance by the common stock. Although this is an easy way to raise capital it would upset and agitate current stockholders and the outcome may not be good as there are not many other reasons to issue the preferred stock.

How would you fund the acquisition, considering all qualitative and quantitative issues?

In order to procure Midland Freight, Inc the optimal way to finance would be through the sale of bonds to the insurance company. According to Exhibit 3 the EBIT for the stock or bond will be $34 million and the EPS of stock at $2.72 and the bond at

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