Southport Minerals

1666 WordsJan 19, 20117 Pages
Case 11: Southport Minerals, Inc. 1. What did Southport Minerals confront in 1964? Did the Firstburg investment opportunity fit well with Southport’s needs in 1970? Southport confronted a period of tightening supplies and rising sulfur prices which lead to a sharp increase in profitability for the company. Profit after tax had jumped from $12.8 million in 1963 to $15.3 million in 1964 increasing its EPS to 1.00 a share while still maintaining a dividend of .60 a share while actually lowering its dividend payout ratio. Southport was also highly liquid during this time, having $54 million in cash on hand and liquid securities and no debt in its capital structure. Being in a highly liquid position Southport sought diversification…show more content…
3. According to the info provided by Exhibits 5 and 7, prepare a consolidated pro forma balance sheet, correspondent debt and equity ratios, and weighted average cost of capital from 1969 to 1985, assume 40% income tax rate. (For the consolidated pro forma balance sheet, the items in Assets could be Net Working Capital and Plant and Equipment; while in Claims are Debt (or different debt items) and Equity.) 4. Which method of analyzing the value of the Firstburg investment proposal to Southport Minerals is most reasonable? Why? Why are the other three methods less reasonable? Present your reasoning in detail. Approach 4 seems most reasonable to me as the actual investment of Southport minerals is only $20 million, not $120 million with NWC. Making the subsidiary will have SI’s debt obligations not liable to Southport Minerals and only to SI, this is yet another reason why the dividend approach is most reasonable. The financing architecture has made contracts with foreign investors who are providing capital to the firm in lieu of loan guarantees that will lower the cost of borrowing for SI. The entire purpose of this venture is to provide diversification and value to Southport Minerals, not run a separate entity known as Southport Indonesia and retain all the earnings in that country to expand, the entire project needs to benefit solely Southport. The other approaches in discounting the

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