Essay about Winfield Refuse Management Case Study Analysis

40%/9% Bonds and Common Stock generates a lower EPS, EBT, and Net Income in all years in comparison to the 50/50 option and is therefore not a practical capital structure option. The interest paid on bonds creates a lower EBT, net income, and total income available for common stockholders for all years in comparison to the 50/50 option. A capital structure of this mix might make banks reluctant to loan money due to the organization debt to income ratio. In addition, investors may be hesitant to invest due to the slow capital growth indicated by the

will generate after-tax (year-end) cash flows of $8 million for five years. The firm has a debt-to-equity

The issuance of convertible debt will result in even more cash holdings for Intel, an additional $1 billion. This, at face value, does not solve Intel’s capital structure dilemma of having too much cash. However, Intel can afford to incur more debt financing, since it has relatively low long-term debt. By doing so, its long term debt ratio (using 1991 figure) would change to:

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

William Wrigley Jr. Company is exploring whether it is optimal to recapitalise with taking on $3 billion of debt. Three options are revised; borrow and repurchase shares, dividend payouts or continue to function with full equity. Debt will provide a tax shield of $1.2 billion given the tax rate is 40%, this should increase the market share price to $61.53 per share. The viable method for the company is to utilize this debt to repurchase shares. The will not only increase Wrigley’s market value, via the debt shield, but also signal to market that management believes Wrigley’s is undervalued, something the dividend payment won’t achieve.

On the other hand, the issuance of bonds to fill the need for additional capital to expand does not require handing over a part of the company. Massachusetts insurance has no say in how the management runs Winfield after issuing bonds. The business relationship between the two institutions will terminate in 15 years (at maturity). The principal and interest are known figures that can be built into the company budget over the upcoming years. Still, money borrowed must be paid back. Taking on too much debt can cause cash flow problems, which can mean difficulty to repay the loan back. If Winfield has too much debt, it can be seen as “high risk” by potential investors, limiting ability to raise capital by equity financing in the future. Debt financing can also increase the vulnerability of the business during hard times (though it seems Winfield was not greatly affected by the recent recession). Debt can also make it difficult for the company to grow, as the cost of repaying the loan is vital to the business. Company assets can be held as collateral and owner of Winfield maybe personally require guarantee of the loan.

This will enable the company to raise huge amount of funds by issuing bond. The main advantage is that the company is not required to pay principal until maturity time; risk involved in bond issue is less which will reduce the cost of loan (Www.boundless.com, n.d.). Debt financing will not dilute the ownership and any decision related to the company can be made fast without any intervention, company will have more independence to make reinvestment of entire profit earned into the future development of the business (Inc.com, n.d.). In this case, debt holders do not have any claim over the economic profits apart from the interest payment, and debt market is more efficient (Bradshaw, 2013). Fixed amount

If the number of outstanding shares is reduced by a buyback of shares then the EPS will increase if the EAT remains unchanged. However the EAT is reduced since there is interest expense. If the dividend payout remains the same then the dividend paid per share will increase as well. The debt interest would be 13% of $3 billion which is $390 million. EBIT in 2001 was $527,366,000. So the EBIT is $137,366,000. Then this is taxed at 40% so the EAT is $82,420,000. So by taking on more debt the EAT diminishes so the earnings per share will drop dramatically. Dividends affect next years earnings as they are taken out of the EAT.

The fact that the analysts particularly concerned about Glent Mount Furniture Company’s growth rate in earnings per share made the CEO Carl Thompson worried. Carl understood the important of the earnings performance to the company’s market value, and looking at the growth rates of the earnings per share for the past five years, he knew that he needs to take action. The consideration of taking $10 million in long-term debt to repurchase 625,000 shares of stock outstanding at $16 per share is on the table. Should he or should he not take this huge debt?

Debt financing is considered the fastest and cheapest method of financing growth of a company, however using debt to finance accelerated and explosive growth can have his drawbacks. The debt financing option enjoyed by Loewen kept shareholders stake in the business constant, and reduced the company’s tax liability. As shown in exhibit 4, from year 1989 to 1996 (excluding the special items regarding the law suits in 1995), the increase in debt (from 79.7 to 1428.6) led to an increase in EBITDA (from 21.4 to 251.9), operating profit(from 17.7 to 195.1) and net income (from 6.2 to 63.9), and led to an increase in the dividends paid throughout these years (from 0 to 11.4), and thus kept the shareholders happy. These results have encouraged investors to invest more in Loewen, and have encouraged Loewen to issue more debt to finance its acquisitions, until they arrived to a point where the debt to equity ratio became too high due to lots of reasons.

This case raises many interesting questions concerning the record setting issuance of corporate debt by WorldCom, Inc. (“WorldCom”). Both the surprisingly voluminous structure of the proposed issuance and the foreboding macro-economic climate in which it was slated spark concerns over the risk and cost of the move. One of the first questions that must be addressed is whether WorldCom’s timing was appropriate. Next, the company’s choice of structure for the bond issuance must be analyzed. Finally, the cost of issuing each tranche of debt must be estimated in order to determine how much WorldCom is actually giving up to achieve the $6 billion in funds.

MCI would be better to keep its capital structure of 55% debt. The cost of equity is high because raising more equity will dilute the value for existing shareholders. Due to the fact that MCI has a high leverage, it is not feasible to issue debt. Additionally, MCI has exhausted the line of credit from the banks and used convertible debentures frequently. MCI belongs to a competitive and regulatory industry. The high leverage will limit its potential to grow. In exhibit 8, MCI does not have a bond rating. The convertible bond allowed the company to raise capital and convert to equity later. The interest coverage ratio of AT&T is 3.6X whereas that of MCI is 4.2X. After increasing the market share, the company can obtain a bond rating by decreasing its financial leverage.

We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.

It is crucial to recognize that, 300% increase in net operating income (NOI) in case 1 leads to 600% increase in shareholder earnings. Unfortunately, it also has a downside where the decrease in NOI will cause a significant drop in share holder’s earnings almost double than what NOI experiences. In scenario A under case 3, it is interesting to observe that shareholder earnings have been wiped out even before the interest is charged. This makes it evident that any further increase in gearing will give rise to negative return on equity. Thus this point can be inferred as the point for optimal capital structure. Thus the Lindley PLC case demonstrates that, under debt financing, even though it provides superior returns in good years, they stand to receive even worse returns in bad years (Pike, Neale and Linsley, 2006).

In Trade of Theory the company will decide that how much debt finance and how much equity finance will be used so that the cost and benefits are balanced out. In fact this theory explains how the corporations finance i.e. partly with debt and party with equity. It emphasis on the marginal benefit of debt finance by stating that tax benefits of debt will offset with the cost of debt.