Essay about Winfield Refuse Management Case Study Analysis

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:

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?

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

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

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?

The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.

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

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.

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.

Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.

As you can see in the graph below, the terminal value for the company if it takes the equity route is about $106M, where if it takes the debt route its terminal value will be about $45M.

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.

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.

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).