Essay about Winfield Refuse Management Case Study Analysis

687 Words Mar 13th, 2014 3 Pages
1. What are the annual cash outlays associated with the bond issue? The common stock issue/
The bond principal repayment will be $6.25 million annually. The cash dividends will be $7.5 million annually on additional stock.
2. How do you respond to each director’s assessment of the financing decision?
The following assessments were given during the last board meeting:
• Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years. We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price
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Issuing bonds in the case would be a better option, as even with the annual principal repayments EPS would be higher and the Company would still enjoy the tax shield.
• James Gitanga was not sure about the unusual capital structure of the Company, avoiding the long-term debt. We believe that the long-term capital structure across the industry was pre-determined by the high capital expenditures and steady cash inflows. Thus, issuing long-term debt was more preferable. Besides, by issuing debt they would enjoy the tax shield since interest on long-term debt is tax-deductible.
3. How should the acquisition of MPIS be financed, taking into account the issues of control, flexibility, income and risk?

Cash flows from Stock Offering (in Million Dollars)
Proceeds from Stock offering $ 125.025

Annual Dividend Payments $ (7.50)
Every year forever
PV of payouts $ (125.000)

NPV $ 0.025

Notes:
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.
Stock price
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