Yikai JIN Winfield

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FINA 6273 (Part 2)
CASES IN FINA. MGMT & INVT BANKING

WINFIIELD REFUSE MANAGEMENT, INC.

Instructor: Prof. Neil G. Cohen
Prepared by: Jin Yikai

Oct 27 2014
1. What are the annual cash outlays associated with the bond issue and the stock issue?
Sheen’s idea (finance with bond) is to issue $125M bond with an annual interest rate of 6.5% and mature in 15 years. Annual principal repayment is $6.25M and leave $37.5M outstanding at maturity. The cash outlay is $6.25M every year besides the interest. See graph below.

If finance by equity, Winfield would issue 7.5M new shares @ $17.75 and keep a constant dividend policy of $1.00/Share. The actual cash outlay is $7.5M every year.

2. Respond to each director 's assessment of the
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3. Interpret the EBIT Chart shown in the case - explain what it means. See Chapter 7 where it is explained.
The debt line is steeper than the equity line because use of debt financing causes EPS to change at a greater rate as EBIT changes – the essence of financial leverage. The double-edged sword aspect of financial leverage – as the lines diverge from the indifference level the gap between EPS with debt and EPS with equity widens. The right-hand divergence is good - financial leverage helps. The left-hand divergence is bad – financial leverage hurts. The EBIT Chart helps display the EBIT-EPS relationship for any level of EBIT in any year.

4. Recommend the financing choice, using the Income, Risk, Control, Marketability, Flexibility, Timing grid as explained in Chapter 7 of the Cohen Finance Book.
Suppose I have four alternatives totally:
a) Debt with Fixed Principal Repayments
b) Debt without Fixed Principal Repayments
c) Equity
d) Debt & Equity (75% debt & 25% equity)
Firstly I calculate the cost of financing, the assumptions are as following:
Assumptions
Marginal Tax Rate
35%
Beta
0.36
Market Risk Premium
6%
Risk-free Rate (Rf)
3%
Cost of Equity (Ke)
5%
Cost of Debt (Kd)
3.5%
Time horizon (Years)
15
Dividend per share
$1

I get the NPV of the cost of financing, from which I can see that among all the financing options considered, Debt (with no principal repayments) has the lowest NPV cost whereas Equity has the highest NPV cost.

Secondly, from the answer of

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