Continental Carriers Inc is a trucking company which specialises in transporting general commodities. Since its establishment in 1952 the company operates within the district of the Pacific Coast and from Chicago to various points in Texas. It was noted that the company maintains an overall low debt policy, whereby they obtain infrequent short term loans and avoid long term debt. Furthermore with the appointment of Mr. Evans as president, the company became more profitable and experienced internal growth through intensive marketing and computerisation of operations.
In order for the company to continue expanding its revenues the president Mr. Evans advocated the acquisition of Midland Freight. External financing of $50 million would be required to accomplish this goal. However, the directors have a difficult challenge with regard to the appropriate method of financing. Through extensive discussion and evaluation the directors identified three distinct options, namely, selling $50 million in bonds at a 10% interest rate to a California Insurance Company or issuing 3 million in common stocks at $17.75 per share with a dividend rate of $1.50 per share or issuing 500 000 preference shares at a par of $100 per share and with a dividend rate of $10.50 per share (See appendix A for case assumptions).
Discussion
1. Given the nature of CCI's business how much debt can it support?
Continental Carriers Inc. must possess certain organizational and structural characteristics if it has to finance its future acquisitions by long term debt. The nature of an incorporated business allows it to enjoy the benefits of liability protection, tax savings, business credibility, ease of raising capital, prestige for the corporate officers, perpetual duration and its centralized management. Consequently, businesses such as this one would be typically expected to be able to support large amounts of debt.
In the first instance, the culture and quality of