Winfield Refuse
Problem Statement:
Winfield Refuse’s acquisition of MPIS was a great opportunity to increase revenue and reduce costs through economies of scale. However, the expansion of the firm also means that Winfield Inc. needs to select a method of external financing to continue its operations effectively.
The Winfield family and senior management held 79% of common stock in 2012. This means the company places tremendous importance in the ownership of company. The acquisition of MIPS should not change the stakes of ownership of Winfield Refuse.
Board Discussion 2012
CFO Mamie Sheene recommended issuing bonds, based on an annual cash cost calculation of 6% for stock issuance. Her rationale was that Winfield could sell $125 million in bonds to Massachusetts insurance company at an annual interest rate of 6.5% set to mature in 15 years. Principal repayment would be $6.25 million, leaving $37.5 million outstanding in 15 years. Her presentation was not received pleasantly. Some of the board members believed this is another long-term commitment the company cannot afford to make. The idea of equity based financing was placed on the table.
Alternatives:
Equity
Debt
Debt with Fixed Principal Repayments
Equity Financing
Having an investor write a check to the company seems like a simple and quick answer to a financial problem. Winfield would be able to effectively expand without taking on debt. There is no interest associated either. This is also a less risky method of injecting funds to the business than a loan. There is also no requirement to payback if the business fails. Cash on hand can be beneficial to the expansion expenses associated with the recent acquisition of MPIS. However, this check comes along with a major commitment. An equity financing option could require a higher rate of return than a bank. The investor gains some ownership of the company and percentage of profits. The senior management will have to consult with the investor prior to making most
Winfield Refuse’s acquisition of MPIS was a great opportunity to increase revenue and reduce costs through economies of scale. However, the expansion of the firm also means that Winfield Inc. needs to select a method of external financing to continue its operations effectively.
The Winfield family and senior management held 79% of common stock in 2012. This means the company places tremendous importance in the ownership of company. The acquisition of MIPS should not change the stakes of ownership of Winfield Refuse.
Board Discussion 2012
CFO Mamie Sheene recommended issuing bonds, based on an annual cash cost calculation of 6% for stock issuance. Her rationale was that Winfield could sell $125 million in bonds to Massachusetts insurance company at an annual interest rate of 6.5% set to mature in 15 years. Principal repayment would be $6.25 million, leaving $37.5 million outstanding in 15 years. Her presentation was not received pleasantly. Some of the board members believed this is another long-term commitment the company cannot afford to make. The idea of equity based financing was placed on the table.
Alternatives:
Equity
Debt
Debt with Fixed Principal Repayments
Equity Financing
Having an investor write a check to the company seems like a simple and quick answer to a financial problem. Winfield would be able to effectively expand without taking on debt. There is no interest associated either. This is also a less risky method of injecting funds to the business than a loan. There is also no requirement to payback if the business fails. Cash on hand can be beneficial to the expansion expenses associated with the recent acquisition of MPIS. However, this check comes along with a major commitment. An equity financing option could require a higher rate of return than a bank. The investor gains some ownership of the company and percentage of profits. The senior management will have to consult with the investor prior to making most