Winfield Refuse Management Case Study Analysis
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 fluctuation. However, Andrea neglected the advantage of the tax shield the Company could use if issuing bonds: the lower discount rate of 4.225% could be applied to discount the cash layouts over 15 years’ period.
• Joseph Winfield calculated the annual dividends payout of $7.5 million and was convinced that the Company could service the dividends using their after-tax earnings. We believe that he overlooked the fact that the benefits of the new entity will be shared amongst the new and existing stockholders on the basis of earnings, not dividends alone. Therefore, earnings per share will decrease even if dividends per share is maintained.
• Ted Kale was concerned about a low issuance price of new stock and diluting the management control by issuing stock. Ted’s concerns are justified: the main task of the management is to maximize the shareholders’ value, i.e. to increase the stock’s price. There was a certain risk of dissatisfying shareholders and pricing new stock close to the lowest stock price of the year ($17.55).
• Joseph Tendi and Naomi Ghonche supported Ted’s concerns and added that the company’s EPS would be diluted to $1.91, whereas debt could increase EPS to $2.51. We agree that EPS would be diluted due to the
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 fluctuation. However, Andrea neglected the advantage of the tax shield the Company could use if issuing bonds: the lower discount rate of 4.225% could be applied to discount the cash layouts over 15 years’ period.
• Joseph Winfield calculated the annual dividends payout of $7.5 million and was convinced that the Company could service the dividends using their after-tax earnings. We believe that he overlooked the fact that the benefits of the new entity will be shared amongst the new and existing stockholders on the basis of earnings, not dividends alone. Therefore, earnings per share will decrease even if dividends per share is maintained.
• Ted Kale was concerned about a low issuance price of new stock and diluting the management control by issuing stock. Ted’s concerns are justified: the main task of the management is to maximize the shareholders’ value, i.e. to increase the stock’s price. There was a certain risk of dissatisfying shareholders and pricing new stock close to the lowest stock price of the year ($17.55).
• Joseph Tendi and Naomi Ghonche supported Ted’s concerns and added that the company’s EPS would be diluted to $1.91, whereas debt could increase EPS to $2.51. We agree that EPS would be diluted due to the