Yikai JIN Winfield
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 financing decision with a short paragraph - as if you are talking to each none in person during a meeting.
2.1 Andrea Winfield: Financing by stock has lower cost while issuing new debt would increase risk of swings in stock price
Yikai Jin: Actually, financing by stock is more expensive (7.5M vs 6.25M). Winfield can meet debt obligations under varying EBIT scenarios. Besides, debt will increase EPS and ROE, increasing stock price.
2.2 Joseph Winfield: By issuing 7.5M shares, Winfield will only have to pay $7.5M in dividends.
Yikai Jin: Debt cash outflows with debt is for a finite period while stock dividend outflows are perpetual
2.3 Ted Kale: Market price is too low (compared to peers with P/B). Issuing shares at low price and loss of management control is a disservice to current stockholders.
Yikai Jin: We can’t decide financing method only by P/B. Price may be low due to a liquidity discount to trade OTC. In fact, P/B is not comparable when capital structure varies.
2.4 Joseph Tendi: Principal repayment obligation is irrelevant to the financing decision.
Yikai Jin: Principal repayment is relevant because it is a real cash outflow
2.5 James Gitanga: Other major companies have long-term debt in capital structure while Winfield is
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 financing decision with a short paragraph - as if you are talking to each none in person during a meeting.
2.1 Andrea Winfield: Financing by stock has lower cost while issuing new debt would increase risk of swings in stock price
Yikai Jin: Actually, financing by stock is more expensive (7.5M vs 6.25M). Winfield can meet debt obligations under varying EBIT scenarios. Besides, debt will increase EPS and ROE, increasing stock price.
2.2 Joseph Winfield: By issuing 7.5M shares, Winfield will only have to pay $7.5M in dividends.
Yikai Jin: Debt cash outflows with debt is for a finite period while stock dividend outflows are perpetual
2.3 Ted Kale: Market price is too low (compared to peers with P/B). Issuing shares at low price and loss of management control is a disservice to current stockholders.
Yikai Jin: We can’t decide financing method only by P/B. Price may be low due to a liquidity discount to trade OTC. In fact, P/B is not comparable when capital structure varies.
2.4 Joseph Tendi: Principal repayment obligation is irrelevant to the financing decision.
Yikai Jin: Principal repayment is relevant because it is a real cash outflow
2.5 James Gitanga: Other major companies have long-term debt in capital structure while Winfield is