Stock and Bond Issue
First Case Analysis: Winfield Refuse Management
Introduction
This case study discusses Winfield Refuse Management which is a publicly traded company that focuses in non-hazardous waste management. The company is considering a major acquisition in the Midwestern U.S. that can provide entry into the region and allow them to compete in a competitive industry which allows them to improve its cost position. In order to avoid long term debt the company has a long-standing policy and until now a lot of small acquisitions have been made by using only internal financing. This policy was questioned and the chief financial officer wanted the board of directors to reconsider it and suggested that funding could be acquisitioned through a bond issue. A lot of disagreement was made by several company directors that instead wanted the firm to issue common stock. In the end, the argument is about whether to raise debt or equity.
What are the annual cash expenses associated with the (a) bond issue? (b) common stock issue?
Analysis of issuing stock The cost of issuing stock is lower than bond. The bond has a principal repayment of an additional $6.25 million cash expenses annually and that is over 9% of the bond issue.
Also, the risk is lower than the bond which has an increased risk that will lead to wild swings in the stock price.
Analysis of issuing bond If the company wanted to issue stock it would hurt the shareholders because the Winfield’s shares are undervalued and by providing more shares would case difficulty to shareholders. Also, by issuing stocks it would weaken the control of Winfield family and instead be a gift to new shareholders. By issuing debt the EPS would go up to $2.51 in comparison to issuing stock which would decrease the EPS to $1.91. In addition, other competitors depend on long-term debt in the capital structures.
How would you response to each director’s assessment of the financing decision?
How should the
Introduction
This case study discusses Winfield Refuse Management which is a publicly traded company that focuses in non-hazardous waste management. The company is considering a major acquisition in the Midwestern U.S. that can provide entry into the region and allow them to compete in a competitive industry which allows them to improve its cost position. In order to avoid long term debt the company has a long-standing policy and until now a lot of small acquisitions have been made by using only internal financing. This policy was questioned and the chief financial officer wanted the board of directors to reconsider it and suggested that funding could be acquisitioned through a bond issue. A lot of disagreement was made by several company directors that instead wanted the firm to issue common stock. In the end, the argument is about whether to raise debt or equity.
What are the annual cash expenses associated with the (a) bond issue? (b) common stock issue?
Analysis of issuing stock The cost of issuing stock is lower than bond. The bond has a principal repayment of an additional $6.25 million cash expenses annually and that is over 9% of the bond issue.
Also, the risk is lower than the bond which has an increased risk that will lead to wild swings in the stock price.
Analysis of issuing bond If the company wanted to issue stock it would hurt the shareholders because the Winfield’s shares are undervalued and by providing more shares would case difficulty to shareholders. Also, by issuing stocks it would weaken the control of Winfield family and instead be a gift to new shareholders. By issuing debt the EPS would go up to $2.51 in comparison to issuing stock which would decrease the EPS to $1.91. In addition, other competitors depend on long-term debt in the capital structures.
How would you response to each director’s assessment of the financing decision?
How should the