Continental Carriers, Inc.
Continental Carriers, Inc., (CCI) is a regular commodities motor carrier, who has different shipping routes along the Pacific Coast, the Midwest, etc. They sought to acquire Midland Freight Inc., to expand their operations. The board of directors met to discuss the different methods to finance the acquisition. Purchasing Midland would cost CCI $50 million in cash. Upon purchase, they would gain an additional $8.4 million in earnings before interest and taxes. The board of directors came up with the three options for acquiring Midland, which were issuing new common stock, issuing preferred stock, or selling bonds. Continental Carriers were successful in their no long-term debt policy. They met their financial needs through retained earnings, short-term loans and proceeds from offerings. Management mainly held common stock, and anything left over was distributed. In recent years, Ms. Thorp and Mr. Evans were not satisfied with the outcome of the common stock performance. Ms. Thorp came up with a few propositions: the first idea was to issue 3 million shares of common stocks, which fell right into their no debt policy and the following was to issues bonds to a California Insurance Company, and the last one was to issue preferred stock. The common stock option, would 3 millions shares of common stock price at $17.75/ share. This would cost new shareholders $4.5 million, but CCI would gain $5 million. However, with issuing new common stock some issues arose. New and old shareholders would reap the same benefit. Issuing new common stock dilutes the stocks and decreases the value. Also, shareholders would have owner ship of the company and there will be less control, which can make it risky. The bond option is to sell $50 million in bonds to a California Insurance Company with a 10% interest and 15-year maturity. This option has a $2.5 million sinking fund, which at maturity would only leave Continental Carriers owing $12.5 million at...
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