Q1 what are the annual cash outlays associated with the bond issue? The common stock
Q2 Analyze and respond to each director’s assessment of the financing decision.
Leo Staumpe believes that MPIS is an excellent buy that will offer tremendous revenue synergy and cost reduction opportunities. Board of directors also agrees with the assessment; the only decision is on the mode to secure funding for the acquisition. Two options available to secure a funding of125 million are for the funds are:
1. Issue bonds for 125 million at 6.25% interest rate and 15 year maturity. Annual principal repayment will be 6.25 million, leaving 37.5 million outstanding at maturity.
2. ...view middle of the document...
Moreover, as of 2011, Winfield is maintaining a healthy cash balance of 27 million in hand and its Accounts Receivable is more than the Accounts Payable, indicating a healthy future cash flow (exhibit 3). Hence adding long term debt should result in any financial risk.
In addition, stock issuing not necessarily has lower cost as compared with debt financing as stock issuance will also result into additional 7.5 million/year in dividend payment.
Joseph Winfield is of the opinion that MPIS deal will pay for itself if Winfield issue new 7.5 million common stock.
Joseph’s math is correct about paying for the MPIS deal. However, he should also be looking into other aspects of deal: dilution of ownership, value creation for shareholders etc.
Ted does not seem to be against issuing common stock. Ted’s concern is centered on 2 observations: Winfield’s Price-Equity ratio and dilution of management control by issuing new common stocks. Ted observes that all other major competitors have higher P/E ratio and hence Winfield should issue stock (if at all) for a higher price than $17.75/share.
However, Winfield stock has not done well over the last few years. In 2010, Winfield stock went as low as 16.90 and in 2011, as low as 17.55. If Winfield wants to fund the MPIS deal by issuing new common stocks then it will not any value into the shareholders. Considering this, the target price of $17.75/stock for new common stock seems reasonable.
As of 2011 end, Winfield has approx. 15 million common stocks issued (exhibit 2- Income After Taxes/EPS), out of which 79% are owned by Winfield management. After MPIS deal, Winfield management will own only 54% (calculations in the attached excel) that is still majority stakes yet an uncomfortable situation. Hence we agree with Ted’s concern on dilution of management control.
Joseph Tendi, and Naomi Ghonche
Both, Joseph and Naomi, are against issuing common stock, however there reason is based on EPS instead of P/E ratio.
Joseph and Naomi’s calculation makes sense (calculations in the attached excel). Raising funds through debt will add more value to shareholders as Winfield will save tax on the interest payment on debt. The same value has been captured in the form of increase in the EPS. Hence the shareholders will be better served with raising funds through debt.
James opinions that all major players in the industry rely on long term debt in their capital structure. James’s observation seems to be true based on the exhibit 1 where all the player are showing long-term debt to equity ratio. Based on the industry insight, James questions the Winfield’s policy against debt.
We agree with James analysis based on the industry insight. It is a...