Saturday, September 14, 2019
Case Note: Winfield Refuse Management, Inc.: Raising Debt vs. Equity
Case: Winfield Refuse Management, Inc. : Raising Debt vs. Equity I. Case situation: Decision Proof: 1. First part: ââ¬Å"â⬠¦ , it was Sheene's responsibility to lead the discussion on how to finance a major acquisitionâ⬠¦ reach a resolution this time. â⬠2. Last part: ââ¬Å"Board Discussionâ⬠,â⬠However, there was decidedly less agreement on the matter of financingâ⬠¦ â⬠3. The article is about background and arguments about whether to raising debt or equity. II. Options: Funding the acquisition through a bond issue or common stock? III. Creteria: 1. Maximum the interest of shareholders/not hurt the existing shareholders' interest. . Stable the stock price and make stock value growth. 3. Solidify its competitive position in the Midwest and make expansion. IV. Analysis of options: 1. Approval of Issuing stock: -Lower cost than bond: ââ¬Ëthe principal repayments on the bond mean an additional $6. 25 million cash outlay every year and it is over 9% of the bond issue. ââ¬Ë -ââ¬ËLower risk than bond: debt burden will increase risk and will lead to wild swings in the stock price. ââ¬Ë 2. Approval of Issuing bond: -Issuing stock would hurt shareholders: the Winfield's shares is now undervalued and issuing more shares would be a disservice to share holders. Weaken the control of Winfield family and a gift to new share holders -EPS would go up: using debt the EPS would go up to $2. 51, on the other hand, the stock issuing would make EPS decrease to $1. 91. -Other major player(competitors) rely on long-term debt in the capital structures. V. Other information: History of Winfield Refuse: -â⬠In 40 years after 1972, the company grew through a combination of organic growth and strategic acquisitions. â⬠>growth history: company amalgamation >Experienced -â⬠During the 1980s, professional management had been brought in. ââ¬Ë >Family control -â⬠a consistent policy of avoiding long-term debtâ⬠>Risk aversi on -â⬠very steady cash flows and 1991 pubblic stock offeringâ⬠>Grow sound and already has stocks in market Expansion Opportunity: -ââ¬Å"The management team had proven successful in the post-acquisition phase, avoiding undue actively seeking a larger acquisition target to solidify its competitive position in the Midwest. â⬠>Experienced and well-controlled in management ââ¬Å"As chief financial officer of Winfield Refuse Management, a vertically integrated, how to finance a major acquisition. >CFO: get oriented > identify problems > analysis > decision ââ¬Å"â⬠¦ a waste management operator collected the waste and then processed it for recovery, combustion for energy recoveryâ⬠¦ â⬠>company: provide new energy, environmental protection ââ¬Å"â⬠¦ generated very steady cash flows. â⬠>take safe with steady cash flow ââ¬Å"â⬠¦ adhered to a consistent policy of avoiding long-term debtâ⬠>capability? How many shares did the company issue in the market? ââ¬Å"The Winfield family and senior management held 79% of the common stock. â⬠>The CFO missed the point about ratio of family control. 15 million family 80% = $11,850,000 others 20% $22. 5 million family 52% = $11,850,000 others 48% > The family control would be weakened and it may hurt family interest if issuing stocks. What's more, if one of the family member sold his/her share, the Winfield Refuse Management, Inc would no longer be a family company. ââ¬Å"The management team had proven successful in the post-acquisition phaseâ⬠¦ â⬠>The company maybe experienced in integrating new companies into its operations but no experience in big companies. The company now has many branches but all in one industry. â⬠¦ had consistently produced 12%-13% operating margins every year for the past 10 years. â⬠>This figure did not compare to the average or competitors in this industry. Exhibit 2 ââ¬Å"operating revenue: 2008: 371,868; 2009: 379. 457â ⬠>The company make through financial crisis. How? Exhibit 3 ââ¬Å"2011 Total assets: $748,681; Total liabilities and stockholders equity: $749,681â⬠>Debt Asset ratio: Total Debt/Total Assets =1 High debt to assets ratio indicate low borrowing capacity of a firm, and lower the firm's financial flexibility.Exhibit 3 >The issued bond is fixed-rate bond or variable bond? What other equity does the company have? (building, trucks, etc. ) Plus: Approval of Issuing stock: As the article mentioned, ââ¬Å"The Winfield family and senior management held 79% of the common stockâ⬠and the fact that the company's stock is undervalued, if the company chose issuing strike, the senior management may own more shares and the change of the stock's price may benefit or hurt them. So issuing strike will motivate senior managers or other employees who own the stocks.
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