What are the annual cash outlays associated with the bond issue? The common stock issue/ The bond principal repayment will be $6. 25 million annually. The cash dividends will be $7. 5 million annually on additional stock. 2. How do you respond to each director’s assessment of the financing decision? The following assessments were given during the last board meeting: •Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years.
We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price fluctuation. However, Andrea neglected the advantage of the tax shield the Company could use if issuing bonds: the lower discount rate of 4. 225% could be applied to discount the cash layouts over 15 years’ period. •Joseph Winfield calculated the annual dividends payout of $7. 5 million and was convinced that the Company could service the dividends using their after-tax earnings.
We believe that he overlooked the fact that the benefits of the new entity will be shared amongst the new and existing stockholders on the basis of earnings, not dividends alone. Therefore, earnings per share will decrease even if dividends per share is maintained. •Ted Kale was concerned about a low issuance price of new stock and diluting the management control by issuing stock. Ted’s concerns are justified: the main task of the management is to maximize the shareholders’ value, i. e. to increase the stock’s price.
The Essay on Issuing Debt and Bond Valuation
1. Internally generated funds and stock issuances are available for for-profit and internally generated funds, philanthropy, government grants, and sale of real estate are available to not-for-profit health care providers to increase their equity position. 2. The advantages of a taxpaying entity in issuing debt are fixed debt service payments, fixed interest rate, no risk ha investor sells bond ...
There was a certain risk of dissatisfying shareholders and pricing new stock close to the lowest stock price of the year ($17. 55).
•Joseph Tendi and Naomi Ghonche supported Ted’s concerns and added that the company’s EPS would be diluted to $1. 91, whereas debt could increase EPS to $2. 51. We agree that EPS would be diluted due to the increased number of shares, however there would be no direct impact on the earnings, whereas the debt would reduce the earnings by the interest expense.
Issuing bonds in the case would be a better option, as even with the annual principal repayments EPS would be higher and the Company would still enjoy the tax shield. •James Gitanga was not sure about the unusual capital structure of the Company, avoiding the long-term debt. We believe that the long-term capital structure across the industry was pre-determined by the high capital expenditures and steady cash inflows. Thus, issuing long-term debt was more preferable. Besides, by issuing debt they would enjoy the tax shield since interest on long-term debt is tax-deductible. 3.
How should the acquisition of MPIS be financed, taking into account the issues of control, flexibility, income and risk? Cash flows from Stock Offering (in Million Dollars) Proceeds from Stock offering $ 125. 025 Annual Dividend Payments $ (7. 50) Every year forever PV of payouts $ (125. 000) NPV $ 0. 025 Notes: In case they finance with debt, Winfield (the company) would be able to enjoy the tax shield as a result of tax deductible interest expense, hence their effective cost of debt will be 4. 225%.
However, when financed with stock, the new stockholders will be entitled to perpetuity of $7.5M in dividends. Working out the net present values of the two scenarios as shown in the tables above, Debt financing becomes a favorable option to stock since it yields a higher NPV. Stock price Analysis Combined Entity MPI Winfield Debt Financed Stock Financed P/E Ratio 17. 4 17. 4 17. 4 17. 4 EPS 0. 7 1. 83 2. 51 1. 91 Price= (P/E)*EPS 12. 18 31. 842 43. 674 33. 234 Number of Outstanding shares (in Millions) 15 15 15 22. 5 Market Capitalization (in Millions) 182. 7 477. 63 655. 11 747. 765 Transaction Value 125M.
The Research paper on Tax Benefits of Debt: a Cese of Pakistani Firms
Supervisor’s Certificate This is certified that Ms. Mahjabeen (4426) and Ms. Saima Mushtaq (4370) of MBA-19 have completed their project report entitled “Tax Benefit of Debt” under my supervision. I have checked this report and found it bonafide work of authors. ___________________ Dr. Taqadus Bashir SUPERVISOR Lecturer Faculty of Management Sciences International Islamic University Islamabad ...
Making an assumption that both Winfield and MPI’s stocks performed as the waste management industry average, their respective P/E ratio will be 17. 4 and it turns out that MPI’s transaction values is undervalued as well as Winfield’s stock. It therefore follows that use of stock would be a double gain to the new stockholders since they be buying an undervalued Winfield stock and by extension, gaining from Winfield’s acquisition of undervalued MPI. Similarly, the combined entity’s stock price is likely to rise marginally if the acquisition is financed by stock as compared to Debt financing which yields a higher price potential.
