The first alternative reflects negativity in its perception, therefore whole debt financing would be a risky factor for Broadway to consider. The downfall can also be observed in whole debt financing in terms of Broadway’s market reputation and its market credibility of whether Broadway is able to pay back its loan or not. In addition, Broadway should go for the second alternative of financing the mix of debt and equity as this alternative is well- balanced and less risky.

Capability of Broadway of servicing its debt after the acquisition

The interest coverage ratio is being calculated to know the ability of Broadway to pay back its debt. By using alternate 1, Broadway will face a huge crisis as its interest coverage ratio for year 2017 is 0.64 in its optimist approach and 0.47 in its pessimistic approach,which reflects that the company is not able to payback its debt and ability to increase interest coverage by just 8%.

The interest coverage ratio of Broadway is 3.34 in year 2017 by optimistic approach and 2.53 with pessimistic scenario. The ratios show that Broadway will have enough free cash flows and operating income to pay back its interest on loan.In addition to this, Broadway should choose the second alternative to finance this deal of acquisition as well as it should increase its interest coverage ratio by 30% in next year.

Question # 3:Does Harris give up shareholder value by opting for the mix of debt and equity financing alternative? What is the real cost of equity dilution?


Shareholder value by opting for the mix of debt and equity financing alternative
The two financing alternates are different in their ways of financing as well as there is difference in their perception of share. The first alternate, which is total debt financing, will not have any significant importance to affect the value of shareholders as it is totally dependent on debt. No correlation can be seen towards equity of shareholders and their share.

Moreover, Harris chose the second alternate that is a mix of both debt and equity. It contains50% of debt and 50% of equity, as well as $60 million for debt and $60 million for equity are included in this alternative. The amount of $60 million will have a huge impact on the shareholders. 40% of the combined equity will be given to the stakeholders, who will accept this offer of investing in thenew company. The cost of equity of the shareholders would be lower and in this way Harris would give up on the value of the shareholders by opting for a mix of debt and equity for the acquisition opportunity
The real cost of equity dilution
This can result in a conflict between the stakeholders and Harris. The calculation is performed, which illustrates a relationship between the two cost of equities and the difference between them. Considering both cost of equities, a dilution of 3.79% has been seen. The dilution is the result of difference between the previous and new cost of equity. Moreover, this dilution can cause loss to stakeholders or to the valuation of company. Overall, this shows that Harris should choose a different alternate, which can adjust the cost of equity effectively.
Question # 4:How do the two financing methods affect the value of the acquisition to existing shareholders of Broadway?


The two financing methods affect the value of the acquisition to existing shareholders of Broadway

The two alternatives for financing are different in nature. First alternate, which is the debt financing of acquisition, seem to be a very risky method. Its interest coverage ratio is less than 1.5, even less than 1, which is alarming for the financers of the company. Moreover, the WACC has been used for the valuation…………..

This is just a sample partial work. Please place the order on the website to get your own originally done case solution

Share This