Winfield Refuse Management Inc Case Solution
Analysis of the financing options
The company is considering whether to finance through issuing equity or by raising debt. Both options have their own pros and cons.
Equity financing is made by selling shares of the business to investors. The money received is not required to be paid back in a future time. The investors become member of the company and owner of the part of the company’s asset equivalent to the value paid for shares. They are given share from the profit of the company.
1. Equity finance provides a permanent funding for the company since there is no need to pay back the money in the future.
2. Although investors expect dividend payments from the company but it is not mandatory and there is no obligation to pay on part of the company.
3. The companycan maintain a good financial leverage ratio, which will be beneficial in times of borrowing from the bank.
4. In times of needs, the company can raise capital through equity by issuing shares to its existing members thus saving cost for issuing shares in market.
1. Issuing shares to public maybe expensive and complex sometimes, as costs like underwriting fee and brokerage will be incurred as well as completing many statutory requirements.
2. The dividend given will not reduce tax liability as in case of debt issue interest expense results in tax deductions.
3. Underwriting cost for shares maybe high or may be in form of shares to be discounted for underwriters.
4. With more shares issued by the company, it would resultin dilution of existing shareholders.
Debt is raising funds through borrowings. It creates obligation to repay the borrowed amount at some future date. If debt borrowed is high, then the creditor may have some influence over the decisions made by the company.
1. With debt financing, the company is required to pay interest expense that will provide tax deductions to the company.
2. It can be a best source of finance in short time, if interest rate is low, or if the company wants to finance the project.
3. No dilution of control results.
1. The company is obliged to pay the borrowed money back in the future prejudice to the future situation.
2. Restricts future cash flows for the company, since the company makes the provision for interest payable and debt payable.
3. Legal actions can be taken against the company on default of payment and can it can also result in seizing the property by the creditor or bank.
The company can finance the acquisition by issuing shares in public. The stock can be issued at $17.75 per share as per investment bank. Underwriting fees will be $1.08 per share which means that the company can receive proceeds from equity finance at $16.67 per share. 7.5 million Sharesare required to be issued by the company so that to pay $125 million for acquisition.
The annual cash outlay in 2013 will be 7.5million that is in face of dividend paymentsandhave NPV of $125million.
This financing option will cost the company with NPV of $125million that is more than debt financing. This finance option is not suggested to opt for.
Earnings per share $ 1.91
Return on equity 0.0641
Interest coverage –
Debt coverage 0
Dividend coverage 1.91
There is no effect on earnings,however,because the number of shares increases, the dividend payment decreases.
The EPS of the company is lower because the number of shareholders increases.
Return on equity indicates the ability of the company to use the shareholders money efficiently in generating profits. The company is making $0.06 on every invested $1 of shareholders’ equity……………
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