Atlantic Corporations-Abridged Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Atlantic Corporations-Abridged Case Study Analysis

The second option of issuance of Debentures has EPS near to the option WACC where the WACC is lower than option 3 and greater than the option 1.

On the basis of above metrics LOC financing option is better for the company due to its lowest WACC and highest EPS, DPS and TIE Ratio. However, the option could more worsen the company’s credit rating and the investors may demand more returns over their investments.

Although, high EPS results in high value for shareholders and could lead to increase in current share price, but the difference in the EPS of LOC and Common stock option is not substantial. Therefore, in order to save its credit rating; the company should go for common stock rather than option despite of highest EPS, DPS and interest coverage ratio.

Recommendations

Management at Atlantic is recommended to acquire Royal Paper through issuing common stock in the market. As the prices of Linerboard is expected to grow rapidly in near future, the company would face several problems if it would not extend its Linerboard capacity. The company has no better option than to acquire Royal Paper as building new Linerboard capacity would require substantial amount of costs and time. However, the purchase price for Royal Paper exceeds the enterprise value,and the company would face huge discounts if it fails to negotiate the price.

The company could finance its acquisition by using Common stock. Although the financing option has low EPS, DPS and TIE ratio but the difference between the EPS and other metrics is not potential that could be considered while selecting the option. Along with it, issuance of common stock would avoid the credit rating of Atlantic to further decline. However, the option has a low leverage ratio and would not bring an interest shield to the company.

Conclusion

Although, the company has low Linerboard capacity, but it can increase its capacity by acquiring various assets of Royal Paper and reduce the risk of increasing operational costs in future.The company should consider the purchase price on the basis of enterprise value and should consider common stock as a financing option to avoid the risk of declining its credit rating...............................

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