Response to each director’s assessment
- Andrea Winfield
Andrea believes that the stock issue is the low cost approach but in fact it is more expensive mode of financing because the shareholders retain a residual interest in the profits of the company. The funds of the potential acquisition can be utilized to pay interest and principal amount. Further, the interest will reduce the funds available for its distribution to shareholders but on the other hand it will also eliminate the negative impact on EPS and return on equity.
- Joseph Winfield
Joseph believes that the potential acquisition is going to finance its own acquisition through generating sufficient funds after tax but the debts outflow are only for a limited period of time whereas dividend payments are for an infinite period of time, which increases the need to pay the dividend on a continuous basis.
- Ted Kale
Ted was concerned about the undervaluation of shares and believed that it could undermine the worth of shareholders. Its statement was quite justifiable but it was not the only measurement tool, the price might be low because the transaction had been executed over the counter.
- Joseph Tendi
Joseph Tendi believes that the principal repayment is irrelevant to the discussion. Its statement is quite shocking because the principal and interest payment represents a substantial portion of total cash out flow, ignoring this will lead the company to dissatisfy its bond holders.
- James Gitanga
James believes that the financial position of the company is quite different from other players in the market. It will increase the possibility for the company to finance its potential strategies through debt financing. Further, it will also increase the chance for the company to raise finance at a reduced rate as comapred to its competitors because the balance sheet of the company justifies low gearing, which will increase the investor’s confidence.
Factors to consider while financing the potential acquisition
The results of our analysis in Appendices 1 shows that the financing through debt will result in an out flow of $106.07 million and equity financing will result in an out flow of $125 million, so it is finanacially viable to finance its strategy through debt finance. Debt financing will not allow the dilution of control; where as equity financing will dilute the control of Winfield over the company’s matters but on the other hand debt financing has a disadvantage as well. It does not allow flexibility and requires the company to pay fix interest and principal at chosen time whereas equity finanacing is flexible because dividend payment is dependent on the discretion of the management.
Financing cost is recognized as an expense in income statement, which will reduce the total profits attributable to the shareholders and hence the EPS; but this has a benefit as well, the company will receive a tax yield because the interest is a tax deductable expense while calculating taxable profits whereas the dividend is not a tax deductable expense in calculating taxable profits. Further, risk is the major factor while evaluating the financing strategy. Debt finance requires periodic payment of interest and principal and failing to satisfy this clause will increase the risk for the company that it will lose its pledged assets whereas equity financing has a risk for the management that it will lose the control over the company matters.....................................
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