Winfield Refuse Management Inc Case Solution
Equity
Issuing equity is basically about selling out the shares to the investors and it is a non-refundable in the future. In this way, a particular investor is treated as the member of the company. The equity funding is considered as the permanent funding for the company, because it is non-refundable. The company has to pay dividends but that is still not necessary for the company because there are other options available. Equity financing will help the company in maintaining a ratio that will help it to borrow from bank in future, easily. The advantage of equity financing is that if the company would require financial support in future;it can issue shares in the market. Whereas, there are few disadvantages, i.e. equity financing can sometimes create costs. It is an expensive option to issue share in the market and the cost of brokers and underwriting are also expected to incur. In this financing method; the dividends payment will not provide any tax relaxation. The underwriting cost may be more than expected sometimes, and the issuance of more shares can cause dilution.
Winfield can issue shares in the market at $17.75 price per share with underwriting fees of $1.08. This indicates that the company can get profits of $16.67 at per share and total 7.5 million shares would be required to be issued by the company.
Impact on cash outlay
The annual cash disbursement would be 7.5 million in 2013, and the company will have the NPV of $125 million. Whereas, the annual cash outlay in 2030, assuming the growth rate of 2%, will be $198.75 million.
Net present value
This option affects the NPV of $125 million and it is greater than the debt option for the company. So, the company is recommended to opt for this financing, as the lower NPV shows lower cost.
Impact on financial ratios
| Post-acquisition | Pre-acquisition | ||
| Earnings per share | 1.906667 | EPS | 1.83 |
| Return on equity | 6.41% | ROE | 4.09% |
It seems that there is no change in the company’s earnings, because as the number of shares increase; the dividends payments also decrease.
The EPS will be 1.91, which increases the EPS after acquisition. So overall, the impact of equity has positive effects. ROE shows the company’s ability to efficiently use the money of shareholders to get the profits. As it shows that the company is earning $0.06 profit on each investment.
The company can pay dividend 1.91 times of the current dividend pay. This implies the positive attributes towards the company’s ongoing concern and profitability.
The company can pay dividend 1.91 times of the current dividend pay. This implies the positive attributes towards the company’s ongoing concern and profitability.
Ownership structure
Current stockholders may have concerns regarding the issuance of new shares,since it results in the decrease in their earnings ratio.However, they fear the risk of dilution in control. New shareholders might influence the company’s decisions. They will own the company according to their share price and existing shareholders’ ownership will get divided to new shareholders. They also fear the reduction in the value of shares, because by issuing more shares; the earning per share will decrease and there will be a slight decrease in the value of the shares.
Advantages and disadvantages
There will be no effect on the company’s earnings. The EPS has a slight increase. Whereas, there will be an increased number of shares, which will create dilution of control.
Risk and reward trade-offs
The company has the ability to pay dividend to all of its shareholders. The dividend cover ratio is 1.91, which means that shareholders will get the promised dividend and the company can pay up to 1.91 dividend.
Debt financing:
Debt financing is increasing the financing in a business through borrowing. It is a repayment system. Whereas, the amount would be repaid to the next party. The creditor in this case may have influence over the firm’s decision-making process. The advantages of this financing is that it allows a company to reduce its tax deductions because of the interest expense. It is a good option to finance the company in a short run if the interest rates are low and the company needs finance for the project, as there is not any threat of dilution. Whereas, the disadvantages are also there, so the repayment of debt borrowed is a prejudice for the company. There are chances of any legal actions alongside the chances of property seizing is there. It also limits the cash flows.
The company can raise debt finance by selling bonds to an insurance company. Annual interest rate that would be payable is at 6.5% rate, with the maturity level of 15 years.
Impact on cash outlay
The annual cash outlay will be $12.62 million in 2013. Whereas the annual cash outlay in 2030 will be null, because the debt is for 15 years, which will be paid off at the end of year 15. Therefore, the company does not have any cash outflow for this finance option after 2026. However annual cash outflow for 2026 is $38.29 million dollars.
Net present value
It has the NPV of $115.21 million as compared to the NPV of $125 million of Equity financing. Therefore, as compared to NPV; the debt financing is much more favorable.
Impact on financial ratios
| Post-acquisition | Pre-acquisition | ||
| Earnings per share | 2.091267 | EPS | 1.83 |
| Return on equity | 5.62% | ROE | 4.09% |
There is no effect on the company’s number of shares; therefore, no dilution of control for shareholders and share value would remain stable.
The company’s earnings would decrease because of the interest expense, which the company would be required to pay against loan. However, earning per share is still higher because the company has increased profit from its operations, but with the same number of shareholders.
The company has to pay interest expense if debt is taken; therefore it has an interest coverage ratio, but since its interest covering ratio is very high; it indicates that the company can pay the interest easily.
There is an increased dividend coverage since the company has lower shareholders as compared to the shareholders it would have had by the usage of equity finance. The company can pay 2.51 times of the current dividend payment, which makes the company more attractive for the investors.
For bondholders, the ratio of dividend coverage is highly favorable. The company would easily be able to pay off its annual principal and interest expenses. Banks and financial institutions are concerned with the company’s ability to pay and will grant debt on the same basis. As a result, the company can raise debt easily............................
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