• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Continental Carriers, Inc.

Extracts from this document...


Continental Carriers, Inc. Advanced Financial Management Professor Clayton June 16, 2005 Tim Boyd Dave Chen Ian Hoffman Chirayu Patel Continental Carriers, Inc. (CCI) should take on the long-term debt to finance the acquisition of Midland Freight, Inc. for a few reasons. The company is heavy on assets, the debt ratio will only grow to 0.40 with the added $50M in debt. Also, the firm will benefit from an added $2M in a tax shield and be able to return $12.7M a year to its stockholders and investors, instead of $8.9M if equity is raised to finance the acquisition. Lastly, the stock price and earnings per share will increase to $3.87 in comparison to an equity-financed acquisition of $2.72 per share. CCI would be taking a somewhat high risk by issuing additional stock due to the uncertainty about the offering price. Having a low P/E ratio with respect to the rest of the market, and the replacement cost of the firm being greater than its book value (argument 3), there is a good chance that the current stock price and the proposed offering prices are too low. ...read more.


In addition, by buying back bonds annually, the interest expense is further decreased, thus creating less of a burden on the cash flow. In contrast, an equity-financed acquisition would spread the net income out over 3 million more shares, thereby reducing the dividend pay-out to shareholders. 2. Another director argued that with equity financing, the shareholders will yield a 10% EBIT of $5M. Furthermore, this director posited that 3 million shares at $1.50 in dividends would only yield $4.5 million dollars in a cash outflow, thereby increasing the company's equity by the difference each year. This argument does not account for the $2M tax shelter that is gain in the debt financing. The expected pay-out per share when using debt financing would be $1.7 per share compared to $1.2 per share of equity financing. The total dividend pay out is also 1.3 M less for debt financing. Since 71% of the assets are fixed assets, Debt ratio of .4 and current ratio of 1.34 does not seem to be a bad number. ...read more.


5. The last director argued for a preferred stock in lieu of a bond issue. This alternative would yield a preferred stock pay-out of $5.25M. The bond alternative would yield a total stockholder pay-out of $7.04M. Furthermore, an equity financed project will likely lower the overall stock price, which would offset the benefits of a preferred stock with a dividend of $10.50. Preferred stock issuance is not good for existing board members and especially common stock holders. It provides a fixed dividend pay out of 5.25 M to the preferred stock holder and leaves the common stock holder with only 3.7 M, which equals a dividend level of only $.83 per share. The common stock holder would be left with only $.22 per share if EBIT grew to only 23.7M. Given that CCI is currently light on debt, the tax-shield resulting from debt, and that a greater return would be realized by stockholders under the issue new debt alternative, it is recommended that CGI pursue their opportunity to sell 50 million in bonds to the California insurance company. Continental Carriers, Inc. 3 June 16, 2005 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Structures, Objectives & External Influences section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Structures, Objectives & External Influences essays

  1. Interpretation of Financial Statements.

    Liquidity can be defined as the ability of a company to meet its debts and obligations as and when they become due for payment. The importance of liquidity is evidenced from a company's cash cycle. A company will receive cash predominantly from debtors and cash sales.

  2. Why did Derbyshire and Flintshire prove to be such an attractive proposition for Toyota?

    be less competitive and Toyota coming to the region would then be welcomed by the community and the local government meaning benefits when starting up. However it is not just the overall labour cost that is important Toyota will have to look at the labour cost per unit - hence

  1. Identifying Financing Needs and Constraints

    All limited companies are incorporated (a firm with separate legal existence) this means that they are able to sue or own assets in their own right. The ownership of limited companies is divided up into equal parts which are known as shares and whoever owns a share is called the shareholder.

  2. Theories of the Firm

    At its simplest, the model has two curves, one of supply-growth (SG1), and one of demand-growth (DG1). The axes are profit rate and growth rate, with growth arising through diversification into new products, rather than expansion of output. The supply-growth is the maximum growth of supply that can be generated

  1. Are dividends and share repurchases substitutes?

    This model is generally accepted among financial researchers and practitioners. It starts by stating a number of assumptions that make the MM world a simplified, easy-to-analyze one. These assumptions are total market efficiency, rational, profit-maximizing behaviour and perfect certainty.

  2. Vodafone Group PLC's acquisition of Mannesmann AG.

    The EC also must approve rules for setting fair tariffs for roaming. They also warned that the acquisition would be blocked if it were not in the interests of European customers. Under EU rules, the Commission's merger task force undertook an investigation into the market conditions to determine whether operation

  1. Finance and Cash Flow Assignment.

    - Interest is therefore not charged - In Some cases when businesses show a decrease or decline in profits, they cannot rely on using retained profits as a source of finance because if the business is not selling, they are then not making any profit and can therefore not seek

  2. Applied Business. Investigating a business Preston Manor High School

    This proves the school is achieving their objectives and students enjoy being at Preston manor because it states in the table that ?how well do pupils achieve and enjoy their learning?? is at top level. This is the result from the questionnaire taken by Ofsted which shows that most parents are happy with their child?s experience at Preston manor.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work