ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
ADVANCED CORPORATE FINANCE PROJECT
GROUP 5
TEAMMATES:
1)PARAM SINGH VINAIK (3035507693)
2)SUJIT ZINE (3035507148)
3)MADHAV AHLUWALIA (3035507083)
4)ANIL KULDALKAR (3035415230)
5)SAURAV SHEKHAR (3035507069)
ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
1. What are the annual cash outlays associated with the bond issue? The common stock issues?
Bond Issue Financing – $125M bonds with an annual interest rate of 6.5%, which has a 15-year
maturity. The company must make $6.25M cash payment every year, leaving $37.5M at maturity.
(Appendix 1)
Equity Finance, the company will issue 7.5M new shares at $17.75. In addition, it will use a
constant dividend policy of $1 per share. Hence the outlay will be $1 x 7.5M shares = $7.5M.
2. How would you respond to each director’s assessment of the financing decision?
1. Andrea Winfield: did not want to issue bonds because Winfield had significant long-term
commitments and bond issuance could further increase the burden. Our opinion: is current
because if the company issues debt under adverse market condition may not be able to
fulfill its debt obligation. This could lead to significant stock price fluctuation. However,
Andrea does not consider the advantage debt issuance and increased tax shield of 4.225%
2. Joseph Winfield: Believes that acquisition can be self financed as by issuing 7.5M shares,
Winfield will only pay $7.5M in dividends. Our Opinion: The understanding of Joseph is
false because with debt the company must make payments for a limited period (i.e. for N
years as agreed). Whereas in share/Equity finance the company will make perpetual
dividend payments.
3. Ted Kale: Thinks that shares are grossly undervalued, and issuance will dilute the
management control and will benefit the new shareholders more than the old shareholders.
Our Opinion: Ted’s concern is justified because their competitor has higher PE ratio of 18
(approx.) with respect to Winfield’s 11, which represents undervalued equity and issuing
ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
new shares will dilute management control. Therefore, it is beneficial for the company to
issue bonds and not equity.
4. Joseph Tendi and Naomi Ghonce: Not issue common stock and financing decision should
be made on EPS and not replacement or book value. Our Opinion: They are right in
making this statement because in case of bond issuance the EPS is value accretive because
pf tax shields. However, when common stock is issued there is dilution in EPS. This can
be seen in the combined exhibit statement. When debt is issued the EPS is $2.51 dollars
(This also signifies that the payout is high) whereas in common stock issuance the EPS
comes to $1.91. (Appendix 2)
5. James Gitanga: Other major companies have long-term debt in capital structure while
Winfield is unusual. Our Opinion: The concerns of James are valid because there is a
possibility for the company to finance through debt. Using debt financing the company has
a chance to raise finance at a reduced rate. This is indicated in the balance sheet. In addition,
debt financing is a good indicator of company growth and increases investor confidence.
The same can be seen in our analysis.
3. How should the acquisition of MPIS be financed, considering the issues of control,
flexibility, income, and risk?
There are 3 ways to financing the acquisition and the final decision will be based on
comparison of these NPV Values. The option will the least NPV is the best financing option
for Winfield
1. Debt with fixed repayments: NPV $106M (Appendix 3)
2. Pure Debt Financing: NPV 98.26M (Appendix 4). This is the best financing option.
ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
3. Pure Equity Financing- As mentioned in the case 7.5 million shares will be issued with
the dividend of $1 USD per share. Sheene calculated a 6% annual cost for stock issuance
if dividend of $1USD is maintained. NPV = $128.6M (Appendix 5 & Appendix 6). Face
Value is $140M = $125M + $15M (MPIS will earn 15 Million in revenue each year after
taxes)
Control – Considering the company fears the dilution the issue can be resolved with debt
financing, there will be no dilution.
Flexibility – They have enough earning as per the Earning per share. As mentioned in the
appendix “for each million dollars change in EBIT, the bond plan brings a change in EPS that is
$0.14 higher than stock plan”. Leverage is favorable for EBIT of $24.35 million upward.
Income - The company is making more money in both situation as the overall net income is
increase in stock issuance and Bond Issuance. However, with Bond issuance has higher EPS.
Risk -Default of debt under adverse market conditions
ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
Appendix:
Appendix 2:
Appendix 3:
ACF Group 05 – Madhav Ahluwalia – 3035507083, Param Singh Vinaik – 3035507693, Sujitkumar Zine –
3035507148, Saurav Sekhar – 3035507069, Anil Kudalkar - 3035415230
Appendix 4:
Appendix 5
Appendix 6
