Winfield Refuse

Management Inc.
Raising Debt vs. Equity

Ashish Gupta
Amit Singh
Amit kr Sinha
Maneesh D Singh
Prem Kumar
Gaurav Kr. Singh

Executive Summary
Objective

Alternatives

Recommendation

What is the best financing option for the $125M acquisition of

Mott-Pliese Integrated Solutions (MPIS)?

1. Debt with Fixed Principal Repayments

2. Debt
3. Equity

Winfield should finance the $125M through issue of bonds with

no principal repayments

Winfield Refuse Management

Concerns from Last Board Discussion

Concern
Andrea Winfield

Additional debt will increase risk and will lead

to wild swing in stock price

Joseph Winfield

By issuing 7.5M shares, Winfield will only have

to pay $7.5M in dividends

Ted Kale

Market price is too low (based on Price-tobook comparable). Issuing shares at low price
and loss of management control is a
disservice to current stockholders.

Joseph Tendi

Issuing Common Stock will dilute the EPS to

$1.91.
Using Debt could bump the EPS upto $ 2.51

James Gitanga

Other major companies have long-term debt

in capital structure while Winfield is unusual
Winfield Refuse Management

Introduction

Net Income
$27M

Net Income
+

$15M

Net Income
=

$42M

Region

Region

Region

Midwest

Mid-Atlantic &
Midwest

Midwest & MidAtlantic

Winfield Refuse Management

Winfields Current Financial Position

Winfields Revenue and Net Income
Revenue

$500

$50

$400

$40

$300

$30

Revenue ($M)
$200

Net Income ($M)

$20

$100
$0
2006

$10
2007

2008

2009

2010

2011

$0
2012E

Industry: Debt-to-Equity
Equity

50%

Debt

50%

Winfield Refuse Management

Financing Alternatives
Capital Needs: $125M
1. Debt with Fixed Principal
Repayments
15 years
6.5% interest rate
$6.25M annual principal
payment

2.

Debt
15 years
6.5% interest rate
Full principal paid at Year 15

Debt with Fixed Principal Repayment Schedule

Debt Schedule
Principal Interest
140

Principal Interest
45
40

120

35

Cash Outflows ($M)

30

100

25

80
37.50

20
15

Cash Outflows ($M)

125.00

60
40

10 6.25
6.25
2.44

5 8.13
0

20
08.13

Year

Year

Winfield Refuse Management

Financing Alternatives Continued:

Capital Needs: $125M
3. Equity
7.5M new shares @ $17.75
Dividend Policy is $1.00/Share

Dividend Payout Schedule

Dividend Terminal Value

Dividend

180
160
140
120
100
Cash Outflows ($M)

80
60
40
20
0 7.50

Year

Winfield Refuse Management

Decision Criteria

Impact on Firm:
Total Cost of Financing
Impact on Shareholders:
Earnings Per Share

Winfield Refuse Management

Cost of Financing

205.00
200.00
195.00
190.00

Column1
Debt with Full
principal
repayment

185.00
180.00
175.00
170.00
165.00
160.00

Cost of Financing

Among all the financing options considered, Debt (with no principal

repayments) has the lowest cost of financing
Winfield Refuse Management

Earnings Per Share

Pre-acquisition EPS: $1.83
Debt

Equity

Pros

No impact on shares

No impact on earnings

Cons

Reduced earnings by
interest

Increased number of
shares

Expected
EPS
$3.50

$ 2.51

$1.91

Post-acquisition Earnings Per Share

$3.00
$2.50
EPS (Debt)

$2.00
Earnings
$1.50 Per Share

EPS(Equity)

Expected
EBIT of
66M

$1.00
$0.50
$0.00

EBIT ($M)

EPS (Debt+Equity)
EPS(Bond with principal repayment)

Debt financing options provide the highest expected EPS under likely
EBIT scenarios.
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Adjusted Earnings Per Share

Adjusted EPS = (NI-principal repayment)/ number of shares
Higher earnings per share with the bond option, even
treating principal repayments as expenses
Adjusted Post-acquisition EPS
$3.00
$2.50
$2.00
Adjusted Earnings Per Share

EPS( Debt, including principal

repayment)

$1.50
$1.00
$0.50
$0.00

Expected
EBIT of
66M

EPS(Equity)

EBIT ($M)

Even with Principal Repayments included on an Adjusted EPS basis, EPS

with Debt Financing would be greater than EPS with Equity Financing
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Final Verdict

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Evaluation of Options & Summary

Decision Criteria

Debt

Debt with
Principal
Repayment

Equity

Cost of Financing
Expected EPS

represents the better alternative represents the lesser alternative

Other considerations
By issuing debt, Winfield would avoid control
dilution
Flexibilities sufficient cash flow to meet
commitments under all options
Winfield should finance the $125M through issue of bonds with no
principal repayments
Winfield Refuse Management

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