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Winfield Refuse Management Inc Raising Debt vs Equity

Solution Id Length Case Author Case Publisher
2508 2135 Words (7 Pages) W. Carl Kester, Sunru Yong Harvard Business School : 913530
This solution includes: A Word File A Word File

In Creve Coeur, Missouri, a firm called Winfield Refuse began recycling the garbage in 1972. Since its start, the firm has become a significant trash recycler in nine states. The company today serves about 500,000 clients, the majority of whom are residential, commercial, and industrial establishments. Organic growth and the development of operational strategies have been credited with this. The corporation has been able to acquire 26 transfer stations and facilities, as well as 22 landfills, via its acquisition of properties. The CEOP, Leo Staumpe, has avoided long-term debt by following a consistent set of strategic objectives and procedures. Short-term bank loans and a 1991 public stock sale have kept the firm financially stable. As a result, the company's senior executives now own 79 percent of the company's ordinary shares. It is apparent that the corporation has a very solid financial structure which includes interest without any debt and common stock. The remaining shares of the corporation have been distributed and traded (Kester & Yong, 2012).

Following questions are answered in this case study solution:

  1. In choosing the "best" financing option for Winfield Refuse Management, Inc., consider the following: 

  • Pros and cons of issuing debt versus equity - specific to Winfield Refuse

  • Interpreting EBIT chart and how used in your decision making

  • Annual cash outlays for each financing decision, especially annual cash outlay in 2013 and 2030 

  • Risk and Return tradeoffs for bondholders versus stockholders - specific to Winfield Refuse

  • Impact of each financing decision on relevant financial ratios, impact to control, corporate flexibility, increased risk

  • Why your chosen financing option is the "best" for this company - how do you address each director's concerns

Case Study Questions Answers

1. In choosing the "best" financing option for Winfield Refuse Management, Inc., consider the following: 

• Pros and cons of issuing debt versus equity - specific to Winfield Refuse.

The fact that the firm is making more money while having less debt is evidence that the debt reduction strategy was successful. Winfield is able to purchase additional assets, such as landfills and material facilities, which it may subsequently use to process waste in order to generate money from recovered commodities since it has the ability to do so thanks to the acquisition of debt. When interest rates on financing are cheap, the company has greater freedom to expand in a more aggressive manner. As long as the company remains profitable, the debt might be paid off in installments rather than all at once. When the company decides to make equity investments, it will not be required to give up ownership of the company. The fact that Winfield had to continue paying dividends for a significant amount of time caused damage to the value of the company's shares, which will work to the company's disadvantage when it comes time to issue debt. If the business is unable to make its interest and loan payments, the bank may be obliged to seize the firm's assets and property, which is especially likely given that the bank just bought MPIS. The company's risk and obligation may be more evenly distributed by the issuance of shares, which is especially beneficial after the merger with MPIS. The creation of cash flow might end up being a boon for the expansion of the organization. The company would need a low debt-to-equity ratio in order to be eligible for funding in the not too distant future. However, there are several downsides associated with giving shares in the company. If the business was able to merge with MIPS, the fact that it controlled one-half of the firm's authority meant that it could hand over responsibility for making significant decisions to its partner.

• Interpreting the EBIT chart and how used in your decision-making.

With the use of an EBIT chart, businesses are able to ascertain what constitutes the optimal debt-equity ratio for the purpose of maintaining the company's assets and activities. Profits Before Interest and Taxes, or EBIT, is a measure of earnings before these expenses are deducted. It does not take into consideration any obligations or debts that are now due to be paid. One of the most important aspects of financial planning is locating the point on the EBIT chart that corresponds to "breakeven," which is also known as "the indifference point." Plans that use a high degree of leverage often provide larger earnings per share (EPS) than plans that utilize a low degree of leverage. The earnings per share (EPS) figure indicates the total profits of the company after all expenditures related to interest and taxes have been deducted. The EBIT chart intersects with bonds and bonds that do not need repayment, both of which are indicated on the chart. The chart also shows bonds that do not need to be repaid. Since the point of indifference is when profits and losses are equalized, there is neither a profit nor a loss at this moment in time. When it comes to the procedure of taking out a loan, Winfield has benefits that extend beyond as well as those that are below the point of indifference. Earnings per share would drop to $1.91 if the company issued ordinary stock, but they might rise to $2.51 if the company issued debt instead. On the graph, it seems that the slope of the line representing the debt is bigger than the slope of the line representing the equity. This is due to the fact that if a firm funds its operations with debt, the pace at which its profits per share and EBIT change will be sped up.

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