Winfield Refuse Management

1. What are the annual cash outlays associated with the bond Issue? The common stock issue/ The bond principal repayment will be $6.

   25 million annually. The cash dividends will be $7.5 million annually on additional stock.

2. How do you respond to each director’s assessment of the financing decision? The following assessments were given during the last board meeting: Andrea Winfield considered issuing bonds was not a good option for financing the acquisition.

She was particularly concerned about the Increasing long-term debt and annual cash layout of $ 6.0 Million for 15 years. We believe that her concerns are Justified, because the Company had already significant amount of debt that could result in higher risks and stock price fluctuation. However, Andrea neglected the advantage of the tax shield the Company could use if issuing bonds: the lower discount rate of 4.225% could be applied to discount the cash layouts over 15 years’ period.

Joseph Winfield calculated the annual dividends payout of $7.5 million and was convinced that the Company could service the dividends using their after-tax earnings.

We believe that he overlooked the fact that the benefits of the new entity will be shared amongst the new and existing stockholders on the basis of earnings, not dividends alone. Therefore, earnings per share will decrease even if dividends per share is maintained. Ted Kale was concerned about a low issuance price of new stock and diluting the management control by issuing stock.

Tee’s concerns are justified: the mall task of the management Is to maximize the shareholders’ value, I. E. To Increase the stock’s price.

There was a certain risk of dissatisfying shareholders and pricing new stock close to the lowest stock price of the year. Joseph Tend and Naomi Conch supported Tee’s concerns and added that the company’s PEPS would be diluted to $1.

91, whereas debt could increase PEPS to $2.51. We agree that PEPS would be diluted due to the increased number of shares, however there would be no direct Impact on the earnings, whereas the debt would reduce the earnings by the Interest expense.

Issuing bonds In the case would be a better option, as even with he annual principal repayments PEPS would be higher and the Company would still enjoy the tax shield.

James Gating was not sure about the unusual capital structure of the Company, avoiding the long-term debt. We believe that the long-term capital structure across the industry was pre-determined by the high capital expenditures and steady cash inflows. Thus, issuing long-term debt was more preferable. Besides, by Issuing debt they would enjoy the tax shield since Interest on long-term debt Is tax-deductible.

3.

How should the acquisition of IMPS be financed, aging into account the issues of control, flexibility. Income and risk? Cash flows from Stock Offering Proceeds from Stock offering Annual Dividend Payments. Every year forever UP of payouts NP 0.025 Notes: In case they finance with debt, Winfield would be able to enjoy the tax shield as a result of tax deductible interest expense, hence their effective cost of debt will be 4.225%.

However, when financed with stock, the new stockholders will be entitled to perpetuity of $7.0 MM in dividends.

Working out the net present values of the two scenarios as shown in the tables above, Debt financing becomes a favorable option to stock since it yields a higher NP. Stock price Analysis Combined Entity Winfield Debt Financed Stock Financed PIE Ratio 17.4 PEPS 0.

7 1. 83 2. 51 pence= 12.18 31.842 43.674 33.

234 Number of Outstanding shares 15 22.5 Market Capitalization 182.7 477.63 655.11 747.765 Transaction Value MM Making an assumption that both Winfield and Mi’s stocks performed as the waste management industry average, their respective PIE ratio will be 17.

And it turns out that Mil’s transaction values is undervalued as well as Winfield stock. It therefore follows that use of stock would be a double gain to the new stockholders since they be buying an undervalued Winfield stock and by extension, gaining from Winfield acquisition of undervalued PM’. Similarly, the combined entity’s stock price is likely to rise marginally if the acquisition is financed by stock as compared to Debt financing which yields a higher price potential.