Continental Carriers, Inc. :: Finance Advanced Financial Management

Continental Carriers, Inc.(This is not an essay. This paper responds to each ofthe comments raised by the five members of the board.)Continental Carriers, Inc. (CCI) should take on the long-term debt tofinance the acquisition of Midland Freight, Inc. for a few reasons. The company is heavy on assets, the debt ratio will only grow to 0.40with the added $50M in debt. Also, the house will benefit from anadded $2M in a tax shield and be able to return $12.7M a year to itsstockholders and investors, instead of $8.9M if equity is raised tofinance the acquisition. Lastly, the stock price and earnings pershare will increase to $3.87 in comparison to an equity-financedacquisition of $2.72 per share. CCI would be taking a somewhat high adventure by issuing additional stock due to the uncertainty about the crack price. Having a low P/E ratio with respect to the reprieve ofthe market, and the replacement cost of the firm being greater thanits book value (argument 3), on that point is a good c hance that the currentstock price and the proposed offering prices are too low.Although long-term debt is a better financing choice a few of thedraw butts are pointed out. Debt holders claim profit before equityholders, so the chance that profits may be lower than expected,increases risk to equity may reduce or impede stock value. However,in extreme financial situations such as a recession period, CCI wouldstill be able to increase its cash during a recession period with alldebt capital structure. Also, there is a remaining 12.5 gazillion thatwould have to be paid at the expiration of the bonds, but that couldbe paid off by issuing sore bonds or additional equity at thattime. Five members of the board raised comments that have been addressed asfollows1. The argument of the debt financing being a untamed venture since theproposition was to pay out to a sinking fund does not make sense. Over the course of the next seven years, CCI had a diachronic growthin revenue of 9%. This gro wth along with the $2M tax shelter wouldeasily pay for the sinking fund. In addition, by buying back bondsannually, the interest expense is further decreased, thus creatingless of a burden on the cash flow. In contrast, an equity-financedacquisition would spread the net income out all over 3 million moreshares, thereby reducing the dividend pay-out to shareholders. 2. Another director argued that with equity financing, theshareholders will yield a 10% EBIT of $5M. Furthermore, this directorposited that 3 million shares at $1.