Winfield Refuse Management, Inc.: Raising Debt vs. Equity
Winfield Refuse Management, Inc. is a regional waste management company in the Midwest. The company was facing pressure from larger competitors of the industry consolidation. As of result, it wanted to acquire Mott-Pliese Integrated Solutions (MPIS) to maintain a competitive position in the industry. The management team believed that the acquisition will improve the cost position from revenue synergies and cost reduction opportunities as well as provide an expansion opportunity into the mid-Atlantic region. Also, they believed that debt finance for MPIS acquisition was the best-fit. However, the company had the policy of avoiding long-term debts. Consequently, several board members …show more content…
The company shareholders would stand to benefit most from the debt financing, and it should have a positive effect on the stock price.
The company is financially viable, it has very little long-term debt and has a positive cash flow with the ability to service the debt financing for the MPIS acquisition. The combined EBIT of $66 million would be sufficient to service the debt, interest payment of $8.125 million, leaving the remainder of $57.875 in EBIT for other expenses. Furthermore, the company has the debt coverage ratio of greater than 8 (66/8.125) which can translate into a good financial health.
In conclusion, the Winfield Refuse Management, Inc. should acquire Mott-Pliese Integrated Solutions for $125 million by issuing $125 million worth of bonds to a Massachusetts insurance company at an annual interest rate of 6.5%. The debt finance will not cause a negative impact on the company financial position. In fact, this would improve the company leverage and competitiveness in the eyes of the investors because the improvement of ROE and
Winfield Refuse Management, Inc. is a regional waste management company in the Midwest. The company was facing pressure from larger competitors of the industry consolidation. As of result, it wanted to acquire Mott-Pliese Integrated Solutions (MPIS) to maintain a competitive position in the industry. The management team believed that the acquisition will improve the cost position from revenue synergies and cost reduction opportunities as well as provide an expansion opportunity into the mid-Atlantic region. Also, they believed that debt finance for MPIS acquisition was the best-fit. However, the company had the policy of avoiding long-term debts. Consequently, several board members …show more content…
The company shareholders would stand to benefit most from the debt financing, and it should have a positive effect on the stock price.
The company is financially viable, it has very little long-term debt and has a positive cash flow with the ability to service the debt financing for the MPIS acquisition. The combined EBIT of $66 million would be sufficient to service the debt, interest payment of $8.125 million, leaving the remainder of $57.875 in EBIT for other expenses. Furthermore, the company has the debt coverage ratio of greater than 8 (66/8.125) which can translate into a good financial health.
In conclusion, the Winfield Refuse Management, Inc. should acquire Mott-Pliese Integrated Solutions for $125 million by issuing $125 million worth of bonds to a Massachusetts insurance company at an annual interest rate of 6.5%. The debt finance will not cause a negative impact on the company financial position. In fact, this would improve the company leverage and competitiveness in the eyes of the investors because the improvement of ROE and