Essay about Continental Carriers

3266 Words Feb 21st, 2009 14 Pages
I. Case Context

Continental Carriers, Inc., (CCI) is known as a regular commodities motor carrier. Since its inception, it has experienced continuous growth in revenues and mastered the strategic reduction of operating costs. It soon became known in the trucking industry as a widely profitable key player.

In order to sustain continuous growth in revenues and income, management has decided that key acquisitions need to be made.

The top contender, Midland Freight, Inc., a common carrier company would expand CCI’s route system. The prospect company also demonstrated congruence with the type of marketing and cost reduction programs that ushered CCI’s growth. The owners of Midland agreed to sell it for $50 million in
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During the meeting, some directors had reservations regarding bond issue, in particular, the sizable need for cash in sustaining the bond until maturity, especially sinking fund requirement. This relative degree of indebtedness, naturally would add sizable risk to the company leading to greater speculation and thus variation in the market price of CCI stock. They also argued that the new issue of common stock will not hurt existing stockholders. However, the bond issue would increase EPS to $3.87. Although CCI was one of the few in the trucking industry that did not make use of long term debt, their price earnings ratio was also one of the lowest.

Other directors also had their own reservations regarding the issue of new common stock. They argued that CCI stock was currently undervalued giving new stockholders a lucky strike whilst diluting the voting control of existing management. Also, issuing new stock would decrease EPS to $2.72.

Other directors also suggested the option of issuing preferred stock.

II. Problem Definition

Faced with the approved acquisition plan of Midland Freight, Continental Carriers must determine its best financing source. Under the leadership of Elizabeth Thorp, the best alternative must be presented to the board of directors given the numerous concerns brought up during the past meeting.

III. Decision Framework

The options

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