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Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
Raising Debt vs. Equity
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Raising Debt vs. Equity

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  • 1. Winfield Refuse Management Inc. Raising Debt vs. Equity Iris Chen Alex Ho Brian Huang Pramod Jindal Michael Trecroce
  • 2. Executive Summary What is the best financing option for the $125M acquisition of Mott-Pliese Objective Integrated Solutions (MPIS)? 1. Debt with Fixed Principal Repayments Alternatives 2. Debt 3. Equity 4. Debt & Equity Impact on Firm: • Total Cost of Financing (NPV) Impact on Shareholders: Criteria • EPS & ROE Risk Tolerance: • Interest coverage, Debt coverage, Dividend coverage Winfield should finance the $125M through issue of bonds with no principalRecommendation repaymentsWinfield Refuse Management 2
  • 3. Introduction Winfield Winfield MPIS + MPIS Net Income Net Income Net Income $27M + $15M = $42M Region Region Region Midwest Mid-Atlantic & Midwest & Mid- Midwest AtlanticWinfield Refuse Management 3
  • 4. Winfield’s Current Financial Position Winfield’s Revenue and Net Income EPS and Dividends Revenue Net Income DPS EPS $500 $50 $2.00 $400 $40 Net Income ($M) $1.50Revenue ($M) $300 $30 $/Share $1.00 $200 $20 $0.50 $100 $10 $0 $0 $0.00 2006 2007 2008 2009 2010 2011 2012E 2006 2007 2008 2009 2010 2011 2012E Industry: Debt-to-Equity Winfield: 100% Equity Ownership Equity Debt Winfield Family OTC 21% 50% 50% 79% Winfield Refuse Management 4
  • 5. Financing Alternatives Capital Needs: $125M 1. Debt with Fixed Principal 2. Debt Repayments  15 years  15 years  6.5% interest rate  6.5% interest rate  Full principal paid at Year 15  $6.25M annual principal payment Debt with Fixed Principal Repayment Schedule Debt Schedule 45 Interest Principal 140 Interest Principal 125.00 37.50 40 120 Cash Outflows ($M) 35Cash Outflows ($M) 100 30 25 80 20 60 15 40 10 6.25 6.25 20 5 8.13 8.13 0 2.44 0 Year Year Winfield Refuse Management 5
  • 6. Financing Alternatives Continued: Capital Needs: $125M 3. Equity 4. Debt & Equity  7.5M new shares @ $17.75  25% equity, 75% debt  Perpetual Dividend Payments  1.87M new shares @ $17.75  Dividend Policy is $1.00/Share  Perpetual Dividend Payments  Dividend Policy is $1.00/Share Dividend Payout Schedule Debt (75%) and Equity (25%) Schedule 180 Dividend Dividend Terminal Value 160 Interest Principal Dividend Dividend Terminal Value 160 140 140Cash Outflows ($M) Cash Outflows ($M) 120 120 100 100 80 80 60 Principal: 60 93.75 40 40 Dividend: 1.87 20 20 Interest: 6.09 7.50 0 0 Year Year Winfield Refuse Management 6
  • 7. Decision Criteria Impact on Firm: • Total Cost of Financing (NPV) Impact on Shareholders: • Earnings Per Share • Return on Equity Risk Tolerance: • Interest coverage • Debt coverage • Dividend coverageWinfield Refuse Management 7
  • 8. Cost of Financing (NPV)1 NPV of Financing Alternatives $160 Assumptions $145 $140 NPV of Fnancing Costs ($M) Marginal Tax Rate 35% $113 $117 $120 $107 Beta 0.36 $100 Market Risk Premium 6% Risk-free Rate (Rf) 3% $80 Cost of Equity2 (Ke) 5% $60 Cost of Debt3 (Kd) 3.5% $40 Time horizon (Years) 15 $20 Dividend per share $1 $0 Debt with Fixed Debt Equity 75% Debt + Principal 25% Equity RepaymentsAmong all the financing options considered, Debt (with no principal repayments) has the lowest NPV cost whereas Equity has the highest NPV cost.1NPV mentioned here represents the cost of financing cost and the lower NPV implies cheaper financing2Cost of Equity was calculated using CAPM formula3Cost of Debt of 3.5% (Prime in 2012) was used rather than Initial Cost of Debt (i.e., 6.5% in 2012) Winfield Refuse Management 8
  • 9. Earnings Per SharePre-acquisition EPS: $1.83 Debt Equity Pros No impact on shares No impact on earnings Cons Reduced earnings by interest Increased number of shares Expected EPS $ 2.51 $1.91 Post-acquisition Earnings Per Share $3.50 $3.00 Earnings Per Share $2.50 EPS (Debt) $2.00 $1.50 EPS(Equity) $1.00 Expected EBIT of EPS (Debt+Equity) $0.50 66M $0.00 $46 $51 $56 $61 $66 $71 $76 EBIT ($M) Debt financing options provide the highest expected EPS under likely EBIT scenarios. Winfield Refuse Management 9
  • 10. Adjusted Earnings Per Share • Adjusted EPS = (NI-principal repayment)/ number of shares • Higher earnings per share with the bond option, even treating principal repayments as “expenses” Adjusted Post-acquisition EPS $3.00 Adjusted Earnings Per Share $2.50 $2.00 $1.50 EPS( Debt, including principal repayment) $1.00 EPS(Equity) Expected $0.50 EBIT of $0.00 66M EBIT ($M) Even with Principal Repayments included on an Adjusted EPS basis, EPS with Debt Financing would be greater than EPS with Equity FinancingWinfield Refuse Management 10
  • 11. Return of EquityPre-acquisition ROE: 4.01% Debt Equity Pros No impact on shares No impact on earnings Cons Reduced earnings by interest Increased BV of equity Expected ROE 5.80% 5.25% Post-acquisition ROE 7.0% 6.5% Return on Equity (%) 6.0% 5.5% 5.0% ROE (Debt+Equity) ROE(Equity) 4.5% Expected ROE (Debt) 4.0% EBIT of 66M 3.5% $46 $51 $56 $61 $66 $71 $76 EBIT ($M) Debt financing options provide the highest expect ROE under likely EBIT scenarios. Winfield Refuse Management 11
  • 12. Debt Service and Retirement CoverageFrom Monte-Carlo Simulation (See Appendix):• EBIT for any given year can range from $46M to $78M• Retained earnings by FY2026 can range from $693M to $1,073M Debt Service Coverage Debt Retirement Coverage 21x 27x 16x 22x 17x 11x 12x 6x 7x 1x 2x $46 $48 $50 $52 $54 $56 $58 $60 $693 $726 $759 $792 $825 $858 Combined Estimated EBIT (in $M) Estimated Retained Earnings by 2026 (in $M) Debt with Fixed Principal Repayment Debt with Fixed Principal Repayment Debt Debt 75% Debt and 25% Equity Winfield can safely meet debt obligations under all financing alternatives. 1Debt service includes interest and principal repayment except for the bullet year 2Debt retirement refers to ability to pay back the principal by end of the term Winfield Refuse Management 12
  • 13. Dividend Payout CoverageAssuming Winfield continues to pay $1 dividend per share to all of its shareholders ineach financing option: Dividend Payout Coverage Ratio1 3x 2x 1x 46 48 50 52 54 56 58 60 Combined EBIT for any given year Debt with Fixed Principal Repayment Equity Debt 75% Debt and 25% Equity Winfield can safely pay dividends to shareholders under all financing alternatives1Dividend to 15M existing shareholders plus additional shareholders needed for the respective option. Winfield Refuse Management 13
  • 14. Evaluation of Options & Summary Debt with Debt (75%) Decision Criteria Debt Principal Equity + Equity Repayment (25%) Cost of Financing (NPV) Expected EPS Expected ROE Risk Tolerance (Coverage) represents the better alternative represents the lesser alternative • Other considerations  By issuing debt, Winfield would avoid control dilution  Flexibilities – sufficient cash flow to meet commitments under all optionsWinfield should finance the $125M through issue of bonds with no principal repayments Winfield Refuse Management 14
  • 15. Question & AnswersThank you for listening to our presentation!
  • 16. Concerns from Last Board Discussion Concern Our ViewAndrea Winfield Stock issue is lower cost and Stock issue is most expensive additional debt would increase risk option. Winfield can meet debt leading to swings in stock price obligations under varying EBIT scenarios. In fact, debt will increase EPS and ROE, increasing stock price.Joseph Winfield By issuing 7.5M shares, Winfield will Debt cash outflows with debt is for only have to pay $7.5M in dividends a finite period while stock dividend outflows are perpetualTed Kale Market price is too low (based on This is not the only criteria for Price-to-book comparable). Issuing financing. Price may be low due to shares at low price and loss of a liquidity discount to trade OTC. management control is a disservice P/B is not comparable when capital to current stockholders. structure varies.Joseph Tendi Principal repayment obligation is Principal repayment is relevant irrelevant to the financing decision because it is a real cash outflowJames Gitanga Other major companies have long- Analysis shows Winfield has the term debt in capital structure while capacity to take-on more debt in its Winfield is unusual capital structure. Winfield Refuse Management 16
  • 17. AppendixWinfield Refuse Management Inc.
  • 18. Summary of Financing SchedulesWinfield Refuse Management 18
  • 19. Monte-Carlo Simulation: EstimatedCombined EBIT Std Dev Average MIPS Before Tax 2,377 24,000 Winfield Before Tax 3,639 36,745Note: Standard Deviation was calculated from last 5 year performance.Winfield Refuse Management 19
  • 20. Monte-Carlo Simulation: EstimatedRetained Earnings in FY 2026Note: Ending Retained Earnings= Beginning Retained Earnings + Net Income – DividendNet Income Standard Deviation=3.6 Winfield Refuse Management 20
  • 21. Cash outflows for debt options Debt with fixed principal repayments: Financing Cash Flow ($M) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026Debt 125.0 118.8 112.5 106.3 100.0 93.8 87.5 81.3 75.0 68.8 62.5 56.3 50.0 43.8 37.5Principal Repayments 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 37.50Interest 4.38 4.16 3.94 3.72 3.50 3.28 3.06 2.84 2.63 2.41 2.19 1.97 1.75 1.53 1.31Debt Outstanding 118.75 112.50 106.25 100.00 93.75 87.50 81.25 75.00 68.75 62.50 56.25 50.00 43.75 37.50 -Tax shield 1.53 1.45 1.38 1.30 1.23 1.15 1.07 1.00 0.92 0.84 0.77 0.69 0.61 0.54 0.46Interest Payment after tax 2.84 2.70 2.56 2.42 2.28 2.13 1.99 1.85 1.71 1.56 1.42 1.28 1.14 1.00 0.85Principal Repayments 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 37.50Net Cash Outflow 9.09 8.95 8.81 8.67 8.53 8.38 8.24 8.10 7.96 7.81 7.67 7.53 7.39 7.25 38.35NPV 113 Debt: Financing Cash Flow ($M) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026Debt 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0Principal Repayments - - - - - - - - - - - - - - 125.0Interest 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4Debt Outstanding 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 125.0 -Tax shield 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5Interest Payment after tax 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8Principal Repayments - - - - - - - - - - - - - - 125Net Cash Outflow 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 127.8NPV 107 Winfield Refuse Management 21
  • 22. Cash outflows for Equity options Equity: Financing Cash Flow ($M) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026Dividend Payout 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5TV 145Div+TV 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 153NPV 145 Equity and Debt: Financing Cash Flow ($M) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026Debt 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8Principal Repayments - - - - - - - - - - - - - - 94Interest 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3Debt Outstanding 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 93.8 -Tax shield 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1Interest Payment after tax 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1Principal Repayments - - - - - - - - - - - - - - 94Net Cash Outflow 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 95.9NPV of Debt 81 Winfield Refuse Management 22
  • 23. Cost of Financing (3.5% vs. 6.5%) NPV @ 3.5% NPV @ 6.5% NPV of Financing Alternatives NPV of Financing Alternatives $160 $160 $145 $145NPV of Fnancing Costs ($M) NPV of Fnancing Costs ($M) $140 $140 $113 $117 $120 $107 $120 $106 $110 $98 $100 $100 $80 $80 $60 $60 $40 $40 $20 $20 $0 $0 Debt with Debt Equity 75% Debt + Debt with Debt Equity 75% Debt + Fixed 25% Equity fixed 25% Equity Principal principal Repayments repayment Change in Interest from 3.5% to 6.5% yields the same financing decision. Winfield Refuse Management 23
  • 24. EPS (with interest = 6.5%) Post-acquisition EPS 3.50 3.00 2.50 EPS (Debt) 2.00 EPS(Equity) 1.50 EPS (Debt+Equity) 1.00 Expected 0.50 EBIT of 66M - EBIT ($M) $46.00 $47.00 $48.00 $49.00 $50.00 $51.00 $52.00 $53.00 $54.00 $55.00 $56.00 $57.00 $58.00 $59.00 $60.00 $61.00 $62.00 $63.00 $64.00 $65.00 $66.00 $67.00 $68.00 $69.00 $70.00 $71.00Winfield Refuse Management 24
  • 25. Adjusted EPS (with interest = 6.5%) Adjusted Post-acquisition EPS3.002.502.00 EPS( Debt, including principal repayment)1.501.00 EPS(Equity)0.50 Expected EBIT of 66M -Winfield Refuse Management 25
  • 26. 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% $46.00 $47.00 $48.00 $49.00 $50.00 $51.00 $52.00 $53.00 $54.00 $55.00Winfield Refuse Management $56.00 $57.00 $58.00 $59.00 $60.00 $61.00 $62.00 $63.00 $64.00 $65.00 $66.00 Post-acquisition ROE $67.00 $68.00 ROE (with interest = 6.5%) $69.00 $70.00 $71.00 66M EBIT of Expected ROE ROE (Debt) ROE(Equity) (Debt+Equity)26

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