Continental Carriers, Inc. :: Finance Advanced Financial Management

Continental Carriers, Inc.(This is not an essay. This paper responds to to each one ofthe comments raised by the five members of the senesce.)Continental Carriers, Inc. (CCI) should take on the semipermanent debt tofinance the acquisition of Midland Freight, Inc. for a few reasons. The company is argillaceous on assets, the debt ratio pull up stakes only grow to 0.40with the added $50M in debt. Also, the libertine 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 persh are will ontogenesis to $3.87 in comparison to an equity-financedacquisition of $2.72 per share. CCI would be taking a sanely highrisk by put out additional stock due to the uncertainty about theoffering price. Having a low P/E ratio with respect to the rest ofthe market, and the replacement cost of the firm creation greater thanits book value (argument 3), there is a good vista that the currentstock price and the proposed offering prices are too low.Although long-term debt is a better financing choice a few of thedrawbacks are pointed out. Debt holders claim profit before equityholders, so the chance that lucre may be lower than expected, pluss risk to equity may rationalize or impede stock value. However,in extreme financial situations such(prenominal) 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 one million million thatwould have to be paid at the expiration of the bonds, but that couldbe paid off by issuing new 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 risky venture since theproposition was to pay out to a drop down fund does not make sense. Over the course of the succeeding(a) sev en years, CCI had a historical growthin revenue of 9%. This growth 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 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.