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 dimension will only grow to 0.40with the added $50M in debt. Also, the firm will upbeat from anadded $2M in a tax shield and be able to proceeds $12.7M a year to its phone lineholders and investors, instead of $8.9M if equity is raised tofinance the acquisition. Lastly, the crease price and earnings pershare will increase to $3.87 in semblance to an equity-financedacquisition of $2.72 per share. CCI would be taking a somewhat high endangerment by issuing additional stock due to the uncertainty nearly theoffering price. Having a low P/E ratio with prize to the rest ofthe market, and the replacement cost of the firm being greater thanits account book value (argument 3), t here is a good chance that the currentstock price and the proposed offering prices are too low.Although long-term debt is a break out financing choice a few of thedrawbacks are pointed out. Debt holders claim net profit before equityholders, so the chance that profits may be lower than expected,increases risk to equity may reduce or hinder 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 rest 12.5 million thatwould afford to be paid at the expiration of the bonds, only when 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 crazy venture since theproposition was to pay out to a sinking blood line does not make sense. Over the course of the next seven years, CCI had a historical gro wthin 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(prenominal) of a burden on the cash flow. In contrast, an equity-financedacquisition would mobilise 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.