Case Note: Winfield Refuse Management, Inc.: Raising Debt vs. Equity

Case: Winfield Refuse Management
I. Decision Proof:

First part: “… , it was Sheene’s responsibility to lead the discussion on how to finance a major acquisition… reach a resolution this time. ”
Last part: “Board Discussion”, “However, there was decidedly less agreement on the matter of financing…
The article is about background and arguments about whether to raising debt or equity.

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II. Options: Funding the acquisition through a bond issue or common stock?
III. Criteria:

Maximum the interest of shareholders/not hurt the existing shareholders’ interest. Stable the stock price and make stock value growth.
Solidify its competitive position in the Midwest and make expansion.

IV. Analysis of options:

Approval of Issuing stock: -Lower cost than bond: ‘the principal repayments on the bond mean an additional $6. 25 million cash outlay every year and it is over 9% of the bond issue. ‘ -‘Lower risk than bond: debt burden will increase risk and will lead to wild swings in the stock price. ‘
Approval of Issuing bond:

Issuing stock would hurt shareholders: Winfield’s shares are now undervalued and issuing more shares would be a disservice to shareholders. Weaken the control of Winfield family and a gift to new shareholders
EPS would go up: using debt the EPS would go up to $2. 51, on the other hand, the stock issuing would make EPS decrease to $1. 91.

Other major players (competitors) rely on long-term debt in the capital structures.
Other information: History of Winfield Refuse:
”In 40 years after 1972, the company grew through a combination of organic growth and strategic acquisitions.
Growth history: company amalgamation
Experienced -”During the 1980s, professional management had been brought in.
Family control -”a a consistent policy of avoiding long-term debt”. Risk aversion -”very steady cash flows and 1991 public stock offering”. Grow sound and already has stocks in the market
Expansion Opportunity:

“The management team had proven successful in the post-acquisition phase, avoiding undue actively seeking a larger acquisition target to solidify its competitive position in the Midwest. ”
Experienced and well-controlled in management “As a chief financial officer of Winfield Refuse Management, a vertically integrated, how to finance a major acquisition.


get oriented
identify problems
decision “… a waste management operator collected the waste and then processed it for recovery, combustion for energy recovery… ”
company: provide new energy, environmental protection “… generated very steady cash flows. ”
take safely with steady cash flow “… adhered to a consistent policy of avoiding long-term debt”
Capability? How many shares did the company issue in the market? “The Winfield family and senior management held 79% of the common stock. ”
The CFO missed the point about the ratio of family control. 15 million family 80% = $11,850,000 others 20% $22. 5 million family 52% = $11,850,000 others 48%
The family control would be weakened and it may hurt family interest if issuing stocks. What’s more, if one of the family members sold his/her share, the Winfield Refuse Management, Inc would no longer be a family company. “The management team had proven successful in the post-acquisition phase… ”
The company may be experienced in integrating new companies into its operations but no experience in big companies. The company now has many branches but all in one industry. … had consistently produced 12%-13% operating margins every year for the past 10 years. ”
This figure did not compare to the average or competitors in this industry.

Exhibit 2.  High debt to assets ratio indicates low borrowing capacity of a firm and lower the firm’s financial flexibility.
Exhibit 3: The issued bond is a fixed-rate bond or variable bond? What other equity does the company have? (building, trucks, etc. ) Plus: Approval of Issuing stock: As the article mentioned, “The Winfield family and senior management held 79% of the common stock” and the fact that the company’s stock is undervalued, if the company chose to issue strike, the senior management may own more shares and the change of the stock’s price may benefit or hurt them. So issuing strikes will motivate senior managers or other employees who own the stocks.

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