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 principal
Recommendation
repayments
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3. Introduction
Winfield
Winfield MPIS
+ MPIS
Net Income Net Income Net Income
$27M + $15M = $42M
Region Region Region
Midwest Mid-Atlantic & Midwest & Mid-
Midwest Atlantic
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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)
$1.50
Revenue ($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%
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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)
35
Cash 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
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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 $1.00/Share
Dividend Payout Schedule Debt (75%) and Equity (25%) Schedule
180 Dividend Dividend Terminal Value 160 Interest Principal Dividend Dividend Terminal Value
160 140
140
Cash Outflows ($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
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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 coverage
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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
Repayments
Among 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 financing
2Cost of Equity was calculated using CAPM formula
3Cost of Debt of 3.5% (Prime in 2012) was used rather than Initial Cost of Debt (i.e., 6.5% in 2012)
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9. Earnings Per Share
Pre-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.
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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 Financing
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11. Return of Equity
Pre-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.
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12. Debt Service and Retirement Coverage
From 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
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13. Dividend Payout Coverage
Assuming Winfield continues to pay $1 dividend per share to all of its shareholders in
each 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 alternatives
1Dividend to 15M existing shareholders plus additional shareholders needed for the respective option.
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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 options
Winfield should finance the $125M through issue of bonds with no principal repayments
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16. Concerns from Last Board Discussion
Concern Our View
Andrea 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 perpetual
Ted 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 outflow
James 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.
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19. Monte-Carlo Simulation: Estimated
Combined EBIT
Std Dev Average
MIPS Before Tax 2,377 24,000
Winfield Before Tax 3,639 36,745
Note: Standard Deviation was calculated from last 5 year performance.
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20. Monte-Carlo Simulation: Estimated
Retained Earnings in FY 2026
Note: Ending Retained Earnings= Beginning Retained Earnings + Net Income – Dividend
Net Income Standard Deviation=3.6
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