Case study 4 Winfield Refuse Management, Inc.

: Raising
Debt vs. Equity

Chengjun Li
Savannah College of Art and Design
Savannah, Georgia,31401
August 2,2020
Mamie Sheene
Chief Financial Officer
Winfield Refuse Management Inc.

Dear Mamie Sheena

My purpose of writing this letter is to help you better use scientific data analysis to persuade the
Winfield board of directors to adopt a unified opinion. I have analyzed the cash flow required by
the two financing methods below and gave the risks and suggestions of two financing methods, I
hope my analysis and suggestions will help you.

1. Introduction
Winfield Waste Management Company is a vertically integrated, harmless waste management
company. Mamie Sheene is the Chief Financial Officer of Winfield Waste Management
Company. Since Winfield Waste Management Company is going to make a major acquisition, it
must decide whether to finance through debt or equity. This issue cannot be unified on the
board of directors, so she needs to use data calculations to convince the board to get a unified
solution. Thomas Winfield founded the company in 1972. He founded the two-truck company
Winfield refuse in Creve Coeur, Missouri, and achieved growth through a combination of
organic growth and strategic acquisitions. By 2012 It has grown to serve 500,000 industrial,
commercial and residential customers in 9 states. Winfield has 22 landfills and 26 transfer
stations and material recycling facilities, serving 33 collection operations. Winfield’s board of
directors followed a consistent policy of avoiding long-term debt. The business uses stable cash
flow and makes short-term loans to the bank when needed. Since the early 1990s, the company
has been making small-scale acquisitions through acquiring companies that will expand its
geographic reach and use existing facilities to create economies of scale. Since 2010, many
competitors (listed companies, private equity companies) have been more active in acquisition
and integration. In order to maintain the company’s competitiveness and expand its business
scope (not limited to the Midwest), acquisitions can only be achieved. After analyzing several
potential targets, Winfield negotiated with MPIS (Mott-Pliese Integrated Solutions). MPIS waste
management company serves parts of Ohio, Indiana, Tennessee and Pennsylvania. The
acquisition of MPIS provides Great revenue synergies and opportunities to reduce costs in the
Midwest and provide access to the Mid-Atlantic region. MPIS has a strong management team,
operating profit margin has been maintained at 12-13%, the purchase price is about 125 million
US dollars, and MPIS is also ready to accept Winfield's purchase price of up to 25% of the stock.
At an earlier board meeting, most board members refused to accept the proposal to finance
the transaction through long-term debt and suggested that the issuance of new common stock
is a better option for generating income. As CFO, Mamie Sheene believes that debt financing
would be a better option, because the issuance of new shares will dilute the price of existing
shares and is detrimental to shareholders, so she must convince the board members. In this
case, I need to analyze which financing method is most beneficial to Winfield Waste
Management Company.

2. Analysis and Findings

A. Financing entirely through issuing debt

Chart 1

Under the method of financing through the issuance of debts (Chart 1), the principal must be
repaid 6.25 million US dollars each year, and 37.5 million US dollars will be paid at maturity. The
annual interest rate is 6.5%. Due to the tax shield reduction policy, the annual net payment
commitment declines. The net expenditure in 2012 was $11,531,250, and the total present
value of payment for 15 years (2012-2026) was calculated as $106,073,872.

B. Financing entirely through issuing equity

Under the method of financing through the issuance of equity (Chart 2), you need to pay 7.5
million US dollars in dividends every year, and you need to pay Net of underwriting fees Chart 2
and expenses $8,100,000 in 2012, but you do not need to pay this expense again for the
remaining 14 years, so 2012 The annual net payment is $15,600,000, and the total present
value of payment for 15 years is calculated as $80,477,156. Assuming that 15 years later, the
dividend per share is still US$1 and there are 7.5 million shares in total, then the annual dividend
payment is still US$7.5 million.

What are the differences in cash flow requirements between the two options?
By comparing the total present value of payment for 15 years between Winfield’s issuance of
bonds and the issuance of stocks, I found that the cash flow required for debt issuance in 15
years is more than $106,073,872, compared to the issuance of stocks, which is $80,477,156.

What are the deciding or most relevant criteria by which to evaluate and
recommend a path forward?
I have three evaluation criteria
1. Through total present value of payment, Present value (PV) is the current value of a future
sum of money or stream of cash flows given a specified rate of return. Therefore, through this, I
judge that Winfield will need more cash flow to issue debt within 15 years, but through the
issuance of stocks, assuming that the dividend of 1 US dollar per share remains the same, the
cash flow will continue to grow after 15 years due to the dividends generated by 7.5 million
shares. After three years (2029), the required cash flow will exceed the bond issuance.
2.
 Chart 3

From Chart 3, I can find that after Winfield successfully acquired MPIS, the earnings per share
through the issuance of debt was $2.51, while the earnings per share for the issuance of shares
was $1.91. This is due to the dilution of stock price and earnings per share due to the newly
issued 7.5 million ordinary shares.
3. Issuing shares to raise funds will have an impact on the company's original shareholder
management company, because the issuance of new shares will dilute the original shareholder's
control. Once a new major shareholder is created and more than 50% of the shares are held, then
control of the company will be lost.

3. Recommendations

Mamie Sheene should convince the board of directors through the conclusions drawn by
financial data analysis. Although in the short term (within 15 years), the issuance of debt will
require more cash flow, but in the long run, the cash flow required after the issuance of stocks in
2029 Will exceed the cash flow required to issue debt, and the issuance of stocks is also
accompanied by risks, not only due to the reduction in earnings per share caused by stock
dilution (damaging the interests of the original shareholders), but also the crisis of diluting the
company's control rights. Overall, issuing bonds is a better choice.

Conclusion

Chart 4

Through the comprehensive consideration of Total Present value of payment, EPS and the risk
judgment of the two financing methods (Chart 4), debt issuance is a better choice. Although in
the short term (within 15 years), debt issuance will require more cash flow, but in the long run
from a point of view, the cash flow required to issue shares after 2029 will exceed the cash flow
required for debt issuance. At the same time, the issuance of shares is accompanied by risks, not
only due to the reduction in earnings per share due to stock dilution (damaging the interests of
original shareholders) And it will also be accompanied by a crisis of diluting the company’s
control. If Mamie Sheene wants to reduce the risk of issuing debt, first after Winfield acquires
MPIS, she should focus on how to create more profits for the company, at the same time, by
optimizing the management structure to reduce unnecessary expenditures, this can reduce
Winfield's cash flow pressure.

Best wishes
Chengjun Li