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

In the last board meeting, each director discussed his or her concerns regarding the financing options of merger. According to Andrea Winfield, additional debt burden is considered risky and may cause large swing in stock price due to annual principal outlays. Stock issuance is a lower cost option. I agree with her opinion that issuing bond may cause stock price fluctuation. However, stock issuance is the worst option. Winfield can benefit from bond issuance since additional debit can increase the company’s ROE and EPS. Joseph Winfield believed that Winfield could pay $7.5 million dividends with an additional 7.5 million shares issuance. He overlooked the fact that EPS will decrease even dividends remain at $1 per share. Further, dividend payments to new stockholders are perpetuities while the bond payments are fixed. Ted Kale thought new shares issuance at a low price would weaken the company’s competitiveness and dilute the management’s control. His concern is justified but keeping a high stock price is not the sole decision criteria. Joseph Tendi and Naomi Ghonche believed that, rather than issuing stocks, financing with debt could bump the EPS up to $2.51. Further, the principal repayment obligation is irrelevant to the decision. It is true that issuing common stock would dilute EPS but we also need to consider debt’s principal repayment obligation. It is relevant to our financing decision because it is a cash outlay in the near future. Lastly, James Gitanga said that Winfield’s capital structure is different from those of other major players in this industry. I would say that Winfield could carry a higher portion of long-term debt in its capital structure. As far as I am concerned, the acquisition of MPIS should be financed by bond issuance without annual fixed principal repayments. By using debt, Winfield can expand with flexible cash flows and avoid management control dilution.