Case Study of Mississippi Milling Company

Mississippi Milling Company

Arguments Favoring Debt:

 Company is expecting EPS to drop by 94 cents in the current year because of higher raw material costs. Financing would further drop the EPS. The reduction in case of Debt is minimum that is 58 cents in comparison to $1.05 in case of preferred stock and $1.70 in case of Common stock.

 The cost of financing in case of debt is lowest i.e. with additional debt of $10 million the weighted average cost of all debt is 8.88 percent before tax which will further reduce to 4.44 percent after taxes. This cost is very low as compared to other options.

 There are some covenants attached to debt but as our legal and financial staff mentioned they are neither overly burdensome nor would they affect the company’s previous plans.

 The amount in case of debt is available within 30days while in case of preferred stock and common stock the amount is available after about 10weeks (70 days).

 The advantage of tax shield can only be availed by taking debt. In case of preferred stock and common stock no tax shield is available.

 An important factor that should also be considered is inflation. It benefits the debtor as they pay in cheaper dollars.

Reply to arguments against Debt:

 Debt increases the return of shareholders as it creates financial leverage and becoming debt free should never be the target of a company.

 History of the company shows that debt had been beneficial for the growth of the company e.g. company took a debt in 1971, the financial data of last five years show that EPS increased from $1.01 in 1971 to $9.44 in 1975.

 This is the best time for the company to avail the opportunity as financial position of the company is strong so it can better negotiate the terms.

 Company must not forgo this opportunity to borrow and invest today against a probable future opportunity which may or may not exist.

Arguments against Preferred stock Issue:

A factor of risk is involved in preferred stock as...