Continental Carriers Case Study Critique

Continental Carriers Case Study Critique

The following document will critique the presentation put forward on ‘Continental Carriers Incorporated’ for the choice of financing recommended for a market acquisition. The three main options available for recommendation where a common share issue, a preference share issue or long term debt financing through the a bond issue.

The presenting group recommended that the company should take on long term debt through a bond issue as the best option to raise finance. Through a bond issue the companies debt ratio will increase from 20% to 33% with a $2.5 million annual sinking fund cash outflow and a residual $12.5 million outstanding at the end of the 15 year maturity term.

The concerns that were evident and not addressed by the presenting group were as follows:

EPS Static view of company performance (Lack of depth):

While EPS analysis allows the investor to make valuable intra sector comparisons between company performance, like many other financial indicators, using it as a soul indicator of firm health is a dangerous pitfall. Static EPS at a given time (EPSt) only gives a snapshot view. Trailing EPS, Current EPS and Forward EPS views all need to be considered when choosing an investment financing decision in alignment with other important ratios such as P/E, PEG, P/B, and ROE.

Why has the company avoided taking on debt in the past?

It is generally considered that long term debt is structuring as a part of company finance is common place. The existence of no previous long term debt in Continental Carriers history is puzzling and places possible question marks over why this might be the case. Although this may require greater depth than required for the base decision rule regarding financing sources it would provide an insight into possible previous and future issues faced by the company and how these may affect financing decisions today. It seems entirely likely that management (as a majority shareholder) is...