A third financing option is preference shares, one of whose principal qualitative advantages is no diminution management's interest in corporate growth or voting power (assuming that non-voting preferred stock issued). Also, any new equity sale requires the company to offer shares to preferred stockholders first to maintain their pro rata interest. This limits the flexibility to bring in new shareholders to influence operation systems. Meanwhile, preferred stock is always subject to the right to common stock conversion with its potential diminution of voting power and control. Likewise, 51-67% of preferred stockholders are required for sale, merger, liquidation, sale of shares with more privileges, issuance of debt over dollar amount, and increase in board size.
Midland Freight should be financed through long-term debt in conjunction with, the sale of $50 million in...
This debt alternative provides a $2 million tax shield, higher earnings per share and market price ratios, a lower weighted average cost of capital and an increase in their return on equity ratio. Before-interest earnings and tax of $12,500,000 (Fig. 3) means EPS would be greater than $1.00. Even after the addition of debt, the debt ratio only increased to 40%, corresponding to the proportion of total assets financed by creditors. Common stock issuance would have lowered EPS to $2.72 versus $3.87. Ms Thorpe pointed out that stock at $16.75 per share and a dividend of $1.50 per share would cost CCI nearly 9% whereas after-tax bond interest was only 6%. The true value of the firm was understated by a lower book value than current replacement cost and a $17.75 per-share common stock sale would be a windfall to new stockholders. This low market-share price lowered price-earnings…
