Winfield Refuse Management Inc.

Raising Debt vs. Equity

Iris Chen
Alex Ho
Brian Huang
Pramod Jindal
Michael Trecroce

Executive Summary
Objective
Objective

Alternatives
Alternatives

Criteria
Criteria

Recommendation
Recommendation

What is the best financing option for the $125M acquisition of

Mott-Pliese Integrated Solutions (MPIS)?

1.
2.
3.
4.

Debt with Fixed Principal Repayments

Debt
Equity
Debt & Equity

Impact on Firm:
Total Cost of Financing (NPV)
Impact on Shareholders:
EPS & ROE
Risk Tolerance:
Interest coverage, Debt coverage, Dividend coverage
Winfield should finance the $125M through issue of bonds with
no principal repayments

Winfield Refuse Management

Introduction

Winfiel
d

MPIS

Net Income

Net Income

$27M

$15M

Winfiel
d+
MPIS
Net Income
=

$42M

Region

Region

Region

Midwest

Mid-Atlantic &
Midwest

Midwest & MidAtlantic

Winfield Refuse Management

Winfields Current Financial Position

Winfields Revenue and Net Income
Revenue

$500

$50

$400

$40

$300

$30

$100

$10
2007

$2.00

DPS

$1.50

$1.00
Net Income ($M)
$/Share
$20

Revenue ($M)
$200

$0
2006

EPS and Dividends

2008

2009

2010

2011

$0
2012E

Industry: Debt-to-Equity
Equity

Debt

$0.50
$0.00

2006 2007 2008 2009 2010 2011 2012E

Winfield: 100% Equity Ownership

Winfield Family

OTC

21%

50%

50%
79%

Winfield Refuse Management

Financing Alternatives
Capital Needs: $125M
1. Debt with Fixed Principal
Repayments
15 years
6.5% interest rate
$6.25M annual principal
payment

2.

Debt with Fixed Principal Repayment Schedule

Debt
15 years
6.5% interest rate
Full principal paid at Year 15

Debt Schedule
Principal Interest
140

Principal Interest
45
40

120

35

Cash Outflows ($M)

30

100

25

80
37.50

20
15

Cash Outflows ($M)

125.00

60
40

10 6.25
6.25
2.44

5 8.13
0

Year

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20
08.13

Year

Financing Alternatives Continued:

Capital Needs: $125M
3.

Equity
7.5M new shares @ $17.75
Perpetual Dividend Payments
Dividend Policy is $1.00/Share

Dividend Payout Schedule

Dividend Terminal Value
180

Dividend

4.

Debt & Equity

25% equity, 75% debt
1.87M new shares @ $17.75
Perpetual Dividend Payments
Dividend Policy is $1.00/Share

Debt (75%) and Equity (25%) Schedule

Dividend Terminal Value
120

160

Principal

Interest

100

140
120

80

100
Cash Outflows ($M)

Dividend

60

80

Cash Outflows ($M)

60
40

93.75

40
20

20
0 7.50

Year

Winfield Refuse Management

1.87
6.09

Year

Decision Criteria
Impact on Firm:
Total Cost of Financing (NPV)
Impact on Shareholders:
Earnings Per Share
Return on Equity
Risk Tolerance:
Interest coverage
Debt coverage
Dividend coverage

Winfield Refuse Management

Cost of Financing (NPV)1

NPV of Financing Alternatives

Assumptions
Marginal Tax Rate
35%
Beta
0.36
Market Risk Premium 6%
Risk-free Rate (Rf)
3%
Cost of Equity2 (Ke)
5%
Cost of Debt3 (Kd)
3.5%
Time horizon (Years)
15
Dividend per share
$1

$160

$145

$140
$120$113 $117
$107
$100
NPV of Fnancing Costs ($M)

$80
$60
$40
$20

$0
Debt with Fixed Principal Repayments

Among all the financing options considered, Debt (with no principal

repayments) has the lowest NPV cost whereas Equity has the highest
1
cost.
NPV mentioned here represents the NPV
cost of
financing cost and the lower NPV implies

cheap

financing
2
Cost of Equity was calculated using CAPM formula
3
Cost of Debt of 3.5% (Prime in 2012) was used rather than Initial Cost of Debt (i.e., 6.5% in 201

Winfield Refuse Management

Earnings Per Share

Pre-acquisition EPS: $1.83
Debt

Equity

Pros

No impact on shares

No impact on earnings

Cons

Reduced earnings by
interest

Increased number of
shares

Expected
EPS
$3.50

$ 2.51

$1.91

Post-acquisition Earnings Per Share

$3.00
$2.50
EPS (Debt)

$2.00
Earnings
$1.50 Per Share

EPS(Equity)

Expected
EBIT of
66M

$1.00
$0.50
$0.00

EBIT ($M)

EPS (Debt+Equity)

Debt financing options provide the highest expected EPS under likely
EBIT scenarios.
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Adjusted Earnings Per Share

Adjusted EPS = (NI-principal repayment)/ number of shares
Higher earnings per share with the bond option, even
treating principal repayments as expenses
Adjusted Post-acquisition EPS
$3.00
$2.50
$2.00
Adjusted Earnings Per Share

EPS( Debt, including principal

repayment)

$1.50
$1.00
$0.50
$0.00

Expected
EBIT of
66M

EPS(Equity)

EBIT ($M)

Even with Principal Repayments included on an Adjusted EPS basis, EPS

with Debt Financing would be greater than EPS with Equity Financing
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Return of Equity
Pre-acquisition ROE: 4.01%
Debt

Equity

Pros

No impact on shares

No impact on earnings

Cons

Reduced earnings by
interest

Increased BV of equity

Expected
ROE7.0%

5.80%

5.25%
Post-acquisition ROE

6.5%
6.0%
5.5%
Return
5.0%on Equity (%)
4.5%

Expected
EBIT of
66M

4.0%
3.5%

EBIT ($M)

ROE (Debt+Equity)
ROE(Equity)
ROE (Debt)

Debt financing options provide the highest expect ROE under likely EBIT
scenarios.
Winfield Refuse Management
11

Debt Service and Retirement Coverage

From Monte-Carlo Simulation (See Appendix):
EBIT for any given year can range from $46M to $78M
Retained earnings by FY2026 can range from $693M to $1,073M
Debt Service Coverage

Debt Retirement Coverage

27x

21x

22x

16x

17x

11x

12x

6x
1x
46

7x

48

50

52

54

56

58

Combined Estimated EBIT (in $M)

Debt with Fixed Principal
Repayment

Debt

60

2x
693

726

759

792

825

858

Estimated Retained Earnings by 2026 (in $M)

Debt with Fixed Principal Repayment
Debt

75% Debt and 25% Equity

Winfield can safely meet debt obligations under all financing

alternatives.

Debt service includes interest and principal repayment except for the bullet year
Debt retirement refers to ability to pay back the principal by end of the term

1
2

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Dividend Payout Coverage

Assuming Winfield continues to pay $1 dividend per share to all of its
shareholders in each financing option:
Dividend Payout Coverage Ratio1
3x

2x

1x
46

48

50

52

54

56

58

60

Combined EBIT for any given year

Debt with Fixed Principal Repayment
Debt

Equity
75% Debt and 25% Equity

Winfield can safely pay dividends to shareholders under all financing

alternatives

Dividend to 15M existing shareholders plus additional shareholders needed for the
respective option.
1

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Evaluation of Options & Summary

Decision Criteria

Debt

Debt with
Principal
Repayme
nt

Equity

Debt
(75%) +
Equity
(25%)

Cost of Financing
(NPV)
Expected EPS
Expected ROE

represents
Risk
Tolerancethe better alternative represents the lesser alternative
(Coverage)
Other considerations
By issuing debt, Winfield would avoid control
dilution
Flexibilities sufficient cash flow to meet
commitments under all options
Winfield should finance the $125M through issue of bonds with no
principal repayments
Winfield Refuse Management

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Question & Answers

Thank you for listening to our presentation!

Concerns from Last Board Discussion

Concern

Our View

Andrea Winfield Stock issue is lower cost and

additional debt would
increase risk leading to
swings in stock price

Stock issue is most

expensive option. Winfield
can meet debt obligations
under varying EBIT
scenarios. In fact, debt will
increase EPS and ROE,
increasing stock price.

Joseph Winfield

By issuing 7.5M shares,

Winfield will only have to pay
$7.5M in dividends

Debt cash outflows with debt

is for a finite period while
stock dividend outflows are
perpetual

Ted Kale

Market price is too low

(based on Price-to-book
comparable). Issuing shares
at low price and loss of
management control is a
disservice to current
stockholders.

This is not the only criteria

for financing. Price may be
low due to a liquidity
discount to trade OTC. P/B is
not comparable when capital
structure varies.

Joseph Tendi

Principal repayment
obligation
is irrelevant to the
Winfield Refuse
Management
financing decision

Principal repayment is
relevant because it is a real16
cash outflow

Appendix

Winfield Refuse Management Inc.

Summary of Financing Schedules

Winfield Refuse Management

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Monte-Carlo Simulation: Estimated

Combined EBIT

Note: Standard Deviation was calculated from last 5 year performance.

Winfield Refuse Management

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Monte-Carlo Simulation: Estimated

Retained Earnings in FY 2026

e: Ending Retained Earnings= Beginning Retained Earnings + Net Income Divid

Income Standard Deviation=3.6
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Cash outflows for debt options

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Cash outflows for Equity options

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Cost of Financing (3.5% vs. 6.5%)

NPV @ 3.5%

NPV @ 6.5%

NPV of Financing Alternatives

$160

NPV of Financing Alternatives

$160

$145

$140

$140

$120$113 $117
$107

$120
$106 $110
$98
$100

$100
NPV of Fnancing Costs ($M)

$145

$80

NPV of Fnancing Costs ($M)

$80

$60

$60

$40

$40

$20

$20

$0
Debt with Fixed Principal Repayments

$0
Debt with fixed principal repayment

Change in Interest from 3.5% to 6.5% yields the same financing

decision.
Winfield Refuse Management
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EPS (with interest = 6.5%)

Post-acquisition EPS
3.50
3.00
2.50

EPS (Debt)

2.00
EPS(Equity)
1.50
EPS (Debt+Equity)
1.00

Expected
EBIT of 66M

EBIT
($M)

0.50
-

46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

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Adjusted EPS (with interest = 6.5%)

Adjusted Post-acquisition EPS
3.00

2.50

2.00
EPS( Debt,
including principal
repayment)

1.50

1.00

EPS(Equity)

Expected
EBIT of
66M

0.50

46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

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ROE (with interest = 6.5%)

Post-acquisition ROE
6.5%

6.0%

ROE
(Debt+Equity)

5.5%

ROE(Equity)

5.0%

ROE (Debt)

4.5%

Expected
EBIT of
66M

4.0%

46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

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