Winfield Refuse Management, Inc. Case – Raising debt versus equity

Winfield Refuses Management

Winfield Refuse Management is publically traded company.   This Case is related to the decision of company for raising debt or equity. In order to take decision on both the point required detail analysis from the debt and equity. We have analysed the case and related benefit in detail manner for considering the fact of company.

We have analysed the raising of debt V/s equity for the company as analysis of all the criteria are as under -

Pros and cons of Debt V/s Equity

Before analysis of any factor we need to analyse the benefit and limitation from both the case. In this case if company undertake financial requirement by way of debt than company weighted average cost of capital is lower but it will arise the compulsory liability even if company is in profit or in loss. But if company raise the fund from equity for their financial needs than company have options to reduce their liabilities, If company is not gaining much than they can reinvest profit into company as well.  

Cash outlay for the year 2013 - 2026 for every financing decision

Acquisition take place in 2012 start
Combined Revenue and margins growth will 2% for the first 6 years, and 3% for next 6 years and 4% for the last 6 years
EBIT MPISin 2012	243,50,000
Cash Flow 2013	debt	equity
EBIT	248,37,000	248,37,000
Interest	77,18,750	0
EBT	171,18,250	248,37,000
Tax	59,91,388	86,92,950
After tax cashflow	111,26,863	161,44,050
	1-in 2013 we will have less cash flow id we choose debt than equity
Cash outlay 2013:	debt	equity
Interest	77,18,750	0
Tax expense	59,91,388	86,92,950
Principal prepayments	62,50,000	0
Dividend payment	0	75,00,000
Total cash outlay	199,60,138	161,92,950

Cash Outlay for the year 2030

Cash Flow 2030	debt	equity
EBIT	873,07,746	873,07,746
Interest	0	0
EBT	873,07,746	873,07,746
Tax	305,57,711	305,57,711
After tax cashflow	567,50,035	567,50,035
	3- in 2030 I will recive the same amount if I take debt or equity
Cash outlay 2030:	bebt	equity
Interest	0	0
Tax expense	305,57,711	305,57,711
Principal prepayments	0	0
Dividend payment	0	87,87,445
Total cash outlay	305,57,711	393,45,157	87,87,445

3- but I will pay less by 10,000,000 if I choose debt. There for we will choose debt. Under debt there is debt with annual payment and without annual payment. To decide with one we will use. I have the two chart above.

from the analysis of both the situation we have concluded that in case of equity cash outlay is higher comparing to the debt situation as rate of return of equity is higher due to higher risk hence it is advisable to select the debt for meet the company financial needs. Analysis reveals that company is company is not in situation to paid cash outlay higher if company get finance at lower cash outlay. at the same time cash outlay for the year 2013 and 2030 have same results with different amount but cash outlay from equity is higher in both the situation.

Risk and Return between bondholders and shareholders –

Particular	Bondholders	Shareholders
Risk	Risk of the bondholders is lower as bond holders are eligible to receive payment of preferential basis on winding up of company. Very low amount of risk are there in case of Bondholders.	Risk of shareholders is higher comparing to the bondholders.
Return	Returns of bondholders are limited up to the rate of interest fixed at the time of issuance of bond.	Return of Shareholders is not fixed. It is vary based on the profit and revenue of the company.

Impact of each financing decision on relevant financial ratio - 

 

In case of debt there is high amount of profit hence it is beneficial for the organisation to issue debt.

Reason behind best financing option – In case of debt company have availability of fund at lower cost hence company can earn high amount of profit from it.

Conclusion – From the whole analysis we reach to the conclusion that we debt is best capital plan for the organisation as capital outlay of the company is lower. Other side liability for the organisation is also reduced at lower level.