Winfield Case

Winfield Refuse
management, Inc.
Raising Debt vs. Equity
Abhinandan Singh (MP15003)
Financial Management II
XLRI PGDM 2015-18 Batch
Winfield Refuse Management, Inc. : Raising Debt

vs. Equity
Executive Summary:
Winfield Reuse Management, a vertically integrated, non-hazardous waste
management company is going for a major acquisition and has to take a
decision whether to finance through Debt or Equity. The company started in
1972 as a two-truck operation in Creve Coeur, Missouri and by 2012; it had
acquired 22 landfills and 26 transfer stations and material recovery facilities,
which served 33 collection operations. Winfields board had adhered to a
consistent policy of avoiding long term debt. The business was done through
the steady cash flows and raising equity whenever required. Since early
1990s the firm had been making small acquisitions by acquiring companies
which would extend its geographical reach and creating economies of scale
with existing facilities. Most of the company operation was in the Midwest
and with other bigger companies indulging in consolidation strategy; it
required to maintain a competitive position on a regional basis which was
only possible through acquisition.
Acquiring a firm like MPIS (Mott-Pliese Integrated Solutions), a waste
management company serving parts of Ohio, Indiana, Tennessee, and
Pennsylvania will increase their footprint in Midwest and also provide an
entry into mid-Atlantic region. MPIS had a strong management team
producing 12-13% operating margins every year and the acquisition bid was
$125 million and was also ready to accept 25% of purchase price in Winfield
stock. At an earlier Board meeting most of the board members refused to
accept the proposal of financing this deal through long term debt and
suggested equity to be a better option to generate the revenue. As a chief
financial officer Mamie Sheene was of the opinion that debt financing would
be a better option and had to convince the Board members. In this case we
have to analyze which financing option would be better for a company in
terms of finance as well as strategy.
Important Facts and Figures

Waste Management industry was highly fragmented and most of the players
were private. All the companies in this sector aimed to achieve economies of
scale and acquisition spree was going on in the business. Winfield being a
regional player in Midwest region wanted to consolidate its position and also
enter into other region. Acquisition cost was estimated to be $125 million
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and was large enough which required external financing. Opting for Equity, it
was estimated that a common stock could be issued at $17.75 per share and
net proceeds to Winfield would be $16.67 per Share. 7.5 million shares would
be required for MPIS.
Companys performance had been steady and the company reliably paid
dividends but in last 2-3 years performance had been disappointing and
dividend had not increased.
If the firm goes for Bond, it could sell $125 million in bonds to a
Massachusetts Insurance company. Annual interest rate would be 6.5% and
would mature in 15 years. Annual principal repayments would be required,
leaving $37.5 million outstanding at majority.
When going for Equity it would dilute the EPS to $1.91, and debt would bump
the EPS to $2.51. The EBIT for the combined Winfield MPIS was expected to
be $66 million.
Problem Statement
What would be the appropriate financing structure for the investment

decision-Raising capital through Debt or Equity?
How the Debt or Equity decision would affect the shareholders and how
EPS (Earnings per share) would be affected in both the cases.
Should the firm goes for entire financing through debt or through
Equity or a combination of both.
Return on Equity before taking this decision

ROE = Net Income in 2011(26350) / Average Stockholders Equity (685380)
= 3.84%
Possible Solutions
A. Financing entirely through Debt with Interest
payment and Final Principal Payment on Maturity
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Under this option the entire capital is to be financed through Debt with yearly
interest payments and principal payment is done only on maturity. The
yearly interest payment comes out to be $8.125 million with an interest rate
of 6.5% on a principal of $125 million. As tax benefit will be reaped by the
firm on interest payment so Net Interest Payment comes out to be 5.28 (65%
of 8.125). The Net present value comes out to be $98.26 million at a
discounting rate of 6.5%.
Earnings per Share - $2.51

B. Financing entirely through Debt with Fixed Principal
payment of $6.25 Million and Interest payment on
Present Principal Amount and Outstanding Principal
Payment on Maturity
3 | Page
Under this option the entire capital is to be financed through Debt with yearly
interest payments and fixed principal payment of $6.5 million. The left over
principal payment of $37.5 million is done on maturity. The yearly interest
payment comes out to be $8.125 million for the first year and a decreasing
interest payments every year with decreasing Principal with an interest rate
of 6.5% every year. As tax benefit will be reaped by the firm on interest
payment so Net Interest Payment comes out to be 5.28 (65% of 8.125) for
the first year and similarly for other years. The Net present value comes out
to be $106.07 million at a discounting rate of 6.5%.
C. Financing Entirely through Equity
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Earnings per Share - $1.91

Under this option the entire capital is to be financed through equity with
yearly dividend payments of $7.5 million and maturity value will be given
after 15 years. The dividend per share has been assumed to be $1 per share
and with total 7.5 million shares; the dividend paid each year comes out to
be $7.5 million.
With price earnings ratio of other firms given and expected Earnings per
share given for Winfield, the expected market price comes out to be 20.17.
Calculating the terminal value gives a value of 151.25. Some assumptions
have also been taken.
Risk free rate assumed to be 4% (taken from US past year data). Stock price
return also assumed to be 13.4% on the basis of actual data from various
finance agencies. As the firm dependency on market performance is minimal
so a low beta has been used for the calculation. On calculating Cost of Equity
was foind out to be 6.82%. On discounting the payments for the 15 years at
a discounting arte of 6.82%, NPV came out to be $125.31.
Return on Equity = Net Income/Average Stockholders Equity

Net Income = 42,900 (Thousand of Dollars)
Average Stockholders Equity = 685380+75000 = 760580
So ROE = 42900/760580 = 5.64%
5 | Page
D.Financing through Debt and Equity (Debt -75% and

Equity 25%)
Under this option the capital is to be financed through both equity and debt
with 25:75 Ratio. The yearly dividend payments come out to be $1.88 million
and maturity value will be given after 15 years. The dividend per share has
been assumed to be $1 per share and with total 1.88 million shares; the
dividend paid each year comes out to be $1.88 million.
On discounting the payments made towards Equity at a Cost of Equity of
6.82% the NPV comes out to be $31.33 million
75% of the capital is to be financed through Debt with only interest
payments every year and principal payment to be made after 15 years. The
NPV for the Debt payments at a discounting rate of 6.5% comes out to be
$73.70 million.
Thus Net NPV for this option comes out to be $105.03 million.
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Conclusion
Various
Financing
Options
Through Debt
with
Fixed
Principal
Payment
NPV
$98.26
million
EPS
ROE
Through
Debt
with
only
Interest
payment
$106.07
million
$2.51
5.48%
Through
Equity
Through Debt
Equity ratio
of 75:25
$125.31
million
$1.91
5.64%
$105.03
million
Considering all the above calculations into account we find that NPV is least
for the option Debt with interest payment and principal payment at end of
maturity. Also the EPS (earnings per share) for this option is the highest with
a value of $2.51. Even though return on Equity is not the highest in this case
but overall this option looks better.
Thus I would recommend going for the Debt option.
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Winfield Refuse

Abhinandan Singh (MP15003)

XLRI PGDM 2015-18 Batch

Winfield Refuse Management, Inc. : Raising Debt

Important Facts and Figures

XLRI PGDM 2015-18 Batch

What would be the appropriate financing structure for the investment

Return on Equity before taking this decision

XLRI PGDM 2015-18 Batch

Earnings per Share - $2.51

XLRI PGDM 2015-18 Batch

C. Financing Entirely through Equity

XLRI PGDM 2015-18 Batch

Earnings per Share - $1.91

Return on Equity = Net Income/Average Stockholders Equity

XLRI PGDM 2015-18 Batch

D.Financing through Debt and Equity (Debt -75% and

XLRI PGDM 2015-18 Batch

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