Central Express Corporation
Central Express Corporation recently experienced high levels of growth as a result of aggressive management which uses the proceeds from the initial public offering of its shares. To continue revenue expansion, CEC adopted a policy of selected acquisitions. The board chose Midland Freight, Inc. for the acquisition. CEC is now considering whether to use long term bonds, common stock, or preferred stock as method of financing for the $10M acquisition project.
Computation of costs of capital shows that long term bonds have the lowest cost at 5.39%; furthermore, it also results to relatively higher earnings per share which most likely results to higher market price per share as supported by statistical analyses. Financial leverage is also favorable starting at EBIT of $2.6M – lower than the projected level of recession of earnings – and higher. Additional risk and cash demand of the bonds is addressed by additional earnings from the acquisition, predicted stability of future earnings, factoring of high levels of receivables, and increasing prices. Dilution of earnings per share is also avoided through the use of debt over equity; therefore, reduction of market price per share is also avoided.
Hence, the group recommends the use of long term debt as means of financing the acquisition.
Central Express Corporation (CEC) is a carrier of commodities serving areas across the entire United States. It has been in the industry for more than 40 years, but has only experienced remarkable growth since the past decade, when efforts have been exerted on intensive marketing and improving service. Initial Public Offering of CEC common stocks in 1967 has raised funds used in computerizing operations that led to reduction of operating costs and an increase in income.
In 1973, with the desire to continue expansion and company profitability, CEC opted for making selected acquisitions of other common carriers. After a study of potential candidates, Midland Freight, Inc. has been unanimously chosen by the board. Its acquisition would expand Central’s route system; and, it adheres to the company’s marketing and cost reduction programs that have fostered Central’s growth.
Which method of financing must CEC use to finance the $10M-acquisition of Midland Freight, Inc.?
The group’s framework for analysis starts with the assessment of CEC’s strategy through the BCG Matrix. This will situate the company in its proper economic context, and verify whether company actions match the appropriate strategy suggested by the matrix.
After assessment, various statistical analyses will be performed on given figures which will aid in decision making. Choosing among the different methods of financing the acquisition of Midland Freight, Inc. – through long term-debt, common stock, or preferred stock – will be evaluated based on their rationality and potential. Options anchored on improper treatment of data will be...