The paper "Analysis of Thomas McGill’ s Financing Decisions from 1990 to 2007 " is a perfect example of a finance and accounting case study. In the 1990 year, the price of the stock was about $10 per share whereas the earnings per share were $1. The average selling at price-earnings ratio was 18. The industry showed better growth trends as far as earning per share is concerned. The debt ration of the company was 30% whereas that of the rest of the industry was 38% The Company had an opportunity of adding its debt financing to the level of that in the rest of the industry (Berk & DeMarzo 823).
The company had to increase its assets by approximately 30% from $80million to $104 million. The external funds required were $20 and there was an option available. The company had three options of attaining funds: issuing commercial paper with a current interest rate of 4.25%, 5% long-term long term non-convertible bonds, and lastly sell of common stock to the net of the company $9 per share. McGill gave the advice of Star Bay Company to go for combined action of selling common stock worth $10 million and ten million was obtained from long-term debt.
This was bad advice from McGill. The company needed to increase its net assets and not to reduce it (Ehrhardt & Brigham 515). Issuing of common stock at a price of $9 was a waste to the company considering that, this was a discount since the price for common was $10. The company reduced its assets instead of increasing it. The debt ratio of the company was 30% and that of the industry was 38%.
The company debt ratio was 8% less than that of the industry. The company was in a better position to borrow funds through long term as opposed to selling the stock at a discount. 1992 Merger Financing Star Bay Company Cash budget The company cash budget indicates the anticipated amount of cash that is needed to finance its activities throughout the specified period. Through it, the amount needed to be borrowed to form debt financing can also be determined. The company had an alternative of a short loan debt bowing at an interest rate of 4.25% and a long term option of the loan at an interest rate of 5%.
The company cash budget indicates the need for debt financing. The performance of the company had improved greatly and its stock was fetching a good price in the stock market. SBC FCST (000$) Q491 Q192 Q292 Q392 Q492 Total sales 21,000 29000 44,000 51,000 54000 Less Total Purchases (22,500) (37500) (37500) (45000) (22500) Less expenditure (4,500) (3600) (4500) (4500) (5200) Deficit/excess (6,000) (12,100) 2000 1500 26300 Min. cash level 5000 5000 5000 5000 5000 Debt Financing required (11000) (17100) (3000) (3500) - 21300 The company required debt financing of about 13.3 million-plus projected reserves of 6million. The total was about $19.3 million. Instead of borrowing money to pay up for the acquisition, the company could also give out stock.
The alternative of getting the money from an insurance company to finance for the merger was not the best option (Adair 103). The funds to finance the short term loan which was available at an interest rate of 4.25% were available. The company could go for short loan financing. The loan term financing required a higher interest rate paid for a very long period of fifteen years. Issue of equity was the best option available to the company.
Watson Denzil and Antony, Head. Corporate Finance Book and MyFinancelab Xl. 2009, New Jersey: Pearson Education, Limited, 473
Ross Stephen, A and Westerfield Jeffrey,J. Corporate Finance. 2006, Boston: McGraw- Hill/Irwin, 926
Adair Troy, Corporate Finance Demystified 2/E, 2011, London: McGraw-Hill Professional.
Ehrhardt Michael, C. & Brigham, Eugene, F. Corporate Finance: A Focused Approach. 2008, New York: Cengage Learning, 680
Berk,Jonathan, B. & DeMarzo, Peter, M, Corporate finance, 2010, Melbourne: Prentice Hall, 1001.