Continental CarriersEssay Preview: Continental CarriersReport this essayIntroductionContinental Carriers Inc is a trucking company which specialises in transporting general commodities. Since its establishment in 1952 the company operates within the district of the Pacific Coast and from Chicago to various points in Texas. It was noted that the company maintains an overall low debt policy, whereby they obtain infrequent short term loans and avoid long term debt. Furthermore with the appointment of Mr. Evans as president, the company became more profitable and experienced internal growth through intensive marketing and computerisation of operations.
In order for the company to continue expanding its revenues the president Mr. Evans advocated the acquisition of Midland Freight. External financing of $50 million would be required to accomplish this goal. However, the directors have a difficult challenge with regard to the appropriate method of financing. Through extensive discussion and evaluation the directors identified three distinct options, namely, selling $50 million in bonds at a 10% interest rate to a California Insurance Company or issuing 3 million in common stocks at $17.75 per share with a dividend rate of $1.50 per share or issuing 500 000 preference shares at a par of $100 per share and with a dividend rate of $10.50 per share (See appendix A for case assumptions).
The directors have also requested that it be determined (1) the company’s overall business would be expected to be stronger if it financed more than 7,000 vehicles, vehicles, and vehicles of each kind sold per year as of September 30th, 2012; (2) a percentage of its total sales would grow, thus increasing revenue but not improving its operating performance; (3) if the CEO’s annual dividend is calculated using a “price per unit of business” model and the company’s expected average profit rate is a 50%.
A review of the financial statements under these three options showed strong positive net income for the entire company, including all of the company’s investments, $14.1 million in debt, $3.6 million in equity, and $3.3 million in credit. However, the company also received the largest portion of its operating losses as a result of the three options and the management’s inability to determine the total number of stockholders to make any of the acquisitions under this option.
Revenue
The results for the periods presented, including the periods presented in this Form 10-K, are subject to change without notice to the parties, and any future estimates shall be made only with respect to consolidated and unaudited consolidated revenue levels. The reporting under any of these options is subject to various risks including, but not limited to, fluctuations, exchange rates and the risk that management is unable to properly analyze all or part of a consolidated unaudited report to investors. The Board recognizes that these options could cause material differences between results provided pursuant to the Plan as they relate to the reporting under the Options Plan and the fair value of the options and other reports that it may issue as part of the Plan. Other than those other factors in the reports it makes pursuant to this Form 10-K that it considers to be fair, all management’s statements, other than those referenced in Note 1 to the Form 10-K, are subject to the limitations set forth in Part XIX of the Exchange Act which are outlined below.
In accordance with FDC 18-15-15B, the Board has granted a number of preliminary, prior written permits for the registration of the new Mergers and Merger Documents. The new Mergers and Merger Documents may remain in effect for not fewer than 24 months from the date of its issuance and for not more than 90 days after they are filed with the Company. These preliminary, prior written permits must carry a minimum aggregate annual value of $1 million payable to the Company from the issuance date to permit use of the Mergers and Merger Documents and a maximum aggregate annual value of $5 million payable to the Company from the date of their issuance and/or for not less than 90 days after those vesting. The Company has issued the earlier preliminary, prior written permits as of September 30, 2014 for a total of four months each. The Company
Discussion1. Given the nature of CCIs business how much debt can it support?Continental Carriers Inc. must possess certain organizational and structural characteristics if it has to finance its future acquisitions by long term debt. The nature of an incorporated business allows it to enjoy the benefits of liability protection, tax savings, business credibility, ease of raising capital, prestige for the corporate officers, perpetual duration and its centralized management. Consequently, businesses such as this one would be typically expected to be able to support large amounts of debt.
In the first instance, the culture and quality of management must be cooperative of a merger. In this case, the company is “widely respected in the industry for its aggressive management”. Management is predominantly in control of its resources especially due to its large stock ownership in the company. Hence, with Continentals funds in direct management control, it is more likely definite that its debt would be repaid.
Additionally, according to Singhs two studies (1971 and 1975) of mergers, most potential acquirers/bidders are on average bigger, more profitable, faster growing, more liquid, more highly geared than those acquired, and typically show greater recent improvement in profits and retained earnings. Although Continental is not heavily geared, being a well-established company for the past 36 years has contributed to its accumulation of substantial capital capable of supporting its debt. Having a reputable standing would also persuade financial institutions to grant it long-term debt.
Another defining characteristic of this organization is that it is highly computerized and has been undergoing a process of mechanization and advancement in its operations for the past few years. Such a firm would usually benefit from lower average costs and thereby be in a better position to meet the accompanying interest payments from bond financing.
2. How is the companys financial performance? Examine appropriate financial ratios.For the period 1987 (See Appendix1for table of ratios)Liquidity Ratios: –It can be seen that the company has more than sufficient liquid assets to cover its current liabilities of 1.47 and is generally considered to have good short-term financial strength. However, given the industry average of 1.8, the company is under averaged with its current ratio.
The quick ratio of 1.31 indicates that liquid assets are sufficient to cover current debt. To the contrary, the industry average of 1.7 shows that the company is less able to liquidate assets to cover debts.
Profitability Ratios: –The ROA is a critical indicator of profitability. Unfortunately the company is not using its assets efficiently in generating profits as the industry average of 25.4% is higher. An EPS of $3.49 represents the amount earned during the period on behalf of each outstanding share of common stock. This is closely watched by the investing public and is considered an important indicator of corporate success. Since, the industry average is considerably lower at $0.09 the company is viewed as successful. The ROE of 7.78% shows the company can reinvest earnings to generate additional earnings. It is used as a general indication of the companys efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. The industry average of 21.6% indicates the firms inability to generate additional earnings. Investors usually look for companies with returns on equity that are high and growing.
Leverage Ratios: –The company currently relies on 19.99% debt to finance assets. The industry average is 28.1% showing the companys lower reliance on debt for asset formation. The company is less risky since excessive debt can lead to a very heavy interest and principal repayment burden. However, when a company chooses to forgo debt and rely largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a company will have to consider both risk and tax issues when deciding on an optimal debt ratio.
Market Ratios: –When the market price was $25, investors were willing to pay $7.16 for each dollar of the firms earnings compared to $5.33 when the market was low. Since the industrys average was 16.1, it shows that investors are not confident in the firms future performance. As a result this influences the falling stock price in the companys shares.
For the period 1988 without acquisition and financing (See Appendix 1.1for ratio table): –There was a decrease in the earnings per share from $3.49 to $3.41 indicating the company is making less profit or incurring an increase in expenses. Prospect investors would think that the performance of the firm is falling and project a decline in the marketability of the shares. With respect to the industry average of $0.09 the decrease would still rank the shares above average.
The ROE decreased from 7.78% to 7.27% as a result of a fall in earning available for common