Financing Alternatives Assignment
Tricky Case Question- We need to choose between one of the four financing options.
We need to raise 15 million dollars to buy a company. Any guidence will be much appreciated.
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The first alternative was a straight equity issue for a total of $15 million. Although Mr. Foster was not sure what price per share would be placed on the offering, he had been told by the investment banker proposing the issue that (after fees) the proceeds to the company would most likely be $13 per share, which could be compared with a high stock pricce of $15 in the prior year and current price of $14. The company would hve to issue 1,153,846 new shares to obtain the funds needed. Exhibit 7 provides Van Dusen's recent stock-price history.
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"Mr. Foster had received a proposal that offered a new seven-year term loan for $22.5 million at an interest rate of 13.3 percent per year. Payments would be made semiannually. A covenant of the current revolver loan restricted Van Dusen to an additional $8.6 million o flongterm debt unless the revolver was fully repaid. At the time, ten-year Treasuries were yielding 10.2 percent and three-month Treasuries were yielding 7.0 percent.
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The third proposal Mr. Foster evaluated was a private placement of subordinated convertible debentures for $15 million. Mr. Foster expected the coupon rate to be 12 percent and the fees 1 percent of the total offering. A sinking fund would begin after the fifth year, with equal payments (at per value) made until the bonds matured in 15 years (if they had not been converted). Each bond was convertable into 57 shares of common stock. The conversion price of $17.50 was 25 percent over the current $14 stock price. After the third year, Van Dusen could call the bonds for $24.50 in cash.
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The fourth option was similar to the third, except that it would be a publicly placed subordinated convertible debenture. The coupon for this offering would be 11 percent, and the fee paid would be 4 percent of the total issue. The public placement would have the same sinking fund, maturity, and conversion provisions that the private issue would have.
