Winfieldpresentationfinal 130212133845 Phpapp02

Winfield Refuse Management Inc.
Raising Debt vs. Equity

Iris Chen
Alex Ho
Brian Huang
Pramod Jindal
Michael Trecroce
Executive Summary
Objective
Objective
Alternatives
Alternatives
Criteria
Criteria
Recommendation
Recommendation
What is the best financing option for the $125M acquisition of

Mott-Pliese Integrated Solutions (MPIS)?
1.
2.
3.
4.
Debt with Fixed Principal Repayments

Debt
Equity
Debt & Equity
Impact on Firm:
Total Cost of Financing (NPV)
Impact on Shareholders:
EPS & ROE
Risk Tolerance:
Interest coverage, Debt coverage, Dividend coverage
Winfield should finance the $125M through issue of bonds with
no principal repayments
Winfield Refuse Management
Introduction
Winfiel
d
MPIS
Net Income
Net Income
$27M
$15M
Winfiel
d+
MPIS
Net Income
=
$42M
Region
Region
Region
Midwest
Mid-Atlantic &
Midwest
Midwest & MidAtlantic
Winfields Current Financial Position

Winfields Revenue and Net Income
Revenue
$500
$50
$400
$40
$300
$30
$100
$10
2007
$2.00
DPS
$1.50
$1.00
Net Income ($M)
$/Share
$20
Revenue ($M)
$200
$0
2006
EPS and Dividends
2008
2009
2010
2011
$0
2012E
Industry: Debt-to-Equity
Equity
Debt
$0.50
$0.00
2006 2007 2008 2009 2010 2011 2012E
Winfield: 100% Equity Ownership

Winfield Family
OTC
21%
50%
50%
79%
Financing Alternatives
Capital Needs: $125M
1. Debt with Fixed Principal
Repayments
15 years
6.5% interest rate
$6.25M annual principal
payment
2.
Debt with Fixed Principal Repayment Schedule
Debt
15 years
6.5% interest rate
Full principal paid at Year 15
Debt Schedule
Principal Interest
140
Principal Interest
45
40
120
35
Cash Outflows ($M)
30
100
25
80
37.50
20
15
Cash Outflows ($M)
125.00
60
40
10 6.25
6.25
2.44
5 8.13
0
Year
20
08.13
Year
Financing Alternatives Continued:

Capital Needs: $125M
3.
Equity
7.5M new shares @ $17.75
Perpetual Dividend Payments
Dividend Policy is $1.00/Share
Dividend Payout Schedule

Dividend Terminal Value
180
Dividend
4.
Debt & Equity

25% equity, 75% debt
1.87M new shares @ $17.75
Perpetual Dividend Payments
Dividend Policy is $1.00/Share
Debt (75%) and Equity (25%) Schedule

Dividend Terminal Value
120
160
Principal
Interest
100
140
120
80
100
Cash Outflows ($M)
Dividend
60
80
Cash Outflows ($M)
60
40
93.75
40
20
20
0 7.50
Year
1.87
6.09
Year
Decision Criteria
Impact on Firm:
Total Cost of Financing (NPV)
Impact on Shareholders:
Earnings Per Share
Return on Equity
Risk Tolerance:
Interest coverage
Debt coverage
Dividend coverage
Cost of Financing (NPV)1

NPV of Financing Alternatives
Assumptions
Marginal Tax Rate
35%
Beta
0.36
Market Risk Premium 6%
Risk-free Rate (Rf)
3%
Cost of Equity2 (Ke)
5%
Cost of Debt3 (Kd)
3.5%
Time horizon (Years)
15
Dividend per share
$1
$160
$145
$140
$120$113 $117
$107
$100
NPV of Fnancing Costs ($M)
$80
$60
$40
$20
$0
Among all the financing options considered, Debt (with no principal

repayments) has the lowest NPV cost whereas Equity has the highest
1
cost.
NPV mentioned here represents the NPV
cost of
financing cost and the lower NPV implies
cheap
financing
2
Cost of Equity was calculated using CAPM formula
3
Cost of Debt of 3.5% (Prime in 2012) was used rather than Initial Cost of Debt (i.e., 6.5% in 201
Earnings Per Share

Pre-acquisition EPS: $1.83
Debt
Equity
Pros
No impact on shares
No impact on earnings
Cons
Reduced earnings by
interest
Increased number of
shares
Expected
EPS
$3.50
$ 2.51
$1.91
Post-acquisition Earnings Per Share
$3.00
$2.50
EPS (Debt)
$2.00
Earnings
$1.50 Per Share
EPS(Equity)
Expected
EBIT of
66M
$1.00
$0.50
$0.00
EBIT ($M)
EPS (Debt+Equity)
Debt financing options provide the highest expected EPS under likely
EBIT scenarios.
9
Adjusted Earnings Per Share

Adjusted EPS = (NI-principal repayment)/ number of shares
Higher earnings per share with the bond option, even
treating principal repayments as expenses
Adjusted Post-acquisition EPS
$3.00
$2.50
$2.00
Adjusted Earnings Per Share
EPS( Debt, including principal

repayment)
$1.50
$1.00
$0.50
$0.00
Expected
EBIT of
66M
EPS(Equity)
EBIT ($M)
Even with Principal Repayments included on an Adjusted EPS basis, EPS

with Debt Financing would be greater than EPS with Equity Financing
10
Return of Equity
Pre-acquisition ROE: 4.01%
Debt
Equity
Pros
No impact on shares
No impact on earnings
Cons
Reduced earnings by
interest
Increased BV of equity
Expected
ROE7.0%
5.80%
5.25%
Post-acquisition ROE
6.5%
6.0%
5.5%
Return
5.0%on Equity (%)
4.5%
Expected
EBIT of
66M
4.0%
3.5%
EBIT ($M)
ROE (Debt+Equity)
ROE(Equity)
ROE (Debt)
Debt financing options provide the highest expect ROE under likely EBIT
scenarios.
11
Debt Service and Retirement Coverage

From Monte-Carlo Simulation (See Appendix):
EBIT for any given year can range from $46M to $78M
Retained earnings by FY2026 can range from $693M to $1,073M
Debt Service Coverage
Debt Retirement Coverage

27x
21x
22x
16x
17x
11x
12x
6x
1x
46
7x
48
50
52
54
56
58
Combined Estimated EBIT (in $M)

Debt with Fixed Principal
Repayment
Debt
60
2x
693
726
759
792
825
858
Estimated Retained Earnings by 2026 (in $M)

Debt with Fixed Principal Repayment
Debt
75% Debt and 25% Equity
Winfield can safely meet debt obligations under all financing

alternatives.
Debt service includes interest and principal repayment except for the bullet year
Debt retirement refers to ability to pay back the principal by end of the term
1
2
12
Dividend Payout Coverage

Assuming Winfield continues to pay $1 dividend per share to all of its
shareholders in each financing option:
Dividend Payout Coverage Ratio1
3x
2x
1x
46
48
50
52
54
56
58
60
Combined EBIT for any given year

Debt with Fixed Principal Repayment
Debt
Equity
75% Debt and 25% Equity
Winfield can safely pay dividends to shareholders under all financing

alternatives
Dividend to 15M existing shareholders plus additional shareholders needed for the
respective option.
1
13
Evaluation of Options & Summary

Decision Criteria
Debt
Debt with
Principal
Repayme
nt
Equity
Debt
(75%) +
Equity
(25%)
Cost of Financing
(NPV)
Expected EPS
Expected ROE
represents
Risk
Tolerancethe better alternative represents the lesser alternative
(Coverage)
Other considerations
By issuing debt, Winfield would avoid control
dilution
Flexibilities sufficient cash flow to meet
commitments under all options
Winfield should finance the $125M through issue of bonds with no
principal repayments
14
Question & Answers
Thank you for listening to our presentation!
Concerns from Last Board Discussion

Concern
Our View
Andrea Winfield Stock issue is lower cost and

additional debt would
increase risk leading to
swings in stock price
Stock issue is most

expensive option. Winfield
can meet debt obligations
under varying EBIT
scenarios. In fact, debt will
increase EPS and ROE,
increasing stock price.
Joseph Winfield
By issuing 7.5M shares,

Winfield will only have to pay
$7.5M in dividends
Debt cash outflows with debt

is for a finite period while
stock dividend outflows are
perpetual
Ted Kale
Market price is too low

(based on Price-to-book
comparable). Issuing shares
at low price and loss of
management control is a
disservice to current
stockholders.
This is not the only criteria

for financing. Price may be
low due to a liquidity
discount to trade OTC. P/B is
not comparable when capital
structure varies.
Joseph Tendi
Principal repayment
obligation
is irrelevant to the
Winfield Refuse
Management
financing decision
Principal repayment is
relevant because it is a real16
cash outflow
Appendix
Winfield Refuse Management Inc.
Summary of Financing Schedules
18
Monte-Carlo Simulation: Estimated

Combined EBIT
Note: Standard Deviation was calculated from last 5 year performance.

19
Monte-Carlo Simulation: Estimated

Retained Earnings in FY 2026
e: Ending Retained Earnings= Beginning Retained Earnings + Net Income Divid

Income Standard Deviation=3.6
20
Cash outflows for debt options
21
Cash outflows for Equity options
22
Cost of Financing (3.5% vs. 6.5%)

NPV @ 3.5%
NPV @ 6.5%

$160

$160
$145
$140
$140
$120$113 $117
$107
$120
$106 $110
$98
$100
$100
$145
$80
$80
$60
$60
$40
$40
$20
$20
$0
$0
Debt with fixed principal repayment
Change in Interest from 3.5% to 6.5% yields the same financing

decision.
23
EPS (with interest = 6.5%)

Post-acquisition EPS
3.50
3.00
2.50
EPS (Debt)
2.00
EPS(Equity)
1.50
EPS (Debt+Equity)
1.00
Expected
EBIT of 66M
EBIT
($M)
0.50
-
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71
24
Adjusted EPS (with interest = 6.5%)

Adjusted Post-acquisition EPS
3.00
2.50
2.00
EPS( Debt,
including principal
repayment)
1.50
1.00
EPS(Equity)
Expected
EBIT of
66M
0.50
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71
25
ROE (with interest = 6.5%)

Post-acquisition ROE
6.5%
6.0%
ROE
(Debt+Equity)
5.5%
ROE(Equity)
5.0%
ROE (Debt)
4.5%
Expected
EBIT of
66M
4.0%
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71
26

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Winfield Refuse Management Inc.

Raising Debt vs. Equity

What is the best financing option for the $125M acquisition of

Debt with Fixed Principal Repayments

Winfield Refuse Management

Midwest & MidAtlantic

Winfield Refuse Management

Winfields Current Financial Position

EPS and Dividends

2006 2007 2008 2009 2010 2011 2012E

Winfield: 100% Equity Ownership

Winfield Refuse Management

Debt with Fixed Principal Repayment Schedule

Cash Outflows ($M)

Cash Outflows ($M)

Winfield Refuse Management

Financing Alternatives Continued:

Dividend Payout Schedule

Debt & Equity

Debt (75%) and Equity (25%) Schedule

Cash Outflows ($M)

Winfield Refuse Management

Winfield Refuse Management

Cost of Financing (NPV)1

Among all the financing options considered, Debt (with no principal

Winfield Refuse Management

Earnings Per Share

Post-acquisition Earnings Per Share

Adjusted Earnings Per Share

EPS( Debt, including principal

Even with Principal Repayments included on an Adjusted EPS basis, EPS

Debt Service and Retirement Coverage

Debt Retirement Coverage

Combined Estimated EBIT (in $M)

Estimated Retained Earnings by 2026 (in $M)

75% Debt and 25% Equity

Winfield can safely meet debt obligations under all financing

Winfield Refuse Management

Dividend Payout Coverage

Combined EBIT for any given year

Winfield can safely pay dividends to shareholders under all financing

Winfield Refuse Management

Evaluation of Options & Summary

Question & Answers

Thank you for listening to our presentation!

Concerns from Last Board Discussion

Andrea Winfield Stock issue is lower cost and

Stock issue is most

By issuing 7.5M shares,

Debt cash outflows with debt

Market price is too low

This is not the only criteria

Winfield Refuse Management Inc.

Summary of Financing Schedules

Winfield Refuse Management

Monte-Carlo Simulation: Estimated

Note: Standard Deviation was calculated from last 5 year performance.

Monte-Carlo Simulation: Estimated