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 operation ...