Continental Carriers

Continental Carriers

1. What are the financial characteristics of the Continental Carriers, Inc. (CCI)? Given the nature of the business and how much debt it can support?

2. Consider the EBIT chart. What information does it provide? What inferences can we draw from it?

3. Which alternative is best for shareholders? Consider the impact of each, in turn, on the following:

a. EPS level- EPS will be higher under debt financing and not dilute current ownership therefore benefiting the shareholders rather than issuing stock.

b. EPS growth-

c. EPS volatility

d. Capacity to pay dividends

4. Why not issue a lot of debt? What are the potential risks and rewards?

Issuing a lot of debt goes against CCI’s past policies since throughout their company’s history they have always tried to avoid long-term debt. Potential risks associated with issue this debt would be the fact that debt holders claim profit before equity holders. Therefore, profits can be lower than initially projected and increases risk to equity may decrease stock value.

Debt holders claim profit before equity holders, so the chance that profits may be lower than expected, increases risk to equity may reduce or impede stock value. However, in extreme financial situations such as a recession period, CCI would still be able to increase its cash during a recession period with all

debt capital structure.

5. Does the sale of new shares pose any risks or potential problems?

Also, if they issue stock at the $17.75 per share, they would be selling considerably lower than the book value of the firm, $45.00