Continental Carriers, Inc.

Continental carriers, Inc.

Suggested questions

1. What are the key financial characteristics of CCI? Given the nature of its business, how much debt can it support?

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

a) Why do the lines for stock plan and the bond plan have different slopes? What is the significance of this difference?

b) Why are earnings per share equal under the two plans at an EBIT level of $12.5 million?

c) Why does the stock plan line pass through the origin while the bond plan line intersects the horizontal axis at $5 million? What is the significance of latter intersection?

3. Which financing alternative is best for shareholders?

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

a) Why is the stock selling below book value?

b) In what sense, if any, will the sale of new shares “dilute” the stock of existing shareholders?

5. What do you recommend CCI do?

American Home Products Corporation

Suggested questions

1. How much business risk does American Home Products face? How much financial risk would American Home Products face at each of proposed levels of debt shown in case Exhibit 3? How much potential value, if any, can American Home Products create for its shareholders at each