Case 55.docx

Combination option with the combination option we

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Combination Option With the combination option. We calculated an additional 2.5 million each year interest costs. This comes from 25 million in funding from bonds with an interest rate of 10%. We would then secure 25 million from issuing new stock at 25/share. This results in the issuing of 1 million new shares of stock. With the combination option I calculated that the EPS in 1996 is \$ 1.88 and in 1997 is \$2.70 . 7. Complete the tables below that show selected financials for Meredith in 1996 and 1997 for each financing option, assuming no external financing beyond the \$50 million. These estimates are based in part on the best guess (most likely") sales forecasts of Exhibit 5. Lease payments are \$750 (000) each year. See Exhibit 5 for yearly dividends and debt due without any new financing. 1996 Estimates Bond Stock Combination Debt .49 0.31 0.4 D/E 0.49 0.12 0.28 DSC 1.7 2.9 2.1 CSC 1.3 1.9 1.5 TIE 4.4 12.2 6.4 FCC 4.1 9.8 5.8 1997 Estimates Bond Stock Combination Debt 0.45 0.3 0.38 D/E 0.38 0.09 0.21 DSC 2.3 4.1 2.9 CSC 1.7 2.4 2.1 TIE 6.3 19.3 9.7

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FCC 6 15 8.5 CSC (1996 bond)= (\$34,125 + \$750)/ \$750 + \$7,800 + (\$7,500+ 4,100/ .60)= 1.3 TIE (1996 Combination)= \$34,125/ \$5,300 = 6.4 FCC (1996 Stock)= (\$34,125+\$750)/ (\$7,800+ \$750) = 4.1 DSC (1997 Combination)= (\$46,400 + \$7500)/ \$4,900 + \$750 + (\$6,250)/.6 = 2.9 CSC (1997 Stock)= (\$46,400 + \$750)/ \$2,400 + \$750 + ( \$5,000+ \$5,100)/ .6 = 2.4 TIE ( 1997 Bond) = \$46,400/ \$7,400 = 6.3 FCC (1997 Stock) = (\$46,400 + \$750)/ (\$2,400 +\$750) = 15 9.Some of Meredith's executives wonder if this is an appropriate time to evaluate the firm's dividend policy. What do you think and why? John Strainer, the treasurer, mentioned and questioned if it was an appropriate time to evaluate the firm’s dividend policy. He stated that Meredith Corporation is underlevered, the stock is unappreciated by investors, and the sales estimates are too low. When a stock is unappreciated by investors it means that the stock is trading under its real value. When a company makes a cut to their dividends paid it is usually a bad sign to investors and shows that a company is having a difficult time raising capital through debt or equity. If Meredith corporation chooses any of the three options (bond, stock, or combination) to raise the \$50 million, they should not make any adjustments right now to their dividend policy because it could cause the stock to be unappreciated more, even with sales expecting to grow. They should wait to see what option they choose and how it actually affects their financials before increasing or decreasing the dividend policy. There are too many unknowns with the proposition and everything is estimated. 10. Play the role of a consultant. Based on your previous answers, information in the case, and any other calculations you think are relevant, what option do you recommend? Defend your position. ` We believe that all of the options appear to be good choices. With that said we were faced with a decision between increasing the debt without increasing the amount of shares of stock outstanding, or issuing new stock and not increasing the debt burden. In previous questions we analyzed the debt aspect of Meredith Corp and decided that they were underlevered compared to other businesses in their industry. It is for this reason we recommend Meredith rely upon the
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