To whom it may concern,

Need help regarding the Continental Carriers Case Analysis using these guidelines:

• Your numerical analysis should be along the lines of Tables 9.2-9.3
• A good scenario format is: [a] one optimistic operating scenario with CATO per share under SEO, and then under debt, and then under convertible exercised plus [b] one pessimistic operating scenario with CATO per share under SEO, and then under debt, and then under convertible with no exercise.
• Use the supplemental financial statements provided by your beloved professor
• Replace the nonsense about a preferred stock issuance with a potential convertible debt issuance at 7.5% coupon. Each $1,000 bond would have a conversion ratio of 42 shares. Principal payment, if needed, would be a balloon in 15 years. The first possible call would be in year 1 at a call price of $1075 ? the call premium decreases by $5 per year.
• What is the primary source of ?dilution? in the common stock financing sub-case?
• For this kind of analysis, set all operating costs as variable
• Inflationrate=0.05.
• -Notquitesurewheretostartorevenhowtosetuptheexcelspreadsheet.Notexactlysurewhatmyprofessorislookingforinthiscase.IfanyonecouldpleasehelpIwouldreallyappreciateit.
• Thanks,
• Andrew

p.s. - For when he refers to Tables 9.2-9.3-

COUNTER?EXAMPLE ? Suppose a high P?E ratio firm expects, if no new investment is made, to have a stream of earnings per share as shown below.

?????????????????????????????????????

Year 1 Year 2 Year 3

EBIT 100.00 120.00 144.00

interest 0.00 0.00 0.00

??? ??? ???

Earnings before tax 100.00 120.00 144.00

Tax at 34% 34.00 40.80 48.96

??? ??? ???

Earnings after Tax 66.00 79.20 95.04

number of shares = 100

Earnings per share 0.66 0.79 0.95

A new investment of $50 would increase EBIT by $10 annually. It can be financed either by selling two shares at $25 or by issuing debt at 10 percent. Stock financing would yield accounting figures:

Year 1 Year 2 Year 3

EBIT 110.00 130.00 154.00

interest 0.00 0.00 0.00

??? ??? ???

Earnings before tax 110.00 130.00 154.00

Tax at 34% 37.40 44.20 52.36

??? ??? ???

Earnings after Tax 72.60 85.80 101.64

number of shares = 102

Earnings per share 0.71 0.84 1.00

Note that EPS increases in each given year. If debt finances the investment, the statements look like:

Year 1 Year 2 Year 3

EBIT 110.00 130.00 154.00

interest (0.10 x 50) 5.00 5.00 5.00

??? ??? ???

Earnings before tax 105.00 125.00 149.00

Tax at 34% 35.70 42.50 50.66

??? ??? ???

Earnings after Tax 69.30 82.50 98.34

number of shares = 100

Earnings per share 0.69 0.82 0.98

Note that each year's EPS is less for debt financing than for equity. However, this demonstration does not in any way suggest which of the two financing methods is superior.

I'm fairly certain this is what he means by table 9.2-9.3

Continental Carriers Exhibit 1 Selected Income and Dividend Data, 1982-1988 (thousands of dollars except per share data) per Share of Common Income Income Income Dividends Stock Operating before after per per __________________ Revenue Taxes Taxes Share Share High Low 1982 1983 1984 1985 1986 1987 1988 est.(a) $630,000 $14,490 693,750 16,650 737,305 19,170 858,460 22,320 926,665 25,020 1,028,570 28,800 1,080,000 25,600 $7,245 8,325 9,585 11,160 12,510 15,725 15,360 $1.61 1.85 2.13 2.48 2.78 3.49 3.41 (a) Excluding the proposed acquisition and its financing (b) Annual rate (c) To May 1 (May 1 prices were 18 7/8-19 1/8) Estimates for Midland 1988 Sales v Depreciation 406000 0.93 20000 = $406 million = $20 million $1.00 1.15 1.25 1.25 1.25 1.5 1.50(b) 16 1/4 11 1/4 19 14 3/4 20 1/8 15 23 3/4 17 3/8 27 5/8 22 1/4 25 18 1/2 20(c) 16 3/8(c) Continential Carriers: Extended Financial Statements Income Statements (millions of $) 1983 693.8 677.1 1984 737.3 718.1 1985 858.5 836.1 1986 926.7 901.6 1987 1028.6 999.8 16.7 8.3 19.2 9.6 22.3 11.2 25.0 12.5 28.8 13.1 Income after taxes 8.3 9.6 11.2 12.5 15.7 Common dividends Earnings retained 5.2 3.2 5.6 4.0 5.6 5.5 5.6 6.9 6.8 9.0 *Includes Depreciation 9.9 11.0 12.0 13.3 14.8 Sales Operating costs* Income before taxes Income taxes TIP: Set all operating cash costs as variable Continential Carriers: Extended Financial Statements Exhibit 2 Summary Balance Sheets at December 31 (millions of dollars) Cash Accounts receivable Inventory Prepaid expenses Current assets Carrier operating property (cost) Less: Accumulated depreciation Net carrier operating property Other assets Total assets 1983 26.5 26.0 5.4 8.8 66.7 157.8 38.0 119.8 29.5 216.0 1984 22.4 27.5 5.7 8.8 64.4 176.8 49.0 127.8 29.6 221.8 1985 17.7 32.2 6.9 8.9 65.7 196.0 61.0 135.0 29.7 230.4 1986 18.8 34.5 7.2 9.0 69.5 215.5 74.3 141.1 30.5 241.1 1987 19.0 38.5 8.1 9.1 74.7 236.7 89.1 147.6 30.9 253.1 Accounts payable Miscellaneous payables and accruals Taxes payable Current liabilities Common stock ($1 par) Paid-in surplus Retained earnings Stockholders' equity Total liabilities and stockholders' equity 17.0 19.1 2.8 38.9 4.5 40.0 132.6 177.1 216.0 18.2 19.3 3.2 40.7 4.5 40.0 136.6 181.1 221.8 21.0 19.0 3.7 43.7 4.5 40.0 142.1 186.6 230.4 22.9 20.5 4.2 47.6 4.5 40.0 149.0 193.5 241.1 25.3 20.3 5.1 50.6 4.5 40.0 158.0 202.5 253.1 EBIT Inflation EBIT Interest 34000 2% 1 34000 5000 2 34680 5000 3 35374 5000 4 36081 5000 5 36803 5000 6 37539 5000 7 38290 5000 8 39055 5000 9 39836 5000 10 40633 5000 11 41446 5000 12 42275 5000 13 43120 5000 14 43983 5000 15 44862 5000 Taxable Earnings Tax (40%) 29000 11600 29680 11872 30374 12149 31081 12432 31803 12721 32539 13015 33290 13316 34055 13622 34836 13935 35633 14253 36446 14578 37275 14910 38120 15248 38983 15593 39862 15945 After-Tax Earnings 17400 17808 18224 18649 19082 19523 19974 20433 20902 21380 21867 22365 22872 23390 23917 Annual Sinking Fund 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 Principal @ Maturity Net Cash Flow 12500 14900 15308 15724 16149 16582 17023 17474 17933 18402 18880 19367 19865 20372 20890 8917 EBIT Interest 22736 2% 1 22736 5000 2 23191 5000 3 23655 5000 4 24128 5000 5 24610 5000 6 25102 5000 7 25604 5000 8 26117 5000 9 26639 5000 10 27172 5000 11 27715 5000 12 28269 5000 13 28835 5000 14 29411 5000 15 30000 5000 Taxable Earnings Tax (40%) 17736 7094.4 18190.72 7276.288 18655 7462 19128 7651 19610 7844 20102 8041 20604 8242 21117 8447 21639 8656 22172 8869 22715 9086 23269 9308 23835 9534 24411 9765 25000 10000 After-Tax Earnings 10641.6 10914.432 11193 11477 11766 12061 12363 12670 12983 13303 13629 13962 14301 14647 15000 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 EBIT Inflation Annual Sinking Fund Principal @ Maturity Net Cash Flow 12500 8142 8414 8693 8977 9266 9561 9863 10170 10483 10803 11129 11462 11801 12147 0