Continental Carriers, Inc.

: Suggested questions for class

discussion
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 excess at $5 million? What is
the significance of the latter intersection?
3. What is the difference between two parallel lines for bond plan?
4. How much EBIT is required for EPS to be greater under the bond
plan than under the stock plan?
5. What is the significance of the intersection at the $12.5 million EBIT
figure?
6. What is the significance of the point ($9.16667 million) at which the
dotted bond plan line intersect the x-axis? Why is the difference
between these two points of intersection $4.1667 million, i.e.,
$9.16667 million minus $5 million?
7. What significance do you attach to the vertical lines at
approximately $20 million and $34 million of EBIT?
8. Why is the dotted line for the bond plan shown as having a vertical
displacement of approximately $.56 below the solid line for the bond
plan?
9. At the expected level of $34 million EBIT, after allowing for the
anticipated profits from the new investment, EPS under the stock
plan is shown at $2.72 and under the bond plan as $3.87. Suppose
the stock plan is selected. At what level of EBIT will EPS under the
stock plan reaches $3.87?
10.
How would your willingness to use debt be influenced if the
possible recession level of EBIT were $10 million rather than $20
million?
11. Does the sale of new shares pose any risk or potential
problems?
a) Why is the stock selling below book value?

b) In what sense, if any, will the sale of new share dilute stock of
existing shareholders?
12. Why not used preferred stock? How does it affect earnings
available to common shareholders?