Andrea Winfield: Financing by stock has lower cost while issuing new

debtwould increase risk of swings in stock priceYikai Jin: Actually,

financing by stock is more expensive (7.5M vs 6.25M).Winfield can
meet debt obligations under varying EBIT scenarios. Besides,debt will
increase EPS and ROE, increasing stock price.2.2
 
Joseph Winfield: By issuing 7.5M shares, Winfield will only have to
pay$7.5M in dividends.Yikai Jin: Debt cash outflows with debt is for a
finite period while stockdividend outflows are perpetual2.3
 
Ted Kale: Market price is too low (compared to peers with P/B).
Issuingshares at low price and loss of management control is a
disservice to currentstockholders.Yikai Jin: We can
’
t decide financing method only by P/B. Price may be lowdue to a
liquidity discount to trade OTC. In fact, P/B is not comparable
whencapital structure varies.2.4
 
Joseph Tendi: Principal repayment obligation is irrelevant to the
financingdecision.Yikai Jin: Principal repayment is relevant because it
is a real cash outflow2.5
 
James Gitanga: Other major companies have long-term debt in
capitalstructure while Winfield is unusual.Yikai Jin: Analysis shows
Winfield has the capacity to take-on more debt inits capital
structure.3.
 
Interpret the EBIT Chart shown in the case - explain what it means.
See Chapter7 where it is explained.The debt line is steeper than the
equity line because use of debt financing causesEPS to change at a
greater rate as EBIT changes
 – 
 the essence of financialleverage. The double-edged sword aspect of
financial leverage
 – 
 as the linesdiverge from the indifference level the gap between EPS
with debt and EPS withequity widens. The right-hand divergence is
good - financial leverage helps. Theleft-hand divergence is bad
 – 
 financial leverage hurts. The EBIT Chart helpsdisplay the EBIT-EPS
relationship for any level of EBIT in any year.