HIGH ROCK INDUSTRIES CASE Rohan Raj Mishra PFM 09-11 IIFM Bhoa!
Bri"# S$%%ar& High Rock Industries (HRI) was engaged in purchase of underdeveloped acreage which was then developed for industrial use.
“Crawford’s attention has been drawn to an area of land which is located on the west of Washington D.C. along the border shared by Maryland and Virginia.”
HRI considered the asking price of $6 million to be ost reasonable
Crawford’s financial staff ass!red her of an increase in HRI’s earnings before interest and taes (!"I#) of % percent
1. Does the proposed acquisition seem to fit HRI’s business pattern? Why or why not?
" Yes "Commercial development in vicinity "Rapid Transit System "Revenue generating property
All indicate a highly profitable investment "
2. Shoud the proposed acquisition be financed with debt! preferred stoc"! or common equity? #nd what are the ree$ant decision criteria?
9alance 6heet #resent
$%!ity &inance
Debt &inance
#reffered $%!ity
C!rrent 'ssets
()*++.++
()*++.++
()*++.++
()*++.++
,et &i-ed 'ssets
*)+++.++
*/)+++.++
*/)++.++
*/)01+.++
2otal 'ssets
*0)*++.++
*1)*++.++
*1)3++.++
*1)/1+.++
C!rrent 4iabilities
*++.++
*++.++
3++.++
/1+.++
Debt
*)+++.++
*)+++.++
0()+++.++
*)+++.++
$%!ity
+)+++.++
5)+++.++
+)+++.++
+)+++.++
#referred 6tock
7
7
7
5)+++.++
Retained $arnings
/)+++.++
/)+++.++
/)+++.++
/)+++.++
2otal 4iab. 8 $%!ity
*0)*++.++
*1)*++.++
*1)3++.++
*1)/1+.++
C$rr"n'
D"*' Finan)"
E($i'& Finan)"
Pr"#"rr"+ E($i'& Finan)"
#resent
$%!ity &inance
Debt &inance
#referred $%!ity
EBIT
,,10.00/ 92,0/ 92,0/ 92,0/ 00 00 00 00
In'"r"s'
3.000/ 3.000/ .9000/ 3.000/ 00 00 00 00
EBT
03.00/ 91.2,0/ ,9.2,0/ 91.2,0/ 00 00 00 00
Ta45306 710.10/00 2.3/00 .,93/00 2.3/00
PAT Pr"#"r"n)" Di8i+"n+2 6:
1,,990/ 0,,22/ 1.,2,22/ 0,,22/ 00 00 00 00
0
0
0
,20000/00
1,,990/ 0,,22/ 17,22/ 00 00 1.,2,22/ 00
Ratios
#resent
$%!ity &inance
Debt &inance
#reffered $%!ity
D:$ Ratio
(.*
+.15
(.**
+.15
Debt Ratio
+.;3
+.;
+.*
+.;
R
5./1
0;.5
1.5;
26.4
R<$
3(.*
3/.*5
/3.;
6!."!
D&4 =$9I2:$92>
.(3
(./(
.(
"."
2ies Interest Co?erage Ratio
(./5
.0
(./1
2.2#
;oo
D")ision Cri'"ria &!t!re fle-ibility in ters of raising f!nds Risks =4e?erage> Incoe =$#6)#'2> Cost of raising f!nds ,ew Cost of Ca@ital Market Val!e of the 6hareholders $%!ity
Information and data are most usefu in answerin% question 2
,et Incoe Ret!rn on 'ssets 8 $%!ity Debt Ratio 2ies Interest Co?erage
&he 'uestion about Sin"in% (und
'ffects Credit risk of the co@any Market rate of interest is i@. Criteria. C!rrent rate is 3A 6inking f!nd in?estent with installent of B;++)+++ @.a.
#dditiona information that coud be usefu
$ffect of $%!ity Iss!e on
)ffect of *robabiity estimates of the )+I& e$e after purchase
#robability estiate7Risk ?ers!s ncertainty Decision 2ree 8 $MV=$-@ected Monetary Val!e> 8 Matheatical 6i!lation
#dditiona Information from I,+an"er
Ind!stry inforation on 9ond ratings Debt7ratios Market conditions 6tate of ca@ital arkets Interest rate trends
What fe-ibiity in future after Debt financin%? Debt ratio after Debt finance is *A 6co@e for additional 0A &ro =0(->:=*1.*->E.** F GE B0./0 Million &or gi?en Debt ratio) financing o@tions liited Debt !@ to B0./ Million Coon $%!ity #referred $%!ity
Definin% /easurin% (e-ibiity! Ris" Income
•
•
•
&le-ibility) refers to the f!t!re financing o@tions for anageent =Debt to 'sset ratio> 's ca@ital is raised) the choice aong alternati?es for raising ca@ital in the f!t!re ay be narrowed Risk =4e?erage) 2ies Interest $arned) > and incoe =$9I2) $#6> •
Higher Risks lead to Higher ains
&han" 0ou
