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Lobo Enterprises, based in Edmonton, began as a sm...

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Lobo Enterprises, based in Edmonton, began as a small radio station. In 1985, it used a sizable loan to purchase a much larger company involved in the exterminating business and has acquired other businesses since then. Net earnings have risen continuously through 2008, 12 years since Lobo Enterprises first went public. Currently, the firm?s equity base is quite small in comparison to the amount of debt financing on its books. The company is doing well in its media, wallcovering, and burglary and fire protection systems businesses, but the exterminating business?benefiting from wider markets, new customers, and higher fees?is performing magnificently. In the fiscal year ended June 30, 2008, gross income at Lobo Enterprises rose 17 percent; profits were held down somewhat by startup costs in several new businesses. Lobo?s capital outlays have been about $11 million in each of the past two fiscal years, but for the 2009 fiscal year a major expansion requiring $23 million of financing is planned. A few years ago, Lobo?s long-term debt was 85 percent of total assets, but debt has since been reduced to 70 percent of total assets. The debt carries an average interest rate of 11.7 percent. The debt reduction was partially financed by issuing $7.7 million of preferred shares with a $20 stated value and a 10 percent dividend rate. Currently, the directors must decide on a method of financing the $23 million expansion. They are primarily interested in an equity financing plan using preferred or common shares because funds could be obtained without incurring added mandatory interest payments that would result in greater risk. Additional equity would allow Lobo Enterprises to avoid restrictive covenants that are often tied to long-term debt financing and would provide a more flexible foundation from which debt could be issued when interest rates fall. The decision, however, could result in the dilution of the current shareholders? interests in the company. Rebecca Marks, the chief financial officer, has been charged with advising Lobo?s board with regard to common and preferred stock financing alternatives. Required a. Discuss the overall advantages of equity financing for Lobo Enterprises at this time. b. Discuss the advantages and disadvantages of selling common shares. Compare and contrast its use to the use of debt financing. c. Discuss the advantages and disadvantages of selling preferred shares. Compare and contrast its use to the use of common share financing. d. In the event Lobo Enterprises decides to use common share financing, discuss the advantages and disadvantages of using a rights offering rather than the public sale of new common shares. e. Provide an example illustrating how issuing common shares could result in the dilution of the current shareholders? interests in the company, focusing on both earnings per share (EPS) and voting control. f. Based solely on the nonquantitative factors discussed in a through d, what recommendation should Rebecca Marks make to Lobo?s board about how to raise the firm?s $23 million required? Justify your recommendation in light of the alternatives.

 

Paper#3881 | Written in 18-Jul-2015

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