RE: RE: Why PP Prices MatterEspagnol, thanks for the 15% bond rate. Started doing the bond financing alternative - delayed by Penguin game (3-2 OT2). Jimbo29, I think both of us do not want another dilutive PP. Continuing the March 31 (12:41 pm) NPV model. There are two other methods that Focus could use.
One just occurred this afternoon - "Pinetree Capital (Inwentash) Announces Proposed $60 Million Convertible Debenture Financing" (on Google). 8% interest, each bond convertible into 235.3 shares ($4.25 conversion price). Focus could do maybe a 10% convertible with say a $1.60 conversion price (convertible into 625 shares). This is a rough guess. A plan that can be compared directly to the PP analyses done this afternoon is a straight bond paying 17% (I am bumping the rate two more points to be conservative).
Borrowing the $70 million for capital expenditures at 17% gives an annual interest expense of $12m (rounded slightly). EBIT from the model (earnings before interest and taxes) was estimated to be $83.75m/yr. With bond financing we subtract the interest expense of $12m to get EBT of $71.75m. Subtracting 30% for taxes ($21.525m) leaves an EAT of $50.225M. Adding back the depreciation of $3.75 gives an annual cash flow of $53.975m/yr (compared to $62.375m/yr for equity PP financing). The present value of the 20 years of inflows is $379.75m (rather than the $438.85m under the PP plans). BUT THERE IS NO DILUTION! Shares out remain at $76m. 379.75/76 = a value of $5.00 per share.
17% financing is far better than a $1.00 PP with a value of $5.00 vs. $3.00/share or a $2.00 PP with a value of $3.95/share. At least in this model. Note: 17% financing sounds expensive but that is a before tax cost. From the Brigham finance text the after tax cost of debt is the interest rate times one minus the tax rate or 17%(1-.3) = 11.9%.