Continental Carries, Inc, a regulated general commodities motor carrier, who has

shipping routes along the pacific coast and other parts of Midwest. To expand its
operations, they were looking to acquire midland freight, inc and were evaluating
the way to finance the acquisition. Midland Freight, Inc would cost $50 million in
cash and would result in $8.4 million in earnings before interest and tax for CCI. The
possible three options being evaluated are:
1) Issuing new common stock
2) Issuing preferred stock
3) Selling bonds.

Ms. Thorp, is trying to evaluate the impact of issuing bond and of issuing stock on
Earnings per share. The risks in accepting any of the options is being evaluated. The
bond alternative arranges to sell $50 million in bonds to a insurance company in
California with the interest rate of 10%. And maturity of 15yrs. The sinking funds
required are $2.5 million, ie it leaves $12.5 million outstanding at the time of
maturity. The issuing of this time is termed as a long-term-debt and can result in
slowed or stunted growth of company. The company needs to payback the loan
amount within stipulated time and in addition needs to pay the interest over the
debt. It also puts additional risk for stockholders and management who are primary
stock holders, because due to some reasons if the company earnings are much
lower than what was forecasted by the company. The resultant would put
bondholders in riding seat and would virtually give companys control to them.

The second alternative of issiuing common stock of 3 mil shares at $17.75 /share.
This would result in common stock to stand at 4.5 million outstanding shares. If
accepted, it would raise many concerns for CCI. The introduction of new shares
would create resentment in present shareholders as it would dilute the stock and
bring down the overall value in terms of earnings per share. If there are too many
shareholders, then the overall increased earnings will need to be shared with all (old
as well as new shareholders). This would create more dependency on shareholders,
which ultimately results in less flexibility for the company.