HIGH ROCK

INDUSTRIES CASE
Rohan Raj Mishra
PFM 09-11
IIFM Bhopal
 Brief
Summary
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 most reasonable

Crawford’s financial staff assured her of an increase in HRI’s earnings

before interest and taxes (EBIT) of 20 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. Should the proposed acquisition be financed with debt,
preferred stock, or common equity?
And what are the relevant decision criteria?
 Balance Sheet
Equity Debt Preffered
Present Finance Finance Equity

Current Assets 1,500.00 1,500.00 1,500.00 1,500.00

Net Fixed Assets 52,000.00 58,000.00 58,200.00 58,390.00

Total Assets 53,500.00 59,500.00 59,700.00 59,890.00

Current Liabilities 500.00 500.00 700.00 890.00

Debt 25,000.00 25,000.00 31,000.00 25,000.00

Equity 20,000.00 26,000.00 20,000.00 20,000.00

Preferred Stock - - - 6,000.00

Retained Earnings 8,000.00 8,000.00 8,000.00 8,000.00

Total Liab. & Equity 53,500.00 59,500.00 59,700.00 59,890.00

Current Equity Finance

Debt Finance Preferred Equity Finance

 Equity Preferred
Present Finance Debt Finance Equity

4,410,700. 5,292,840. 5,292,840. 5,292,840.

EBIT 00 00 00 00

2,375,000. 2,375,000. 2,795,000. 2,375,000.

Interest 00 00 00 00

2,035,700. 2,917,840. 2,497,840. 2,917,840.

EBT 00 00 00 00

Tax@30% 610,710.00 875,352.00 749,352.00 875,352.00

1,424,990. 2,042,488. 1,748,488. 2,042,488.

PAT 00 00 00 00
Preference
Dividend(8
%) 0 0 0 480,000.00

1,424,990. 2,042,488. 1,562,488.

00 00 1,748,488. 00
Net Profit 00
 Ratios

Equity Preffered
Present Finance Debt Finance Equity

D/E Ratio 1.25 0.96 1.55 0.96

Debt Ratio 0.47 0.42 0.52 0.42

ROI 26.89 34.62 29.64 26.48

ROE 71.25 78.56 87.42 60.10

DFL (EBIT/EBT) 2.17 1.81 2.12 1.81

Times Interest
Coverage
Ratio 1.86 2.23 1.89 2.23
Looking at TIC and Debt
Ratio
 Decision Criteria

Future flexibility in terms of raising funds

Risks (Leverage)
Income (EPS,PAT)
Cost of raising funds
New Cost of Capital
Market Value of the Shareholders Equity
 Information and data are most useful in
answering question 2

Net Income
Return on Assets & Equity
Debt Ratio
Times Interest Coverage
 The Question about Sinking Fund

Affects Credit risk of the company

Market rate of interest is imp. Criteria.

Current rate is 7%
Sinking fund investment with installment of
$400,000 p.a.
 Additional information that could be useful

Effect of Equity Issue on Ownership Control

Status of Capital Markets

Trends of Interest rates

Effect of raising debt on Company’s bond

Attitude of Management and Shareholders towards Debt

 Effect of Probability estimates of the EBIT level
after purchase

Probability estimate-Risk versus Uncertainty

Decision Tree & EMV(Expected Monetary Value) &

Mathematical Simulation
 Additional Information from I-Banker

Industry information on
Bond ratings
Debt-ratios

Market conditions
State of capital markets
Interest rate trends
 What flexibility in future after Debt financing?

Debt ratio after Debt finance is 52%

Scope for additional 3%

From (31+x)/(59.5+x)=.55 ; X= $3.83 Million

For given Debt ratio, financing options limited

Debt up to $3.8 Million
Common Equity
Preferred Equity
 Defining & Measuring Flexibility, Risk & Income

• Flexibility, refers to the future financing options for management (Debt to

Asset ratio)

• As capital is raised, the choice among alternatives for raising capital in the
future may be narrowed

• Risk (Leverage, Times Interest Earned, ) and income (EBIT, EPS)

• Higher Risks lead to Higher Gains
Thank You