Continental Carriers Inc.

Report
1. What are the financial characteristics of the Continental Carriers, Inc. (CCI)? Given the nature of the business and how much debt it can support? CCI has no long-term debt. It grows slowly and the stock doesnt perform very well these years. It can support a considerately large amount of debt because it has a healthy financial situation that makes it easy to raise capital. 2. Consider the EBIT chart. What information does it provide? What inferences can we draw from it? The chart provides the relationship between EPS and EBIT in each alternative. With bonds plan, CCI will have higher financial leverage, which leads to a higher EPS when EBIT is higher. But the bond plan will have a sinking fund payment, which result in a decrease in EPS. The stock plan will increase the shares outstanding by 3million. That directly reduces the EPS. 3. Which alternative is best for shareholders? Consider the impact of each, in turn, on the following: a. EPS level b. EPS growth c. EPS volatility d. Capacity to pay dividends Shareholders may concern most about the EPS level. That will determine the dividend they get. It measures profitability and useful to assess the value of equity. EPS growth will affect the shares future price. Most stocks which rise substantially also rise very much in EPS growth rate. 4. Why not issue a lot of debt? What are the potential risks and rewards? Issuing a lot of debt may have some risks. Firstly, it will substantially increase the financial leverage, which may lead to even worse performance when a recession comes. Secondly, to issue debt, a company should follow some restrictions. That may affect its operation. Also, too much debt may affect the companys credit rating, thus making the future financing more difficult. Lastly, it will increase the risk of a company. But there are also some rewards. As an officers said, debt will not let others have control over the company, so it can protect shareholders interest. Also, debt will increase the financial leverage. When the business runs well, it will increase the performance of the company.

5. Does the sale of new shares pose any risks or potential problems? Of course it may bring some risks. First, it may let shareholders outside the company have control on this company. It affects the managers interest. Also, issuing stocks is a negative signal to the market. That may affect the companys stock price, which is the least thing the managers want to see. 6. What do you recommend CCI do? I will suggest it to take the bond plan.