The warrant for equity stock purchases associated with the corporate bond issue would assure that dilution of existing ownership would occur only within terms prescribed in the issuing agreement, and that market value of the shares would be paid by those investor exercising the warrants.
The interest costs associated with the bond issue are significant. The question of generating the desired level of capital through either and IPO or a bond placement must be determined on the issue of corporate control: Is the retention of control worth $8.3 million?
The value of the Johnstown Corporation was estimated through the application of four methodologies. These methodologies are (1) 1.5 times book value, (2) six times cash flow, (3) 21 times 1987 earnings, and 18 times estimated 1988 earnings. Based on these methodologies, the estimated values of the firm are as follows:
1. 1.5 times book value: $5.4 million.
2. Six times cash flow: $16.2 million.
3. 21 times 1987 earnings: $37 million.
4. 18 times estimated 1988 earnings: $34.7 million.
A mean of the four estimates would yield an estimated value of the firm of $23.3 million. The probability, however, is that the $16.2 cash flow-based estimate is the most accurate, as that value corresponds relatively well with the P/E-based value based on 1987 data.
The American steel industry is divided into two major groups...