Alliance Concrete Essay

766 WordsAug 27, 20144 Pages
9/18/13 Alliance Concrete Executive Summary: Based on available financial data and forecasts, Alliance Concrete should pay the $3million dividend to National as well as invest the full $16million in new fixed assets to assure that there are not shutdowns, as there were in 2004. By paying the dividend and purchasing new equipment Alliance will need to renegotiate with its bank in order to delay any scheduled debt retirement and instead acquire additional debt financing. Doing so will ensure that Alliance maximizes its Return on Equity as well as continue its trend of increasing earnings, which is especially important considering the slowdown in the real estate market. 1. A reduction in the dividend would decrease the need for long-term debt in multiple ways. Without the dividend payment an extra $3million would be available for paying off existing debt and the retirement of debt would decrease the interest expense for that year, allowing the retirement of debt to exceed $3m. 2. My recommendation for Alliance Concrete would be to make the $16million in capital expenditures as well as make the $3m dividend payment to National in 2006. Accomplishing both of these would require an increase in long-term debt of about $1.8million dollars based on calculating Alliance’s external financing need. The investment of the $16million in capital expenditures should be given priority as the potential cost and loss of sales due to a failure of Alliance’s fixed assets would serve to erode the value of Alliance to its owner National as well as make Alliance a greater credit risk for the institutions who own its outstanding debt. An example of the type of financial harm that could be caused by a malfunction of Alliance’s plant and equipment was demonstrated in 2004 when Alliance experienced an earnings decline of nearly 6.5% despite revenues increasing by over

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