Central Express CorporationCentral Express Corporation has recently experienced high levels of growth thanks to aggressive management using proceeds from the initial public offering of its stock. To continue revenue expansion, CEC adopted a policy of selected acquisitions. The board of directors selected Midland Freight, Inc. for the acquisition. CEC is currently considering using long-term bonds, common stock or preferred stock as a financing method for the proposed $10 million acquisition. Calculating the cost of capital shows that long-term bonds have the lowest cost, at 5.39%; Furthermore, this also results in relatively higher earnings per share, which most likely translates into a higher market price per share, as confirmed by statistical analyses. Financial leverage is also favorable from and above the projected earnings recession level of EBIT of $2.6 million. The additional risk and liquidity demand of the bonds is offset by the additional profits from the acquisition, the expected stability of future profits, the consideration of high levels of receivables and the increase in prices. Dilution of earnings per share is also avoided through the use of debt rather than equity; therefore, the reduction in the market price per share is also avoided. Therefore, the group recommends the use of long-term debt as a means of financing the acquisition. Central Express Corporation (CEC) is a raw materials carrier serving areas throughout the United States. It has been in the industry for over 40 years, but has only seen remarkable growth since the last decade when efforts were made for intensive marketing and service improvement. The initial public offering of CEC ordinary shares in 1967 raised funds used in computerization operations...... middle of paper ......000 7 -800 000 -800 0008 - 800,000 -500,000 -1,300,000 8 -800,000 -800.0009 -800,000 -500,000 -1,300,000 9 -800,000 -800,00010 -800,000 -500,000 -1,300,000 10 -8 00 000 -800 00011 -800,000 -500,000 -1,300.0 00 11 -800,000 -800 00012 -800,000 -500,000 -1,300,000 12 -800,000 -800 00013 -800,000 -500,000 -1 300 000 13 -800 000 -800 00014 -800 000 -500 000 Payment of capital -1 300 000 14 -800 000 Payment of principal -800 000End 15 (settlement of obligation) -800 000 -500 000 -2 500 000 -3 800 000 End of 15 (Settlement of obligation) -800,000 -10,000,000 -10,800,000IRR 10.78% IRR 8.00% After-tax cost 5.39% After-tax cost 4.00% Exhibit 5 Cost of equity Cost of P/S Dividend per share 8.25 Cash proceeds 98.50 Cost 8.38% of C/SDividend per share 2.00 Cash proceeds 25.00 Average growth 14.44% Cost 22.44%