What Is the Problem at Cumberland Worldwide?
Essay by Willie Bass • June 30, 2018 • Case Study • 575 Words (3 Pages) • 1,393 Views
Questions:
1. What is the problem at Cumberland Worldwide? How did we get into this mess? Cumberland was a multinational conglomerate with businesses ranging from mining to aerospace. The company relied heavily on debt financing for operations, acquisitions, which were not carefully monitored and did not produce financial performance above its cost of capital. Cumberland slowly experienced lower than anticipated cash flows with high cost of capital needs. There was an obviously not well thought out capital strategy with Cumberland’s leadership and it appears that the belief in a well-diversified portfolio of companies would somehow minimize the risk posed by heavy debt financing.
2. Compare the value of the various Cumberland securities to the value of the underlying assets. Be careful to consider both selling Cross River (and Cumberland) as well as fixing Cross River and operating it. Is the market optimis¬tic or pessimistic? What does the market think will happen? Is the market ex¬pecting an asset sale, a Chapter 11 filing, or what? As¬sume:
a. Treasury bond rate is 8.5%
b. U is 0.8.
c. The sub debt receives $707 face amount of new zero-coupon debt, not $1673
Cumberland appears to have an average of $550 million in assets over a rolling 3-year period at their height with decline asset value in the 90s. There underlying securities out value their current assets by around $200 million. Their attempt to remove preferred stock of a value in excess of $100 million would suggest not only the control premium elimination is of interest but the ability to fulfil the obligations associated with it are not possible even after an emergence from bankruptcy. This will also make it possible for other creditors to accept common stock. I would say that the market is pessimistic about the ability. When considering the sale of Cross river in a soft market, there most reasonable expectations for a salve value ranges between $50 Million to $150 Million which would not completely satisfy the equity obligations to
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