| Course | BUS 551 Corporate Financial Management |
|---|---|
| Module | Module 5 |
| Paper type | Long-term financing analysis |
| Length | About 1,102 words, 7 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 551 Module 5
Trailers, a Terminal and Four Ways to Pay: Matching Long-Term Financing to Assets at a Refrigerated Trucking Company
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MBA Program, Aspen University
BUS 551: Corporate Financial Management
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Trailers, a Terminal and Four Ways to Pay: Matching Long-Term Financing to Assets at a Refrigerated Trucking Company
Frontier Cold Logistics, a composite trucking company in Salt Lake City, Utah, hauls refrigerated and frozen food for grocery distributors and processors across the Mountain West. It has about $210 million in annual revenue, 340 tractors and 520 trailers. A major grocery chain has offered a ten-year contract to serve its new regional distribution center, which would require 120 additional refrigerated trailers, about $30 million, and a cross-dock terminal near the center, about $10 million. The founder's family owns 85% of the company and managers own the rest. The company has four financing offers. This paper compares them.
The Four Sources
A private equity firm has offered $40 million for a 30% stake, with two board seats and rights to sell its shares in five to seven years. A regional bank has offered a seven-year term loan of up to $40 million at 7.4%, secured by the trailers and terminal, with covenants limiting total debt to three times operating earnings. An investment bank has proposed $40 million of five-year convertible notes at 4.5% interest, convertible into shares at a price 25% above the company's current appraised value. And a leasing company has offered seven-year leases on the 120 trailers at payments implying a 6.8% rate, with the option to buy them at the end.
Why Equity Can Be Expensive
Equity carries no interest, but it is not cheap. Shareholders bear the most risk and expect the highest return; the private equity firm's own target is above 20% a year. Myers and Majluf (1984) added an information problem. Managers know more about their company's prospects than outside investors do. If managers act in existing owners' interest, they will prefer to sell shares when they believe the shares are overvalued. Investors, knowing this, treat a share issue as bad news and pay less, which raises the cost of equity financing and explains why many firms prefer internal funds and debt.
How New Issues Perform
Ritter (1991) studied 1,526 initial public offerings in the United States from 1975 to 1984 and found that, over the three years after going public, they substantially underperformed a sample of comparable firms. He suggested that firms tend to go public when investors are overly optimistic about their industries. The lesson for Frontier is that selling equity, whether publicly or privately, involves pricing at a moment that may favor the buyer or the seller, and private equity investors are skilled at negotiating prices that favor themselves.
Comparing the Options
| Source | Cost | Effect on control | Flexibility | Risk to the company |
|---|---|---|---|---|
| Private equity, 30% stake | Highest; investor targets more than 20% a year | Two board seats; eventual sale of stake | High; no required payments | Low payment risk; loss of control |
| Term loan at 7.4% | Moderate; about 5.6% after tax | None | Covenants limit future borrowing | Fixed payments in downturns |
| Convertible notes at 4.5% | Low interest; dilution if converted | Possible dilution later | Moderate | Payments fixed until conversion |
| Equipment leases at 6.8% | Moderate; payments deductible | None | Trailers can be returned or bought | Fixed payments; asset-specific |
Matching Financing to Assets
Brigham and Ehrhardt (2020) explain the principle of matching maturities: finance assets with funding whose term roughly matches the assets' useful lives, so that payments are made from the cash the assets produce and the firm is not forced to refinance at a bad time. Refrigerated trailers have useful lives of about seven to ten years and lose value steadily; a cross-dock terminal on owned land lasts decades. Seven-year leases match the trailers, and their option to return or buy the trailers adds flexibility if the grocery contract changes. The terminal suits a term loan, or later a mortgage, secured by real estate.
The Private Equity Offer in More Detail
The private equity offer deserves a closer look because it removes all payment risk. The investor would put in $40 million, take two of seven board seats and require the right to approve major decisions such as acquisitions and new debt. In five to seven years, it would expect to sell its stake, either to another investor or through a sale of the whole company, which the family might be pressured to accept. If Frontier grows as planned, the 30% stake could be worth well over $100 million at exit, making the money far more expensive than any loan. For a family that intends to keep the business, these terms weigh heavily against the offer.
Lease or Buy the Trailers
Leasing the trailers rather than borrowing to buy them has costs and benefits beyond the implied rate. The leasing company assumes the risk of the trailers' resale value, which matters because refrigeration units age quickly. At the end of seven years, Frontier can return the trailers and lease newer ones with more efficient refrigeration, or buy them if they remain in good condition. A loan would leave Frontier owning aging equipment whose value it would have to manage itself.
Why Not the Convertible Notes
The convertible notes offer low interest, but conversion would bring new shareholders into a family company, and the conversion price is set on an appraisal that may not hold. For a private company with no public market, convertible notes create complications in valuing and transferring shares that leases and a term loan avoid.
Debt Capacity and Risk
Leases and the term loan together would raise Frontier's fixed obligations. With operating earnings of about $28 million, total debt and lease obligations after the financing would be about 2.4 times operating earnings, within the bank's covenant. The ten-year grocery contract provides revenue to cover the new payments, but a recession could reduce other freight volumes. Frontier should keep its existing credit line undrawn as a reserve.
Recommendation
Frontier should finance the trailers with seven-year leases and the terminal with a $10 million term loan from the regional bank, structured with a fifteen-year amortization and a seven-year maturity. It should decline the private equity offer, preserving family control and avoiding an expensive sale of equity, and decline the convertible notes. If the company later pursues a much larger expansion that would push debt beyond safe levels, equity could be reconsidered at that time.
Conclusion
Frontier's $40 million need does not require a single source. Equity, though free of interest, is the most expensive option and would give up control, as research on information and new issue performance suggests. Matching leases to trailers and a term loan to the terminal lowers cost, preserves control and aligns payments with the assets and the contract that will pay for them.
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Ritter, J. R. (1991). The long-run performance of initial public offerings. Journal of Finance, 46(1), 3-27. https://doi.org/10.1111/j.1540-6261.1991.tb03743.x
BUS 551 Module 5 instructions, in plain terms
Aspen's catalog for BUS 551 lists long-term financing among the course's core topics, and this module commonly asks students to compare ways a company can raise long-term capital and recommend one or a combination. The posted Module 5 directions set the specifics; this example compares four sources for one company. Describe the financing need and the assets it will fund. Explain each source's cost, terms, effect on control and risk. Use research on how markets react to different kinds of issues and how they perform afterward. Compare the options with clear criteria. Match the financing to the life and risk of the assets where possible. Recommend a plan and explain its effect on the company's flexibility for future needs.
How this BUS 551 Module 5 example is built
The paper opens with Frontier Cold Logistics, its $210 million of revenue and its plan to serve a new grocery distribution center. Four sources are described: a private equity offer of $40 million for 30% of the company, a seven-year term loan at 7.4%, five-year convertible notes at 4.5% convertible at a 25% premium, and seven-year equipment leases at an implied 6.8%. Myers and Majluf's Journal of Financial Economics model explains why outside investors treat equity issues as a sign of overvaluation. Ritter's Journal of Finance study of 1,526 IPOs from 1975 to 1984 found that they underperformed comparable firms over three years. A comparison table rates the options. The plan finances $30 million of trailers with leases and $10 million of the terminal with a term loan, preserving control and matching maturities.
Reading the BUS 551 Module 5 grading rubric
Credit in a financing comparison goes to precise terms for each source, sound comparison using costs and risks, use of research on market reactions and a recommendation that fits the company's assets and owners. This example describes each source with specific terms and compares them with stated criteria in a table the grader can follow. Myers and Majluf's Journal of Financial Economics article and Ritter's Journal of Finance study explain why equity can be the most expensive source despite carrying no interest. Brigham and Ehrhardt's text supports the principle of matching maturities. The recommendation combines sources rather than choosing one, a practical approach that shows the student understands how real firms finance different assets differently.
BUS 551 Module 5 help from the desk
Many Module 5 drafts treat equity as free because it carries no interest. Equity is usually the most expensive source, since shareholders bear the most risk and new issues can signal bad news. Explain the cost of each source in comparable terms. Another weakness is choosing one source for every need; match financing to the life of the assets. Describe terms precisely, such as interest rate, maturity and conversion price. Consider control, since selling a large stake changes who decides. Include flexibility for future needs. Use research to support claims about how markets react. Present the comparison in a table. Finally, consider what happens in a downturn, when fixed payments on debt or leases must still be made.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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BUS 551 Module 5 questions, answered
What does BUS 551 Module 5 usually ask for?
Aspen's BUS 551 covers long-term financing in this module, so comparing ways a company can raise long-term capital and recommending a plan is typical. Check your classroom prompt.
Why might issuing shares lower a company's stock price?
Myers and Majluf showed that because managers know more than investors, a decision to sell shares can signal that managers think the shares are overvalued.
What are convertible notes?
Debt that the holder can exchange for a set number of shares, usually carrying a lower interest rate because of the conversion option.
Where can I find a free BUS 551 Module 5 sample paper?
The full analysis is above: a refrigerated trucking company comparing equity, a term loan, convertible notes and leases, with research on equity issues and a combined financing plan.
What does it mean to match financing to assets?
Funding short-lived assets with shorter-term financing and long-lived assets with longer-term financing, so payments align with the cash the assets produce.