Reference no: EM132944159
Question - Case study - Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company's management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 11 million shares of common stock outstanding. The stock currently trades at $48.50 per share.
Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $45 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson's annual pretax earnings by $10 million in perpetuity. Kim Weygand, the company's new CFO, has been put in charge of the project. Kim has determined that the company's current cost of capital is 10.5 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a coupon rate of 7 percent. Based on her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate (state and federal).
i) If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
ii) Construct Stephenson's market value balance sheet before it announces the purchase.
iii) Suppose Stephenson decides to issue equity to finance the purchase. What is the net present value of the project?
iv) Which method of financing maximizes the per-share stock price of Stephenson's equity?
How many payments will take to settle the loan
: How many payments will it take to settle the loan? Longcore Technologies has to settle a business loan of $60,000, which has an interest rate of 13% compounded.
|
Explain what use of the term sale
: Explain what use of the term sale rather than demand presume
|
Critically analyse and evaluate risk analysis
: Critically analyse and evaluate risk analysis and management strategies to address the associated risks, threats, vulnerabilities
|
What dollar sales volume is currently required to obtain
: In the absence of income taxes, at what sales volume will both alternatives (automation and out- sourcing) provide the same profit?
|
What is the net present value of the project
: Suppose Stephenson decides to issue equity to finance the purchase. What is the net present value of the project
|
How much must be contributed at the end of each month
: An RESP account earns 4.16% compounded daily. How much must be contributed at the end of each month in order to accumulate $270,000 in 16 years?
|
What is the estimated cost of merchandise inventory
: If the estimated rate of gross profit is 40%, what is the estimated cost of merchandise inventory on June 30, based on the following data?
|
Calculate the minimum required annual operating hours
: A small solar power plant is built and installed in Abbotsford, Calculate the minimum required annual operating hours so that all the annual costs are covered.
|
What is the annual depreciation amount
: What is the annual depreciation amount for 2020 and 2021 under the double-declining balance method. Blossom Manufacturing purchased a machine on January 1, 2020
|