Bus 650 Week 4
STEPHENSON REAL ESTATE RECAPITALIZATION
Francisco Morales
BUS 650
Dr. Hollman
12 / 17 /12
1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
In order to maximize the total market value the company should issue debt to finance the land purchase. Using debt will allow the company to create a tax shield which will decrease taxes and increase the overall value. The tax shield will be created because interest payments are tax deductible and will decrease the overall taxable income.
Construct Stephenson’s market value balance sheet before it announces the purchase.
3. Suppose Stephenson decides to issue equity to finance the purchase.
a. What is the net present value of the project?
NPV(Purchase) = - $95,000,000 + {($23,000,000)(1 – 0.40) / 0.125}
= - $95,000,000 + ($13.8 million / 0.125)
= $15,400,000
b. Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue in order to finance the purchase?
The new market value of the company will be $517,500,000 + $15,400,000 = $532,900,000
The price per share = $532.9 million / 15 million shares = $35.53 per share
Needed shares to issue to finance purchase = $95 million / $35.53 = 2,673,797 shares
Construct Stephenson’s market value balance sheet after the equity issue, but before the purchase has been made. How many shares of common stock does Stephenson have out- standing? What is the price per share of the firm’s stock?
The equity of the company will increase $95 million due to the release of stock shares therefore the overall value of the company is 532.9 million + 95 million = 627.9 million. The company's outstanding stock will be the original 15 million
Francisco Morales
BUS 650
Dr. Hollman
12 / 17 /12
1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
In order to maximize the total market value the company should issue debt to finance the land purchase. Using debt will allow the company to create a tax shield which will decrease taxes and increase the overall value. The tax shield will be created because interest payments are tax deductible and will decrease the overall taxable income.
Construct Stephenson’s market value balance sheet before it announces the purchase.
3. Suppose Stephenson decides to issue equity to finance the purchase.
a. What is the net present value of the project?
NPV(Purchase) = - $95,000,000 + {($23,000,000)(1 – 0.40) / 0.125}
= - $95,000,000 + ($13.8 million / 0.125)
= $15,400,000
b. Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue in order to finance the purchase?
The new market value of the company will be $517,500,000 + $15,400,000 = $532,900,000
The price per share = $532.9 million / 15 million shares = $35.53 per share
Needed shares to issue to finance purchase = $95 million / $35.53 = 2,673,797 shares
Construct Stephenson’s market value balance sheet after the equity issue, but before the purchase has been made. How many shares of common stock does Stephenson have out- standing? What is the price per share of the firm’s stock?
The equity of the company will increase $95 million due to the release of stock shares therefore the overall value of the company is 532.9 million + 95 million = 627.9 million. The company's outstanding stock will be the original 15 million