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Finance Cas Study Essay

658 words - 3 pages

Lesson 7 case study extra credit

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.
If Stephenson wants to maximize its total market value it should use debt to finance the $100 million dollar purchase. By using the debt to finance it will decrease the overall taxable income the company reports. Since interest payments are tax deductible it will create a tax break for the company which will increase the overall total value of Stephenson Real Estate.

2. Construct Stephenson’s market value balance sheet before it announces the purchase.
Stephenson has 15 million shares of common ...view middle of the document...

83
Stephenson needs to issue 2,955,956 shares to finance the purchase.
100,000,000/33.83 = 2,955,956

c. 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 outstanding? What is the price per share of the firm’s stock?
Balance sheet after equity issue
Old Assets $487,500,000 Debt 0
Cash 100,000,000 Equity $607,500,000
NPV 20,000,000________________________________________________
Total assets $607,500,000 Total debt and equity $607,500,000
Shares outstanding = 15,000,000 + 2,955,956 = 17,955,956 shares outstanding
Stock price per share = 607,500,000/17,955,956 = $33.83 it remains the same.

d. Construct Stephenson’s market value balance sheet after the purchase has been made.
PV= 15,000,000/0.125 = $120,000,000
Balance sheet after purchase
Old Assets $487,500,000 Debt 0
PV 120,000,000 Equity $607,500,000
Total assets $607,500,000 ...

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