Get the step by step solution to this homework question now:Read the Closing Case entitled A Stephenson Real Estate Recapitalization (attached) and answer the five questions posed on this sheet.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.Stephenson should issue debt, since interest is tax deductible and so provides a tax shield which will increase the value of the firm2.Construct Stephensons market value balance sheet before it announces the purchase.Market Value Balance SheetAssetsEquityTotal assetsDebt & Equity3.Suppose Stephenson decides to issue equity to finance the purchase.a. What is the net present value (NPV) of the project? (Hint: Calculate the after-tax increase in earnings as a result of the land purchase as a perpetuity.)The after tax cash flows each year are 14 million X (1-0.4) = $8.4 millionSince the cash flows are a perpetuity, the present value is calculated as Annual cash flow/discounting rate. As the firm is all equity financed, the discounting rate should be the cost of equity which is the current cost of capital which is 12.5%.PV of cash flows = 8.4/12.5% = $67.2 millionThe cost of project is 60 millionNPV = 67.2 – 60 = $7.2 millionPresently the market value of equity is 20 million shares X $33.50 = $670 millionAfter the project the value of equity will increase to 670+7.2 = 677.2 millionGiven that there are 20 million shares, price per share will be 677.2/20 = $33.86Number of shares to be issued = 60,000,000/33.86 = 1,772,002b. Construct Stephensons market value balance sheet after it announces the purchasewill be financed with equity. (Hint: The market value of equity increases by themarket value or NPV of the land purchase.)Market Value Balance SheetOld assetsNPV of project EquityTotal assetsDebt & EquityWhat would be the new price per share of the firms stock?How many shares will Stephenson need to issue in order to finance the issue?c. Construct Stephensons market value balance sheet after the equity issue, butbefore the purchase has been made.Market Value Balance SheetCashOld assetsNPV of project EquityTotal assets Debt & EquityHow many shares of common stock does Stephenson have outstanding after thenew equity issue?What is the price per share of the firms stock?d. Construct Stephensons market value balance sheet after the purchase has beenmade.Market Value Balance SheetOld assetsPV of project EquityTotal assets Debt & Equity4. Suppose Stephenson decides to issue debt to finance the purchase.a. What will the market value of the Stephenson company be if the purchase isfinanced with debt? (Hint: VL = VU + tCB.)b. Construct Stephensons market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firms stock after the debt issue?Market Value Balance SheetValue unlevered DebtTax shield EquityTotal assets Debt & Equity
