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I need help creating a thesis and an outline on Stephenson Real Estate Recapitalization. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required.
I need help creating a thesis and an outline on Stephenson Real Estate Recapitalization. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain
To maximize its total market value, it should use debt to finance the $110 million purchase. As interest payments are tax-deductible, Taxable income will decrease with debt in the capital structure, creating a tax shield to increase the overall value of the firm.
Market value of equity = .$35.20(15,000,000) = .$528,000,000
Market value balance sheet
Assets $528,000,000 . Equity . $528,000,000
Total .assets $528,000,000 . Debt .& .Equity  .$528,000,000
3. Suppose Stephenson decides to issue equity to finance the purchase.
a. What is the net present value of the project?
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?
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?
d. Construct Stephenson’s market value balance sheet after the purchase has been made.
a. Earnings increase = $27,000,000(1 – .40) = $16,200,000
As Stevenson is an all-equity based firm, At firm’s unlevered cost of equity, the NPV of the purchase is = –$110,000,000 + ($16,200,000 / .125) = $19,600,000
b. After Stephenson announces that the firm will finance the purchase using equity, the value of Stephenson will increase by $20 million, the NPV of purchase.
Equity value = $507,500,000
Market value balance sheet
Old assets
$528,000,000
 .
 .
NPV of project
19,600,000
 .
Equity
$507,500,000
 .
Total assets
$547,600,000
 .
Debt & Equity
$547,600,000
Now,
The market value of the firm’s equity is $547,600,000
Shares of common stock outstanding=15 million
New share price = $547,600,000 / 15,000,000
New share price = $36.51
Since Stephenson has to raise $110 million to finance the purchase, it should issue:
Shares to issue = $110,000,000 / $36. = 3,013,148
c. Stephenson will receive $110 million in cash as a result of the equity issue. This will increase the firm’s assets and equity by $110 million. So, the new market value balance sheet after the stock issue will be:
Market value balance sheet
Cash
$110,000,000
 .
 .
Old assets
528,000,000
 .
 .
NPV of project
19,600,000
 .
Equity
$657,600,000
 .
Total assets
$657,600,000
 .
Debt & Equity
$657,600,000
Total shares outstanding = 15,000,000 + 3,031,148
Total shares outstanding = 18,013,148
So, the share price is:
Share price = $657,600 / 18,013,148
Share price = $36.51
d. After taxes, the project increases the annual earnings of the firm by $16.2 million.
PVProject = $16,200,000 / .125= $129,600,000
Market value balance sheet
Old assets
$528,000,000
 .
 .
PV of project
129,600,000
 .
Equity
$648,000,000
 .
Total assets
$657,600,000
 .
Debt & Equity
$657,600,000
4. a. Modigliani-Miller Proposition with respect to corporate taxes:
VL = VU + tCB
The value of the company if it financed with debt is:
VL = $657,600,000 + .40($110,000,000)
VL = $701,600,000
b.
Market value balance sheet
Value unlevered
$657,600,000
 .
Debt
$110,000,000
 .
Tax shield
44,000,000
 .
Equity
591,600,000
 .
Total assets
$701,600,000
 .
Debt & Equity
$701,600,000
Stock price = $591,600,000 / 15,000,000
Stock price = $39.44
If Stephenson uses equity to finance the project,
Stock price= $36.51
If Stephenson uses debt to finance the project,
Stock price = $39.44
Hence, debt financing is instrumental in increasing the stock price of Stephenson’s equity.
