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Stephenson Real Estate Recapitalization - Case Study Example

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Summary
Where,
A is the fixed periodic payment
Where r = discount rate
N = time factor
Using post tax earnings
= $11.25M/ (10.20%) - $95M
=$15.2941Million
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Stephenson Real Estate Recapitalization
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School Affiliation Stephenson Real E Recapitalization QUESTION If a debt is issued; Market value= (Value of equity + Annual post tax value of land investment – Bond coupon rate paid to lenders)
($37.80 * 9million) + (60% * $18.75 million) + (6% * $95 million)
$357,150,000
If it finances the project from equity, market value
= (Value of equity + Annual post tax value of land- Cost of capital)
= ($37.80 * 9million) + (60% * $18.75 million) – (10.2% * $95million)
= $341,760,000
Verdict: Stephenson should issue a debt since it maximizes the company’s value.
2. Balance sheet
Balance sheet
Assets
$340,200,000
Liabilities and capital
$340,200,000
3. Balance sheet
Balance sheet
Buildings and property
$245,200,000
Land
$95,000,000
Total Assets
$340,200,000
Liabilities and Capital
$340,200,000
Total liabilities
$340,200,000
a. Net present value
Net Present Value = A/r – Initial investment
Present Value (PV) of Perpetuity = A/r
Where,
A is the fixed periodic payment
Where r = discount rate
N = time factor
Using post tax earnings
= $11.25M/ (10.20%) - $95M
=$15.2941Million
c. Balance sheet
Balance Sheet
Assets
$245,200,000
Land
$95,000,000
Total Assets
$340,200,000
Debt on Bond
$95,000,000
Capital
$245,200,000
Total liabilities
$340,200,000
New price per share= (340.2M + 95M)/ 90M shares
= $48.35 per share
The number of shares that Stephenson will need to issue to finance the purchase = 95million/37.80 = 2,513,228 shares
d. Balance Sheet
Price per share of the firm’s stock is $37.80
Outstanding shares of common stock are 9 million
e. Balance Sheet
Assets
Buildings and property
$340,200,000
Land
$95,000,000
Total Assets
$435,200,000
Liabilities
Interest on Bonds
$5,700,000
Bond
$95,000,000
Capital: Common stock
$334,500,000
Total liabilities
$435,200,000
4. Suppose Stephenson decides to issue debt to finance the purchase;
a. What will the market value of the Stephenson company be if the investment gets financed with debt?
If the purchase is financed with debt;
Market value= (Value of equity + Annual post tax value of land investment – Bond coupon rate paid to lenders)
($37.80 * 9million) + (60% * $18.75 million) + (6% * $95 million)
$357,150,000
b. Balance Sheet
Assets
Buildings and property
$245,200,000
Land
$95,000,000
Total Assets
$340,200,000
Liabilities
Interest on Bonds
$5,700,000
Bond
$95,000,000
Capital: Common stock
$239,500,000
Total liabilities
$340,200,000
Price per share = $239,500,000/ 9million shares
= $26.61
5. Which method of financing maximizes the per-share stock price of Stephenson’s equity?
The pre share stock price is maximized when the firm issues equity. Illustration;
per-share stock price after issuing bonds = (340.2M -95M – 5.7M)/9million shares= = $26.61
Per-share stock price after issuing equity= (340.2M + 95M)/9million shares =$48.35
Works Cited
Siegel, J. G., Shim, J. K., Dauber, N. A., & Qureshi, A. A. (2015). Accounting handbook. New York: Barrons Educational Series. Read More
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