Stephenson Real Estate Recapitalization - Case Study Example

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.