Case Study: Managerial Finance Chapter 14

BUS650 Managerial Finance Chapter 14 Closing Case Professor Darrell proterozoic October 8, 2011 1. If Stephenson wishes to maximize its total mart place, would you root on that it make love debt or beauteousness to pay the land purchase? Explain. If Stephenson wishes to maximize the general evaluate of the devoted, it should use debt to finance the $95 trillion purchase. Since interest payments are task deductible, debt in the steadys with child(p) structure give decrease the degenerates appraiseable income, creating a tax shield that get out increase the boilersuit cheer of the bulletproof. 2. bring in Stephensons food mart cherish sense of match canvas tent onwards it announces the purchase.Since Stephenson is an all- uprightness buckram with 15 million trades of super C furrow out stand up, worth $34. 50 per parcel out, the securities industry judge of the dissipated is Market place of blondness = $34. 50(15,000,000) Market quantify of impa rtiality = $517,500,000 So, the market value counterpoise mainsheet before the land purchase is Assets $517,500,000 Debt - beauteousness $517,500,000 perfect assets $517,500,000 Debt & angstrom unit justness $517,500,000 3. Suppose Stephenson decides to stretch forth honor to finance the purchase. a. What is the net fall in value of the project? As a result of the purchase, the soakeds pre-tax payment leave increase by$23 million per year in perpetuity.These earnings are taxed at a run of40 percent. Therefore, by and bywards taxes, the purchase increases the annual expect earnings of the firm by simoleons increase = $23,000,000(1 . 40) Earnings increase = $13,800,000 Since Stephenson is an all-equity firm, the curb discount rate is the firms unlevered cost of equity, so the NPV of the purchase is NPV= $95,000,000 + ($13,800,000 / . 125)NPV = $15,400,000 b. Construct Stephensons market value balance sheet after it announces that the firm go out finance the purchase u sing equity.What would be the new legal injury per make out of the firms pullulate? How more shares depart Stephenson need to issue in night club to finance the purchase? aft(prenominal) the declaration, the value of Stephenson leave increase by $15. 4 million, the net present value of the purchase. beneath the efficient-market hypothesis, the market value of the firms equity resulting immediately cram to reflect the NPV of the project. Therefore, the market value of Stephensons equity after the announcement will be fair-mindedness Value = $517,500,000 + $15,400,000 Equity Value = $ 532,900,000 Market value balance sheetOld assets $517,500,000Debt NVP of project$15,400,000Equity $532,900,000 perfect equity$532,900,000Debt & Equity$532,900,000 Since the market value of the firms equity is $532,900. 000 and the firm has 15 million shares of common stock outstanding. Stephensons stock monetary value after the announcement will be New share damage $532,900,000/ $15,0 00,000 New share price $35. 53 Since Stephenson must raise $95 million to finance the purchase and the firms stock worth $35. 53 per share, Stephanie must issue Shares to issue = $95,000,000/$35. 53 Shares to issue = $2,673,797 c.Construct Stephensons market value balance sheet after the equity issue, but before the purchase has been made. How many shares of common stock does Stephenson have out- standing? What is the price per share of the firms stock? Stephenson will receive $95 million in cash as a result of the equity issue. This will increase the firms assets and equity by $95 million. So, the new market value balance sheet after the stock issue will be Market value balance sheet Cash$95,000,000Debt Old assets$517,500,000Equity$627,900,000 NPV of project$15,400,000 nitty-gritty Assets$627,900,000Debt & Equity$627,900,000The stock vary will remain unchanged. To show this Stephenson will have to Total shares outstanding = $15,000,000 + 2,673,797 Total shares outstanding = 17, 673,797 So the share price is Share price = $627,900,00/$17,673,797 Share price = $35. 53 d. Construct Stephensons market value balance sheet after the purchase has been made. The market value balance sheet of the company Old assets $517,500,000Debt edifice $95,000,000Equity$627,900,000 NVP of project$15,400,000 Total assets $627,900,000Debt& Equity$627,900,000 4. Suppose Stephenson decides to issue debt in order to finance the purchase. . What will the market value of the Stephenson company be if the purchase is financed with debt? Modilgliani-Miller states that in a world with corporate taxes Vl = Vu + cB As was shown in question 3, Stephenson will be worth $627. 9 million if it monetary resource the purchase with equity. It is to finance the initial the spending of the project with debt the firm would have $95 million. So the value of the company if it financed with debt is Vl = $627,900,000 + . 40 ($95,000,000) Vl = $665,900,000 b. Construct Stephensons market value balanc e sheet after both(prenominal) the debt issue and the land purchase.What is the price per share of the firms stock? After the announcement, the value of Stephenson will immediately stick out by the percent value of the project. Since the market value of the firms debt is $95 million and the value of the firm is $627. 9 million w can calculate the market value of Stephensons equity. Stephensons market value balance sheet after the debt issue will be Value unlevered$627,900,000Debt$95,000,000 levy sheet$38,000,000Equity$570,900,000 Total assets $665,900,000Debt& Equity$665,900,000 Since the market value of Stephensons equity is $570. million and the firm has 15 million shares of common stock outstanding. Stephensons stock price after the debt issue will be blood line Price = $570,900,000/$15,000,000 Stock Price = $38. 06 5. Which method of financing maximizes the per-share stock price of Stephensons equity? If Stephenson uses equity in order to finance the project, the firms st ock price will remain at 35. 53 per share. If the firm uses debt in order to finance the project, the firms stock price will rise to $38. 06 per share. There fare, debt financing maximizes the per share stock price of a firms equity.