Project #28274 - Finance Project

Firm Valuation, Impact of Financial Leverage on Firm Value ans Stock Price


All work must be submitted in a single MS word file!!!!

 

Wayne Realtor, Inc. is currently entirely equity financed. That means it carries no debt in its capital structure. It has only 25 million shares of common stock outstanding. The stock is selling at $42.50 per share.

WR is considering purchasing a large rental property located in downtown Cincinnati, Ohio to lease to small business owners.  The offer price for this rental property is $750 million.  This project is expected to increase WR's annual pretax earnings by $240 million and the same amount of annual pretax earnings increase will occur forever into the future.  WR's current cost of capital is 15%.  According to the investment bank in Indiana, WR can issue bonds at par value with a 7.5 percent coupon rate and the optimal capital structure for WR is 50 percent equity and 50 percent debt.  If WR uses more than 50 percent debt, the cost of debt to the firm will increase significantly. WR pays 35 percent corporate taxes (including both state and federal).

You have just been hired by WR as the financial manager of the company. You are expected to look for the answers to all the key questions as stated below, that might be brought up for discussion in the next board meeting.

Requirements

I) a brief summary of at least 350 words of the case background description.

II) answers to the following questions in your own words.

1.  If WR would like to maximize its total market value, should it issue debt or equity to pay for the rental property? Briefly explain.

2.  How does the market value balance sheet of WR look like before the firm makes the announcement on the rental property project? Explain and construct the market value balance sheet.  (for this question and any question below that asks for a market value balance sheet, you have to present the balance sheet with the proper format to earn full points).

3.  What is the net present value of the rental property project, assuming that WR issues equity (i.e. stock) to finance it?

4.  How will WR's market value balance sheet look like after the firm makes announcement on the rental property project which will be financed by equity? Explain and construct the market value balance sheet.

5. If WR decides to issue equity to fund the purchase of the rental property,

a) What will be the price per share of the firms stock?

b) How many shares will WR need to issue?

c) How will the firm's market value balance sheet look like after the equity issue but before the purchase of the rental property has been made? Explain and construct the market value balance sheet.

d) How many shares of common stock will be outstanding after the equity issue?

e) What is the new price per share of the firm's stock

f) How will the firm's market value balance sheet look like after purchasing the rental property? Explain and construct the market value balance sheet.

6. If WR decides to issue debt (i.e. borrow money by selling the 7.5% bonds) to pay for the rental property,

a) What will be the market value of the firm?

b) How will the firm's market value balance sheet look like after both the debt issue and the purchase of the rental property? Explain and construct the market value balance sheet.

c) What will the price per share of the firm's stock be after both the debt issue and the rental property purchase?

7. Which method of financing (equity versus debt) maximizes the per-share stock price of WR's equity? Briefly explain.

 

Subject Business
Due By (Pacific Time) 04/25/2014 12:00 am
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