4. Construct Nana Glen’s market value statement of financial position after the purchase has been made.

4. Suppose Nana Glen decides to issue debt to finance the purchase.

1. What will the market value of the Nana Glen Real Estate Company be if the purchase is financed with debt?

2. Construct Nana Glen’s market value statement of financial position after both the debt issue and the land purchase. What is the price per share of the firm’s shares? Nana Glen Real Estate Company was founded 25 years ago by the current CEO, Russell Cross. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Nana Glen Real Estate, Russell was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 8.5 million shares outstanding. The shares currently trade at $44.50 per share.

Russell is evaluating a plan to purchase a huge tract of land in south-eastern Queensland for $50 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Nana Glen's annual profit before tax by $11 million in perpetuity. Kim Weyand, the company’s new CFO, has been put in charge of the project. Kim has determined that the company’s current cost of capital is 12.5 per cent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to finance the project entirely. Based on some conversations with investment banks, she thinks that the company can borrow the required funds at 8 per cent. From her analysis, she also believes that a capital structure in the range of 70 per cent equity/30 per cent debt would be optimal. If the company goes beyond 30 per cent debt, its debt would carry a lower rating and a much higher interest rate because the possibility of financial distress and the associated costs would rise sharply. Nana Glen has a 30 per cent company tax rate.