Bansal Real Estate Company was founded 25 years ago by the current CEO, RanjitBansal.

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 stock

holders are satisfied with the company's management. Prior to BansalReal Estate Mr.

Bansal was CEO and founder of agro firm which was bankrupt because of debt financing.

So Mr. Bansal was against debt financing and therefore the Bansal Real Estate Company is

100% equity financed with 15 million shares outstanding and the stock currently trades at

Rs. 300 per share.

Bansal is evaluating a plan to purchase a huge tract of land near Kathmandu for Rs 900

million. The land will generate huge revenue so the pretax income will increase by Rs. 220

million in perpetuity. The new CFO Mr. Supreme has determined the current cost of capital

of the company is 12.5%. He feels that the company would be more valuable if it included

debt in its capital structure, so he is evaluating whether the company should issue debt to

entirely finance the new project. He thinks that the bond can be issued at par with coupon

rate of 8%. Based on some conversations with investment bank, he thinks that the 70%

equity and remaining debt would be optimal capital structure. He also thinks that higher

debt would be lowering the rating and cost would increase. The corporate tax rate is 40%.

a.

If the Bansal wishes to maximize its total market value, would you recommend that it

issues debt or equity to finance land purchase? Explain

b.

If the company issue debt then what would be the impact in price per share? If the

company issue equity rather thandebt, what would be the impact in price per share?