be more valuable if it included debt in its capital som so she is evaluating whether the company should issues to entirely finance the project. Based on some conversion 2. Construct Stephenson's market value balance sheer belie MINICASE Stephenson Real Estate Recapitalization Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company pur- chases real estate, including land and buildings, and rents the with investment banks, she thinks that the company canine property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied bonds at par value with a 6 percent coupon rate. From te with the company's management. Prior to founding Stephen analysis, she also believes that a capital structure in the reg son Real Estate, Robert was the founder and CEO of a failed of 70 percent equity/30 percent debt would be optimal.Ite alpaca farming operation. The resulting bankruptcy made him company goes beyond 30 percent debt, its bonds would ce extremely averse to debt financing. As a result, the company a lower rating and a much higher coupon because the pers is entirely equity financed, with 9 million shares of common bility of financial distress and the associated costs would nie stock outstanding. The stock currently trades at $37.80 per sharply. Stephenson has a 40 percent corporate tax rate sa share. and federal). Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $95 million. The land will subsequently be leased to tenant farmers. This QUESTIONS purchase is expected to increase Stephenson's annual pretax 1. If Stephenson wishes to maximize its total market value. earnings by $18.75 million in perpetuity. Jennifer Weyand, would you recommend that it issue debt or equity to the company's new CFO, has been put in charge of the proj finance the land purchase? Explain. ect. Jennifer has determined that the company's current cost of capital is 10.2 percent. She feels that the company would it announces the purchase. purchase. Suppose Stephenson decides to issue equity to finance the Chapter 16 Financial Leverage and Capital Structure Policy 573 d. Construct Stephenson's market value balance sheet after the purchase has been made. What is the net present value of the project? 4. Suppose Stephenson decides to issue debt to finance the Construct Stephenson's market value balance sheet purchase. after it announces that the firm will finance the a. What will the market value of the Stephenson purchase using equity. What would be the new price company be if the purchase is financed with debt? per share of the firm's stock? How many shares will b. Construct Stephenson's market value balance sheet Stephenson need to issue to finance the purchase? after both the debt issue and the land purchase. What Construct Stephenson's market value balance sheet is the price per share of the firm's stock? after the equity issue but before the purchase has 5. Which method of financing maximizes the per-share been made. How many shares of common stock does stock price of Stephenson's equity? Stephenson have outstanding? What is the price per share of the firm's stock