Capital structure decision: a case study (18 points) RNT is a warehouse management company that has generated profits over the past 26 years. It is currently an all-equity company and 8.4 million shares of common stock outstanding, and the current stock price is $58.08 per share. RNTs current cost of capital is 10.2 percent and the combined federal and state corporate tax rate is 23 percent.

3 The company has a new CFO, Susan Field, after the previous CFO retired. Susan reviews a proposal to purchase a new warehouse complex in Texas for $114 million and estimates that the purchase is expected to increase RNTs annual pretax earnings by $17.59 million in perpetuity. RNT needs to decide whether to fund the purchase with new equity or new debt. Susan thinks RNT will be more valuable when it adds new debt to its capital structure. She discusses the issue with investment banks and finds that RNT can issue 10-year bonds at par with a 6 percent coupon rate. She forms a task force to analyze the issue and estimates that a capital structure up to 30 percent debt is optimal. If the debt is over 30 percent, the bond rating will be lower and thus cost of debt will rise. 1) (4 points) What is the net present value of the new warehouse project? Answer: $___________________________ You should show your calculation here or submit an Excel file to earn the full credit.

2) (6 points) What will be the new stock price after the announcement of the new project if it is financed by new equity? Answer: $___________________________ You should show your calculation here or submit an Excel file to earn the full credit.

3) (8 points) What will be the new stock price after the announcement of the new project if it is financed by new debt? Answer: $___________________________ You should show your calculation here or submit an Excel file to earn the full credit.