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Case study "Trucker Estate Recapitalization" Trucker Estate Company was founded 25 years ago by the current CEO, Robert Trucker. 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 Trucker Estate Company, Robert 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 15 million shares of common stock outstanding. The stock currently trades at $35.20 per share. Trucker Estate Company is evaluating a plan to purchase a huge tract of land in the southeastern United States for $110 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Trucker's annual pretax earnings by $27 million in perpetuity. Jennifer Weyand, the company's new CFO, has been put in charge of the project. Jennifer has determined that the company's current cost of capital is 12.5 percent. 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 entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with an 8 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Trucker has a 40 percent corporate tax rate (state and federal). Questions 2. If Trucker wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. (3 marks) 2. Construct Trucker's market value balance sheet before it announces the purchase. Case study "Trucker Estate Recapitalization" Trucker Estate Company was founded 25 years ago by the current CEO, Robert Trucker. 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 Trucker Estate Company, Robert 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 15 million shares of common stock outstanding. The stock currently trades at $35.20 per share. Trucker Estate Company is evaluating a plan to purchase a huge tract of land in the southeastern United States for $110 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Trucker's annual pretax earnings by $27 million in perpetuity. Jennifer Weyand, the company's new CFO, has been put in charge of the project. Jennifer has determined that the company's current cost of capital is 12.5 percent. 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 entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with an 8 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Trucker has a 40 percent corporate tax rate (state and federal). Questions 2. If Trucker wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. (3 marks) 2. Construct Trucker's market value balance sheet before it announces the purchase