If Stephenson wishes to maximize its total market value, would you recommend that it issue debt

or equity to finance the land purchase? Explain.

Assets

Total assets

a$)$ Perpetual aftertax earnings

NPV of purchase

b$)$

Old assets

NPV of project

Total assets

New share price

Shares to issue

c$)$

Cash

Old assets

NPV of project

Total assets

Total shares outstanding

Share price

d$)PV$ of earnings increase

Old assets

$PV$ of project

Total assets

a$)$ Value of levered company

b$)$

Value unlevered

Tax shield value

Total assets

Stock share price

Equity

Debt & Equity

Equity

Debt & Equity

L$?,$ Balance Sheet

Balance Sheet

Equity

Debt & Equity

Balance Sheet

$?$

$?$

$?$

Equity

Debt & Equity

Debt

Equity

Debt & Equity

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