Jordan Real Estate Company is all-equity financed with 10 million shares of common stock outstanding. The stock currently trades at $23.50 per share.

The firm is evaluating a plan to purchase a huge tract of land for $30 million. The land will be then leased to farmers. The purchase is expected to increase annual pretax earnings by $12 million in perpetuity. The firms WACC is 13%.

1) What is the NPV of this land purchase?

2) The firm announces the project to the public. What will happen to the stock price immediately after the announcement?

3) The firm now decides to issue equity to finance the project, how many shares should it issue?

(Hint: The stock price has become $26.04, the firm will issue at this new price.) What is the total firm value after issuing equity and taking the project?

4) Instead of issuing equity, the firm decides to use debt financing. If ignoring distress costs, what will be the effect on its stock price?

(Hint: issuing $30m debt creates tax shield. Number of shares stays at 10m.) What will be the firm value after issuing debt and taking the project?

5) Continuing from part (4), assume that the interest rate on new debt is 8%. What should be the WACC for the new levered firm? (Remember that unlevered WACC is 13%)

(Hint: Equity value E = $272,384,615.38

Debt value D = $30m

Levered firm value VLV_L =$302,384,615.38)