Part A. Suppose that you're an analyst for a commercial real estate company that is considering to invest in a property valued at $100 million with an expected payoff of $107 million in one year. You think that a 7 percent return is not very attractive. A colleague suggests that the firm could borrow $90 million for one year at 5 percent interest to help pay for the investment. a. What is the firm's expected return if you borrow the money? b. If the M&M's Irrelevance Proposition holds, what would be your choice between these two different financing strategies to acquire this property and why? c. By using one or more factors from the Higgins Five-Factor Model for Financing Decisions, discuss why your firm should or should not use leverage for this investment. Interest 5.00% ($ millions) | 100% Equity Financing 10% Equity Financing Equity 100 10 Debt 90 0 100 Assets 100 E[EBIT] 107 107 IE |NI ROIC a. HPR (ROE) b. C. Part B. TBC, Inc. is seeking to raise $200 million in a seasoned equity offering, net of all fees. The firm's stock currently sells for $45.00 per share. The underwriters will require a fee of $1.50 per share, and indicate that the issue must be underpriced by 6%. In addition to the underwriter's fee, the firm will incur $1,185,000 in legal, administrative, and other costs. How many shares must TBC sell in order to raise the desired amount of capital? Stock price Issue price Spread Net proceeds per share No. of new shares to be sold Underwriter fees Part A. Suppose that you're an analyst for a commercial real estate company that is considering to invest in a property valued at $100 million with an expected payoff of $107 million in one year. You think that a 7 percent return is not very attractive. A colleague suggests that the firm could borrow $90 million for one year at 5 percent interest to help pay for the investment. a. What is the firm's expected return if you borrow the money? b. If the M&M's Irrelevance Proposition holds, what would be your choice between these two different financing strategies to acquire this property and why? c. By using one or more factors from the Higgins Five-Factor Model for Financing Decisions, discuss why your firm should or should not use leverage for this investment. Interest 5.00% ($ millions) | 100% Equity Financing 10% Equity Financing Equity 100 10 Debt 90 0 100 Assets 100 E[EBIT] 107 107 IE |NI ROIC a. HPR (ROE) b. C. Part B. TBC, Inc. is seeking to raise $200 million in a seasoned equity offering, net of all fees. The firm's stock currently sells for $45.00 per share. The underwriters will require a fee of $1.50 per share, and indicate that the issue must be underpriced by 6%. In addition to the underwriter's fee, the firm will incur $1,185,000 in legal, administrative, and other costs. How many shares must TBC sell in order to raise the desired amount of capital? Stock price Issue price Spread Net proceeds per share No. of new shares to be sold Underwriter fees
