Q1) AYESHA Real Estate Company was founded 25 years ago by the current CEO, Saifan Amin. 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 companys management. Prior to founding Ayesha Real Estate, Saifan 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 RM32.50 per share. Ayesha is evaluating a plan to purchase a huge tract of land in the southeastern Malaysian state for RM100 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Ayeshas annual pretax earnings by RM25 million in perpetuity. Tashfin, the companys new CFO, has been put in charge of the project. Tashfin has determined that the companys current cost of capital is 12 percent. He feels that the company would be more valuable if it included debt in its capital structure, so he is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, he thinks that the company can issue bonds at par value with an 8 percent coupon rate. Based on his analysis, he 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. Ayesha has a 40 percent corporate tax rate (state and federal).

Suppose Ayesha decides to issue equity to finance the purchase.

1. Calculate the net present value of the project?

6 Marks

2. Construct Ayesha market value balance sheet after it announces that the firm will finance the purchase using equity.

7 Marks

3. Compute the new price per share of the firms stock? How many shares will Stephenson need to issue to finance the purchase?

10 Marks

4. Construct Ayeshas market value balance sheet after the equity issue but before the purchase has been made.

7 Marks

5. Compute the number of shares of outstanding common stock. Calculate the price per share of the firms stock.

10 Marks

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