This case entails analyzing and re-evaluating a firms existing capital structure after identifying an acquisition opportunity. Unfortunately, there will not be a template associated with this case as Im trying to mimic what an internship/full-time job would require of you as it relates to delivering a proposal & excel spreadsheet that you have created from scratch. Also, similar to an internship/full-time job, you will be expected to accomplish tasks with limited guidance, so I wont be answering any questions on the case. Similar to past cases, grading will be effort based. Answers to the case questions + excel support for to the case are due on Friday, November 17th and will be submitted electronically through Canvas. You can work in pairs or individually. If you work in pairs then you will both turn in the same submissions with both of your names on it so Canvas sees a submission from everyone. You are welcome to provide or ask for help from your classmates if you get stuck. ____________________________________________________________________________ Presario Ventures (Presario) was founded 10 years ago by the current CEO, Jack Richardson. The company acquires real estate (specifically multi-family (i.e. apartments)) and rents those properties to tenants. The company has been profitable every year for the last 8 years. Prior to founding Presario, Jack was the founder/CEO of a failed cannabis cultivation/processing company - the firm had utilized a significant amount of private debt so Jack is now fairly averse to debt financing. Due to this, Presario is financed entirely by equity, with 8 million shares of common stock outstanding. The company is publicly traded and the stock currently trades at $38.60 per share. Presario is evaluating a plan to acquire a multi-family property in the Austin area (specifically in the East 6th neighborhood) for $27 million. This acquisition is expected to increase Presarios annual pretax earnings by $4.5 million in perpetuity. You have recently been hired as an associate at Presario and you are spearheading this project. You have determined that Presarios existing cost of capital is 9.7%. You feel that the company should consider adding debt to its capital structure, so you are analyzing whether the firm should raise/issue 100% debt to finance the project. Based on your conversations with investment banks, there is another publicly traded firm similar to Presario that has bonds outstanding and they feel that Presarios debt issuance would be priced similar to the comparable company. The comparable companys bonds are trading at $935.74 [five years ago, that firm had issued these 10 year, $1,000 par value, 4.5% coupon bonds (coupons paid semi-annually)]. Based on your evaluation/analysis, you feel that 65% equity and 35% debt would be the optimal capital structure. Quite likely, if the firm exceeds 35% debt, the

bonds would be rated much lower by S&P/Moodys and investors would require a significantly higher coupon rate due to the possibility of default and financial distress. Presario has a 25% corporate tax rate (state and federal). For your analysis, assume the firm currently has no current or long-term liabilities. Please provide all your answers in a word document, but have support for your calculations for questions #2, #3, #4 and #6 in excel. For the excel document, include the formulas as necessary in the excel spreadsheet for the relevant cells dont hard code your answers because my TA and I and wont know how you calculated your answers...if you provide an excel sheet with only hard coded answers or just pdf the excel spreadsheet as your deliverable, points will be deducted from your submission. 1. Presuming Presario wishes to maximize the total market value (MV) of the firm, what course of financing would you recommend the firm pursue the issuance of debt or equity? Why would you choose this course of action? 2. Create Presario's MV balance sheet prior to the acquisition announcement of the multi- family project in Austin. 3. Presume Presario makes the decision to issue equity to finance the acquisition of this property. a. What is the NPV of the investment? b. Create Presario's MV balance sheet after it announces the firm will finance the acquisition utilizing 100% equity. What would be the new price per share of Presarios stock? How many shares will Presario need to issue to finance the acquisition? c. Now, create Presario's MV balance sheet after the equity issue but before the acquisition has been made. How many shares of common stock does Presario have outstanding? What is the price per share of the firm's stock? d. Construct Presarios MV balance sheet after the acquisition has been made. 4. Now suppose Presario makes the decision to issue debt to finance the acquisition of this property. a. What will the MV of the firm be if the acquisition is financed with 100% debt? b. Create Presario's MV balance sheet after both the debt issue and the acquisition. What is the price per share of the firm's stock?

c. What will the cost of equity be if the firm decides to utilize debt for the acquisition? What will the new cost of capital (WACC) be for the firm? d. What type of risk is the firm taking on that would drive this change in the cost of equity? 5. Does the route of financing the acquisition with equity or with debt maximize the price per share of Presario's equity? 6. Scenario Analysis: a. Assume Presario makes the decision to issue equity to finance the acquisition of this property. Now presume two scenarios where the acquisition is expected to increase Presarios annual pretax earnings by the below (instead of $4.5 million): 1. $1.5 million in perpetuity 2. $3.492 million in perpetuity All else being equal, what would the new price per share of Presarios stock be for each scenario? How many shares will Presario need to issue to finance the acquisition in each scenario?