Unibail is entirely equity financed, with 10 million shares of common stock outstanding. The stock currently trades at $50 per share.

The new CFO, Sarah Gold, is evaluating a plan to purchase land in the southeastern United States for $40 million. The land will subsequently be leased to tenant farmers.

This purchase is expected to increase Unibails annual pretax earnings by $9 million in perpetuity.

The new CFO has been put in charge of the project and has determined that the companys current cost of capital is 10 percent. The new CFO feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project.

Based on some conversations with investment banks, the new CFO thinks that the company can issue bonds at par value with a coupon rate of 6 percent.

From her analysis, she 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.

Unibail has a 21 percent corporate tax rate.

a. What is the Market Value of equity before Unibail announces the purchase?

b. Suppose Unibail decides to issue equity to finance the purchase. What is the NPV of the project? (6p)

c. What is the Market Value of equity after Unibail raises equity and the purchase has been made? Assume that the market is efficient and the value of the new project will immediately be reflected in the value of equity.

d. Suppose Unibail decides to issue debt to finance the purchase. What is the Levered Value of the firm after the purchase?

e. If Unibail wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Please explain your answer.