You know that the per share equity price before the project is added is $46.75. Based on the new Balance Sheet w/Project, find the value per share after the project is added before financing is considered (# shares still 16 m). Use this value to determine how many shares of new equity the firm must issue to finance the $95m investment. Finally, determine the share price for all shares once new shares are issued (16m + # new shares).

Calculations based on #shares @ 16 m.

New firm value:

Original # shares 16,000,000

Share value:

Number Shared needed:

Calculationswith (#shares @ 16 m + # new shares).

New firm value:

Original # shares 16,000,000

# New shares req:

TOTAL# Shares:

Share Value:

Recall that: XYZ will incur no bankruptcy costs if they add this amount of debt to their capital structure. Use Modigliani-Miller Proposition I to find the firm value w/debt financing for the entire $95m oultay (no new equity), and calculate the share price that would result.

Show your work

New Firm Value:

New Share Value:

ZXY is a family firm, and Jim is currently CEO. The company is quite large, and engages in real estate transactions at many levels. Jim and prior family members in management have always maintained an all equity capital structure; they have been unusually concerned about bankruptcy risk, despite the fact that ZXY has an excellent financial track record. The company currently has 16m shares of outstanding common stock, w/current price of $46.75. At this stock price, the current cost of equity is 10.5%. ZXY is currently evaluating a project to develop an extremely large area of land, valued at $95m, with a plan to lease the land to tenant farmers. This model has been highly successful for them in the past, and this land is unusually good for farming. The projection is that the project will provide $21.2m. in annual case flows -- in perpetuity -- for the firm. The firm must raise capital to finance the project. You have been assisting in valuing this project, and want to make a case to Jim that the firm should consider using debt. After much analysis, and discussion w/your investment bankers, you can support the following: (1) the firm is a good candidate to go to the debt markets, as it would have the highest bond rating, (b) a target D/E structure in your industry of 30% debt and 70% equity makes sense for your firm, as this would allow you to keep the top bond rating, and (3) were you to issue debt you would need to offer a 7% annual coupon rate on the debt. The firm has a 21% tax rate