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.

Please show all your works! Thanks!

Ignore ST Assets & Liabilities. Fill in the values for a simple market value balance sheet, with NO DEBT and before the project is initiated. HINT: The asset value of the firm must equal the equity value Pre-Project Market Value Balance Sheet: Debt Orginal Assets Equity Total Shareholder & Debtholder Total ASSETS Value Find the value of the new project to the firm, i.e., find the NPV. Show your calculation in the cell below. HINT: This is a very simple calculation. NPV: Continue to ignore ST Assets & Liabilities, other htan new Cash added from equity financing (assume no financing costs, so the firm keeps the entire $95m). . Fill in the values for a simple No DEBT balance sheet for the firm, including the value added from the project. 0 With Project, Market Value Balance Sheet: Cash raised 95,000,000 Original Assets Debt PV of Project Equity Total Shareholder & Debtholder Total ASSETS Value Ignore ST Assets & Liabilities. Fill in the values for a simple market value balance sheet, with NO DEBT and before the project is initiated. HINT: The asset value of the firm must equal the equity value Pre-Project Market Value Balance Sheet: Debt Orginal Assets Equity Total Shareholder & Debtholder Total ASSETS Value Find the value of the new project to the firm, i.e., find the NPV. Show your calculation in the cell below. HINT: This is a very simple calculation. NPV: Continue to ignore ST Assets & Liabilities, other htan new Cash added from equity financing (assume no financing costs, so the firm keeps the entire $95m). . Fill in the values for a simple No DEBT balance sheet for the firm, including the value added from the project. 0 With Project, Market Value Balance Sheet: Cash raised 95,000,000 Original Assets Debt PV of Project Equity Total Shareholder & Debtholder Total ASSETS Value