Neil@FKPS2024
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Mini Case Assessment
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1. This assignment contains question that is set in English. Answer in English.
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person’s assignment. You should also not plagiarise another person’s work as
your own.
3. This assignment accounts for 30% of the total marks for the course.
4. Assignments should be submitted according to the due date. Your assignment
must be submitted by 20th May 2024.
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6. Plagiarism is not acceptable. If you are not sure what is meant by plagiarism,
refer to the various websites which discuss this matter.
7. Assignment Format:
Use double space and 11-point of AriNeil@FKPS2024
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Mini Case Assessment
FIN5100 – Corporate Finance
Firm’s Capital Structure
Mini Case Assessment
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert
Stephenson. 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 company’s management. Prior to founding Stephenson
Real Estate, Robert 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 12 million shares of common stock outstanding. The stock
currently trades at $53.80 per share.
Stephenson is evaluating a plan to purchase a tract of land in the southeastern United States
for $49 million. The land will subsequently be leased to tenant farmers. This purchase is
expected to increase Stephenson’s annual pretax earnings by $11.5 million in perpetuity. Kim
Weyand, the company’s new CFO, has been put in charge of the project. Kim has determined
that the company’s current cost of capital is 10.5 percent. She 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, she thinks that the company can issue bonds at par value with a coupon
rate of 7 percent. Based on 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 will carry a lower rating and a much higher coupon because the possibility of
financial distress and the associated costs would rise sharply. Stephenson has a 21 percent
corporate tax rate (state and federal).
1. If Stephenson wishes to maximize its total market value, would you recommend that it issue
debt or equity to finance the land purchase? Explain. (2 Marks)
2. Construct Stephenson’s market value balance sheet before it announces the purchase. (5
Marks)
3. Suppose Stephenson decides to issue equity to finance the purchase.
i. What is the net present value of the project? (5 Marks)
ii. Construct Stephenson’s market value balance sheet after it announces that the firm
will finance the purchase using equity. What would be the new price per share of the
firm’s stock? How many shares will Stephenson need to issue to finance the purchase?
(5 Marks)
iii. Construct Stephenson’s market value balance sheet after the equity issue but before
the purchase has been made. How many shares of common stock does Stephenson
have outstanding? What is the price per share of the firm’s stock? (5 Marks)
iv. Construct Stephenson’s market value balance sheet after the purchase has been
made. (5 Marks)
4. Suppose Stephenson decides to issue debt to finance the purchase.
i. What will the market value of Stephenson be if the purchase is financed with debt? (5
Marks)
ii. Construct Stephenson’s market value balance sheet after both the debt issue and the
land purchase. What is the price per share of the firm’s stock? (5 marks)
5. Which method of financing maximizes the per-share stock price of Stephenson’s equity? (3
Marks)