Prepare the companys market value balance sheet

Assignment Help Corporate Finance

Reference no: EM131608054

Assignment

Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower, Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 35%.

Prepare a 1,050-word memo advising the management of Hightower, Inc. on the financial impact, including the following:

• What is the expected return on the company's equity before the announcement of the debt issue?

• Construct the company's market value balance sheet before the announcement of the debt issue. What is the price per share of the firm's equity?

• Construct the company's market value balance sheet immediately after the announcement of the debt issue.

• What is the company's stock price per share immediately after the repurchase announcement?

• How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?

• What is the required return on the company's equity after the restructuring?

• Discuss the advantages and disadvantages of debt financing over equity financing.

Show all calculations and submit with your memo.

Format your paper consistent with APA guidelines.

Reference no: EM131608054

Questions Cloud

Write a program that reads in the side of a square : (Hollow Square of Asterisks) Modify the program you wrote in Exercise so that it prints a hollow square. For example, if your program reads a size of 5.

Active multinational enterprise in a latin american country : How must your negotiation style change when dealing with a unionized plant as an active multinational enterprise in a Latin American country versus.

Budget through budget implementation : Give a BRIEF, general overview of the Annual Budget Cycle, from the president's budget through budget implementation.

What would be initial cash outlay for this expansion project : what would be the initial cash outlay for this expansion project?

Prepare the companys market value balance sheet : Prepare the company's market value balance sheet immediately after the announcement of the debt issue. Show all calculations and submit with your memo.

What are the obstacles to effective leadership : What are the obstacles to effective leadership?

When does bugging someone become bullying : When does "bugging" someone become bullying? Or is there a boundary and what can HR do about any of this/? Discipline people, terminate them?

How many dollars will the cash management system free up : Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. how many dollars will the cash management system free up?

Difference between strategic hr and traditional hr : What is the difference between strategic HR and traditional HR? What does it mean for an HR professional to be a "strategic" part of the business?

User Account

All Pages