Case Study: Managerial Finance Chapter 14

Closing Case: Managerial Accounts Chapter 14 1. If Stephenson wishes to aerate its absolute bazaar value, would you acclaim that it affair debt or disinterestedness to accounts the acreage purchase? Explain. If Stephenson wishes to aerate the all-embracing amount of the firm, it should use debt to accounts the $95 actor purchase. Since absorption payments are tax-deductible, debt in the firm’s basic anatomy will abatement the firm’s taxable income, creating a tax absorber that will access the all-embracing amount of the firm. 2. Construct Stephenson’s bazaar amount antithesis area afore it announces the purchase. Since Stephenson is an all-equity close with 15 actor shares of accepted banal outstanding, account $34. 50 per share, the bazaar amount of the close is: Bazaar amount of disinterestedness = $34. 50(15,000,000) Bazaar amount of disinterestedness = $517,500,000 So, the bazaar amount antithesis area afore the acreage acquirement is: Assets $517,500,000 Debt -Equity $517,500,000 Absolute assets $517,500,000 Debt &Equity $517,500,000. 3. Suppose Stephenson decides to affair disinterestedness to accounts the purchase. a. What is the net present amount of the project? As a aftereffect of the purchase, the firm’s pre-tax antithesis will access by$23 actor per year in perpetuity. These antithesis are burdened at a amount of 40 percent. Therefore, afterwards taxes, the acquirement increases the anniversary accepted antithesis of the close by: Antithesis access = $23,000,000(1– . 40) Antithesis access = $13,800,000 Since Stephenson is an all-equity firm, the adapted abatement amount is the firm’s unlevered amount of equity, so the NPV of the acquirement is: NPV= – $95,000,000 + ($13,800,000 / . 125)NPV = $15,400,000 b. Construct Stephenson’s bazaar amount antithesis area afterwards it announces that the close will accounts the acquirement application equity. What would be the new amount per allotment of the firm’s stock? How abounding shares will Stephenson charge to affair in adjustment to accounts the purchase? Afterwards the announcement, the amount of Stephenson will access by $15. 4 million, the net present amount of the purchase. Under the efficient-market hypothesis, the bazaar amount of the firm’s disinterestedness will anon acceleration to reflect the NPV of the project. Therefore, the bazaar amount of Stephenson’s disinterestedness afterwards the advertisement will be: Disinterestedness Amount = $517,500,000 + $15,400,000 Disinterestedness Amount = $ 532,900,000 Bazaar amount antithesis sheet. Old assets $517,500,000Debt NVP of project$15,400,000Equity $532,900,000 Absolute equity$532,900,000Debt & Equity$532,900,000 Since the bazaar amount of the firm’s disinterestedness is $532,900. 000 and the close has 15 actor shares of accepted banal outstanding. Stephenson’s banal amount afterwards the advertisement will be: New allotment price: $532,900,000/ $15,000,000 New allotment price: $35. 53 Since Stephenson charge accession $95 actor to accounts the acquirement and the firm’s banal account $35. 53 per share, Stephanie charge issue: Shares to affair = $95,000,000/$35. 53 Shares to affair = $2,673,797 c. Construct Stephenson’s bazaar amount antithesis area afterwards the disinterestedness issue, but afore the acquirement has been made. How abounding shares of accepted banal does Stephenson accept outstanding? What is the amount per allotment of the firm’s stock? Stephenson will accept $95 actor in banknote as a aftereffect of the disinterestedness issue. This will access the firm’s assets and disinterestedness by $95 million. So, the new bazaar amount antithesis area afterwards the banal affair will be: Bazaar amount antithesis area Cash$95,000,000Debt Old assets$517,500,000Equity$627,900,000 NPV of project$15,400,000 Absolute Assets$627,900,000Debt & Equity$627,900,000. The banal change will abide unchanged. To appearance this Stephenson will accept to: Absolute shares outstanding = $15,000,000 + 2,673,797 Absolute shares outstanding = 17,673,797 So the allotment amount is: Allotment amount = $627,900,00/$17,673,797 Allotment amount = $35. 53 d. Construct Stephenson’s bazaar amount antithesis area afterwards the acquirement has been made. The bazaar amount antithesis area of the company: Old assets $517,500,000Debt Building $95,000,000Equity$627,900,000 NVP of project$15,400,000 Absolute assets $627,900,000Debt& Equity$627,900,000. 4. Suppose Stephenson decides to affair debt in adjustment to accounts the purchase. What will the bazaar amount of the Stephenson aggregation be if the acquirement is financed with debt? Modigliani-Miller states that in a apple with accumulated taxes: Vl = Vu + cB As was apparent in catechism 3, Stephenson will be account $627. 9 actor if it affairs the acquirement with equity. It is to accounts the antecedent outlay of the activity with debt; the close would accept $95 million. So the amount of the aggregation if it financed with debt is: Vl = $627,900,000 + . 40 ($95,000,000) Vl = $665,900,000 b. Construct Stephenson’s bazaar amount antithesis area afterwards both the debt affair and the acreage purchase. What is the amount per allotment of the firm’s stock? Afterwards the announcement, the amount of Stephenson will anon acceleration by the percent amount of the project. Since the bazaar amount of the firm's debt is $95 actor and the amount of the close is $627. 9 actor w can account the bazaar amount of Stephenson’s equity. Stephenson’s bazaar amount antithesis area afterwards the debt affair will be: Amount unlevered$627,900,000Debt$95,000,000 Tax sheet$38,000,000Equity$570,900,000 Absolute assets $665,900,000Debt& Equity$665,900,000 Since the bazaar amount of Stephenson’s disinterestedness is $570. actor and the close has 15 actor shares of accepted banal outstanding. Stephenson’s banal amount afterwards the debt affair will be: Banal Amount = $570,900,000/$15,000,000 Banal Amount = $38. 06. 5. Which adjustment of costs maximizes the per-share banal amount of Stephenson’s equity? If Stephenson uses the disinterestedness in adjustment to accounts the project, the firm’s banal amount will abide at 35. 53 per share. If the close uses debt in adjustment to accounts the project, the firm’s banal amount will acceleration to $38. 06 per share. Their fare, debt costs maximizes the per-share banal amount of a firm’s equity.

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