Professional Documents
Culture Documents
Case Study
So, the market value balance sheet before the land purchase is:
Since the market value of the firm’s equity is $532,900,000 and the firm has 15 million shares of
common stock outstanding, Stephenson’s stock price after the announcement will be:
Since Stephenson must raise $95 million to finance the purchase and the firm’s stock is worth
$35.53 per share, Stephenson must issue:
Stephenson will receive $95 million in cash as a result of the equity issue. This will increase the
firm’s assets and equity by $95 million. So, the new market value balance sheet after the
stock issue will be:
The stock price will remain unchanged. To show this, Stephenson will now have:
After the announcement, the value of Stephenson will immediately rise by the present value
of the project. Since the market value of the firm’s debt is $95 million and the value of the firm
is $627.9 million, we can calculate the market value of Stephenson’s equity.
Since the market value of the Stephenson’s equity is $570.9 million and the firm has 15 million
shares of common stock outstanding, Stephenson’s stock price after the debt issue will be:
If Stephenson uses equity in order to finance the project, the firm’s stock
price will remain at $35.53 per share. If the firm uses debt in order to
finance the project, the firm’s stock price will rise to $38.06 per share.
Therefore, debt financing maximizes the per share stock price of a firm’s
equity.
Conclusion
• Stephenson should use debt to finance the purchase because it
will maximize the company value and share price
• The new capital structure after debt is used is 14% : 86% (debt :
equity)
• It is still well below the limit of 30% debt where afterwards the debt
will be riskier
THANK YU