Managarial Finance

posted by .

"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 15 million shares of common stock outstanding. The stock currently trades at $34.50 per share.
Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $95 million. The land will subsequently be leased to tenant farmers. This purchase is ex- pected to increase Stephenson’s annual pretax earnings by $23 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 12.5 percent. She feels that the company would be more valuable if it in- cluded 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 an 8 percent coupon rate. 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 would 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 40 percent corporate tax rate (state and federal)."

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. math

    vivian sold her home through a real estate company. Vivial received $140,000 after she paid the real estate agent a 6% commission. What was the selling price of her home?
  2. business

    A company has the following alternatives on some real estate that it needs for its new plant. It can lease the facility for $10,000 a month for 15 years, or it can buy the facility now for $800,000. The company’s weighted average …
  3. business

    A company has the following alternatives on some real estate that it needs for its new plant. It can lease the facility for $10,000 a month for 15 years, or it can buy the facility now for $800,000. The company’s weighted average …
  4. ACCOUNTING

    On March 1, 2012, Enrique Company acquired real estate, on which it planned to construct a small office building, by paying $90,504 in cash. An old warehouse on the property was demolished at a cost of $7,646; the salvaged materials …
  5. personal finance

    If you want a risk-proof real estate investment, invest in: A. real estate investment trusts. B. real estate limited partnerships. C. participation certificates (PCs). D. real estate syndicates.
  6. Finance

    Stephenson Real Estate Capitalization
  7. Math

    A real estate company owns 218 efficiency apartments, which are fully occupied when the rent is $940 /month. The company estimated that for each $25 increase in rent, 5 apartments will become unoccupied. What rent should be charged …
  8. Fiancne

    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 …
  9. English 1

    In the sentences name the subject and the verb. 1) He applied for one on Tuesday. 2) The position is with a real estate company. 3) The company has an excellent reputation. 4) It pays its employees well and offers great benefits.
  10. math

    A new computer software company earns a profit of $245 000 in its first year. The company expects the profit to increase by 15% each year for each subsequent year. (a) What profit can the company expect to earn in its seventh year?

More Similar Questions