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qo825

Business Finance

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For my portion i only need 250 words on the following questions in bold

Purpose of Assignment

The purpose of this assignment is to demonstrate to students how the issuance of debt to purchase outstanding common stock could affect the value of the company's equity and redefine the capital structure. The problem will also allow students to explore the effect of corporate taxes through debt financing. Assignment Steps

Resources: Corporate Finance

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.


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Effect of Debt Issuance on Stock Valuation Grading Guide FIN/571 Version 9 Foundations of Corporate Finance Copyright Copyright © 2017, 2016, 2013 by University of Phoenix. All rights reserved. University of Phoenix® is a registered trademark of Apollo Group, Inc. in the United States and/or other countries. Microsoft®, Windows®, and Windows NT® are registered trademarks of Microsoft Corporation in the United States and/or other countries. All other company and product names are trademarks or registered trademarks of their respective companies. Use of these marks is not intended to imply endorsement, sponsorship, or affiliation. Edited in accordance with University of Phoenix® editorial standards and practices. Effect of Debt Issuance on Stock Valuation Grading Guide FIN571 Version 9 Learning Team Assignment: Effect of Debt Issuance on Stock Valuation Purpose of Assignment The purpose of this assignment is to demonstrate to students how the issuance of debt to purchase outstanding common stock could affect the value of the company’s equity and redefine the capital structure. The problem will also allow students to explore the effect of corporate taxes through debt financing. Resources Required Corporate Finance Grading Guide Content Prepared a 1,050-word memo advising the management of Hightower, Inc. on the financial impact of the provided scenario. Used the following questions to prepare the memo: • • • • • • • 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. Showed all calculations. Met Partially Met Not Met Comments: 2 Effect of Debt Issuance on Stock Valuation Grading Guide FIN571 Version 9 Content Met Partially Met Not Met Total Available Total Earned 5 #/5 Partially Met Not Met Total Available Total Earned 2 #/2 7 #/7 Comments: Formatted your paper consistent with APA guidelines. Writing Guidelines Met The paper—including tables and graphs, headings, title page, and reference page—is consistent with APA formatting guidelines and meets course-level requirements. Intellectual property is recognized with in-text citations and a reference page. Paragraph and sentence transitions are present, logical, and maintain the flow throughout the paper. Sentences are complete, clear, and concise. Rules of grammar and usage are followed including spelling and punctuation. Assignment Total Additional comments: # Comments: 3
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Running head: CORPORATE FINANCE

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CORPORATE FINANCE
Name:
Institution affiliation:
Date:

CORPORATE FINANCE

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The number of shares that the company will repurchase as a result of debt issue is obtained by
dividing the amount of debt to be issued by the price of the share immediately after the
announcement of the repurc...


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