a)
Case summary:
SP is a real estate firm that was established by the present CEO, RS, 25 years ago. The company had been profitable for the past 18 years. Before commencing the real estate business, RS was involved in a bankruptcy of a farming business. SP has a plan to buy a tract of land in U Country for $45 million. This land will be leased to tenant farmers. The land purchase will raise the annual pre-tax earnings by $10 million in perpetuity.
KM, the new CFO, has been put in charge of the current project. KM has determined that the firm’s cost of capital is 10.5%. KM feels that the firm should issue debts to finance the project. Based on some planning, KM thinks that the company can issue bonds at par value with a coupon rate of 7%; she also believes that the firm’s capital structure in the range of 70% equity and 30% would be optimistic. The firm has to bear 40% corporate tax rate.
To determine: The
b)
To construct: The
c)
To construct: SP’s market value balance sheet after announcement that the company will finance the purchase using equity. Also, to determine how many shares of common stock does SP have outstanding and the price of share.
d)
To determine: SP’s market value balance sheet after the purchase has been made.

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Chapter 16 Solutions
CORPORATE FINANCE
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning

