Stephenson Real Estate Recapitalization
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 9 million shares of common stock outstanding. The stock currently trades at $37.80 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 expected to increase Stephenson’s annual pretax earnings by $18.75 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included 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 a 6 percent coupon rate. From 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).
5. Which method of financing maximizes the per-share stock price of Stephenson’s equity?
Want to see the full answer?
Check out a sample textbook solutionChapter 16 Solutions
Fundamentals of Corporate Finance
- Malone Industries has been in business for five years and has been very successful. In the past year, it expanded operations by buying Hot Metal Manufacturing for a price greater than the value of the net assets purchased. In the past year, the customer base has expanded much more than expected, and the companys owners want to increase the goodwill account. Your CPA firm has been hired to help Malone prepare year-end financial statements, and your boss has asked you to talk to Malones managers about goodwill and whether an adjustment can be made to the goodwill account. How do you respond to the owners and managers?arrow_forwardTom purchased the following assets for use in his business during the current year: Date Asset Cost 12 - Jan Car 24,000 4 - Feb Equipment 36,000 15 - Mar Qualified leasehold improvement 40,000 24 - Apr Computers 10, 000 Total 110, 000 Tom has $50,000 in profits before depreciation expense and has no other sources of income. Tom does not expect to purchase any new assets next year and hopes to grow sales, but who knows for sure? Give Tom two options as to how to depreciate the assets for tax. Select one option to recommend and justify your answer.arrow_forwardYou manage a real estate investment company. One year ago, the company purchased 10 parcels of land distributed throughout the community for $11.2 million each. A recent appraisal of the properties indicates that five of the parcels are now worth $9.0 million each, while the other five are worth $17.0 million each. Ignoring any income received from the properties and any taxes paid over the year, calculate the investment company's accounting earnings and its economic earnings in each of the following cases: a. The company sells all of the properties at their appraised values today. b. The company sells none of the properties. c. The company sells the properties that have fallen in value and keeps the others. d. The company sells the properties that have risen in value and keeps the others. Note: Negative amounts should be indicated by parentheses. Enter your answers in millions. a. b. C. d. Accounting Economic Income (million) Income (million)arrow_forward
- Moab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. a. Moab Incorporated sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 in depreciation. b. Moab Incorporated held stock in ABC Corporation, which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year. c. Moab Incorporated sold some of its Inventory for $7,000 cash. This Inventory had a basis of $5,000. d. Moab Incorporated disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken…arrow_forwardAmy and Jevin Mounty own a textile design business in Beau Bassin. They bought a new computer which cost $4000 on 1 January 2020. The depreciation charge for the computer was 40% per annum using reducing balance method. Because of rapid developments in technology, the computer was out of date by end of 2021. Amy decided to sell the computer and was offered $600 which she accepted. The computer was sold on 31 December 2021. The financial year for the business runs from 1 January to 31 December.a. Calculate the accumulated depreciation charge and the net book value of the computer at the end of 2020 and 2021. b. Calculate the profit or loss on disposal of the computer.c. Show the Computer account and the Provision for depreciation Account for the year ended 31 December 2020. d. List down all the journal entries for the disposal of the computer.arrow_forward4arrow_forward
- Give answer of this questionarrow_forwardRead the scenario and associated questions below. Research the pertinent issues and write a three-to-four-page paper to explain the accounting options for the scenario. AT & T company was depreciating its antennas over 20 years. The total cost of the antennas accounted for 20 million dollars. It was recently discovered that the antennas useful life is only seven years due to new technological development. With reference to the above scenario answer the following questions. What is the accounting implication in this situation and why? What promulgated Accounting Standards should be followed? Provide your rationale. How and why should this discovery be recorded in the financial statements of the company? Explain your response. If the company issues quarterly financial statements and the discovery is made in the third quarter, should this impact be shown prospectively or retroactively and in what specific time period? Explain your response. As the accountant, what could you…arrow_forwardRon Swanson owns Swanson’s Woodcraft Connection, a store dedicated to woodworking tools, supplies, and design plans. On May 1, Year One, Swanson’s purchased a new warehouse to store additional inventory to help meet customer demand. Ron paid $50,000 for the warehouse and estimates that it will be used for twenty years. Salvage value is $5,000 and Swanson uses the straight-line method of depreciation. Swanson’s Woodcraft Connection has a December 31st year-end. What is the amount of depreciation to be taken in Year One? The amount of depreciation to be taken in Year One is: $ Question 2 The amount of depreciation to be taken in Year Two is:$ Question 3 Now, assume that Swanson’s Woodcraft Connection applies the half-year convention. The amount of depreciation expense to be taken in Year One is: $ Question 4 Assuming that Swanson’s Woodcraft Connection applies the half-year convention. The amount of depreciation expense to be…arrow_forward
- Moab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. Moab Incorporated sold a machine that it used to make computerized gadgets for $33,300 cash. It originally bought the machine for $23,200 three years ago and has taken $8,000 in depreciation. Moab Incorporated held stock in ABC Corporation, which had a value of $32,000 at the beginning of the year. That same stock had a value of $35,230 at the end of the year. Moab Incorporated sold some of its inventory for $11,000 cash. This inventory had a basis of $5,000. Moab Incorporated disposed of an office building with a fair market value of $95,000 for another office building with a fair market value of $71,000 and $24,000 in cash. It originally bought the office building seven years ago for $82,000 and has taken $15,000 in…arrow_forwardMoab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. Moab Incorporated sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 in depreciation. Moab Incorporated held stock in ABC Corporation, which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year. Moab Incorporated sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000. Moab Incorporated disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in…arrow_forwardLevi Ackerman decided to resign from his current job and start his own café. He is investing $50,000 of his own money and took out a business loan worth $100,000. Levi handed in his resignation in May 2021, purchased and fully paid for an established café costing $109,000 in June 2021, and plans to open shop on 1 July 2021. Additional information: • Annual depreciation for the non-current assets taken over from the previous owner totals $18,000. Additional equipment costing $5,000 were purchased and paid for in June. These equipment are depreciated on a straight-line basis and have an expected useful life of ten years with no residual value. Assume that monthly payment for the loan is $780, of which $240 relates to interest payment and the remainder relates to principal repayment. One month's credit is received from inventory suppliers and Levi will utilise this payment term, paying the amounts owed one day before it is due. Inventories costing $4,000 are acquired in June 2021.…arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning