NO PLAGIARISM PLEASE
ORIGINAL THOUGHTS ONLY
PLEASE FOLLOW INSTRUCTIONS
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.
VERY IMPORTANT – ONE SUBMISSION IS REQUIRED FOR THIS ASSIGNMENT
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 memo advising the management of Hightower, Inc. on the financial impact. Memo must include the four main headings (To, From, Date & Subject). Word has templates that you can download. Use a business or professional template. An example related to the calculation portion of this assignment is provided above for review prior to starting this assignment. CALCULATIONS MUST BE DONE IN ORDER – FOLLOW MY EXAMPLE! Your outline for your paper should look similar to 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.
- Appendix (This should be similar to my example above. FOLLOW MY EXAMPLE!)
Each point above should be a paragraph containing 4-5 sentences, with the exception of the reference and appendix pages. There are required references for each assignment. Those are given to you below. So, all you need to do is copy, paste and then proceed to double-space, alphabetize and format into a hanging indent. You should not need to use other references. But if you do, format those using the Reference and Citation Generator Tool (see link below).
Minimum required references include your textbook. The textbook reference is as follows:
Ross, S., Westerfield, R., Jaffe, J. & Jordan, B. (2016). Corporate finance (11th edition). New York, N.Y. McGraw-Hill Education.
- Center for Writing Excellence
- Reference and Citation Generator
- Grammar and Writing Guides
- Learning Team Toolkit
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