Mini Case: STEPHENSON REAL ESTATE RECAPITALIZATION
Stephenson current 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 companys management. Prior to base Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca ground operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is totally equity financed, with 20 cardinal shares of car park stock outstanding. The stock currently trades at $35.50 per share. Stephenson is evaluating a computer programme to purchase a huge tract of land in the southeastern United States for $60 million. The land will afterwards be leased to tenant farmers. This purchase is expected to enlarge Stephensons annual pretax earnings by $14 million in perpetuity. Kim Weyand, the companys new CFO, has been put in charge of the project.
Kim has determined that the companys current cost of capital is 12.5 part. She feels that the company would be more valuable if it include 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 valuation and a much higher coupon because the possibility of fiscal distress and the associated...If you want to get a full essay, guild it on our website: Ordercustompaper.com
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