equity and redefining
Assignment ID Number AFFGEHU83939HD Type of Document Essay Writing Format APA/MLA/Harvard Academic Level Masters/University References/Sources 4 References
valuing the company’s equity and redefining the capital structure
Need unplagiraied and propoer clacutions…
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.
Scenario: Hightower, Inc. plans to announce it will issue $2.0 millions 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, including the following:
Calculate, answer and show brief explanation of the (2) questions below… MAX 250 words for both.
- 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?
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. Use of Sources (worth a maximum of 20% of the total points). Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper.
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