Expert answer:FIN571 Effect of Debt Issuance on Stock Valuation
Expert answer:Please note this is a group effort and the below bullets are my parts.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. Assignment Steps 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 .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 1,050-word memo advising the management of Hightower, Inc. on the financial impact, including the following:
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.
Show all calculations and submit with your memo. Note: two files to submit are required — one MS Word File and one MS Excel spreadsheetFormat your paper consistent with APA guidelines.**Cannot accept more than 5% plagiarism, it will be submitted to TurnItIn. If you are referencing please do in-text citations.***Please use grading guide attached to help you and make sure that all requirements are met.Written Paper Assignments:It should not have to be restated, but remember that ALL written paper assignments are required to have references AND citations in the body of the paper. A paper with no references or citations is considered a form of plagiarism and will result in zero points.Please note the discussions are NOT like a paper — it is considered a public type of forum. Most items from the web site and the text are considered copyrighted information and it is an infringement to copy and paste without express written permission by the author. This includes items copied that are even referenced and cited. I will not count these items as substantive. Please feel free to include the URL address in your discussion posts so we can go to the site, but keep your discussion comments ONLY in your own words. Thanks for your attention to this matter. ***It is VERY IMPORTANT that you follow the grading guide as well as the APA format. This professor is very picky and must be done carefully and correctly.BOOK: Ross, S., Westerfield, R., Jaffe, J. & Jordan, B. (2016). Corporate finance (11th edition). New York, N.Y. McGraw-Hill Education. Feel free to use more than one reference.Let me know if you have any questions.
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