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Case Study: Stephenson Real Estate Recapitalization

Introduction

In this paper, we will discuss about the options that the Stephenson real estate has to

finance a tract of land in the southeastern Unites States for $49 million. Kim Weyand is the CFO

of the company, who would be doing the analysis of the project to purchase the land. We would

be discussing about the balance sheet of the company to determine the market value of the

Stephenson real estate. We would be analyzing the price per share of the firm and how it could

maximize the per share stock price of the Stephenson’s equity. Issuing debt would be inform of

bonds which would be sold to investors and paid in interest as compensation (Slovin, (n.d.).

If Stephenson wishes to maximize its total market value, would you recommend that

it issue debt or equity to finance the land purchase? Explain

To maximize the total market value, Stephenson should use the debt finance of the $49

million required for the purchase of the land. The purchase of the land would increase the pretax

earning of the firm by $11.5 million, on which the Stephenson is expected to pay tax for it. When

the Debt finance is used for funding the interest paid are non-taxable which will reduce the

taxable income of Stephenson (Ross, 2022).

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Construct Stephenson’s market value balance sheet before it announces the purchase.

Number of Shares: 12 million

Value of each Shares: $53.8

Total share value: 12 *53.8= $645.6million

Stephenson Real Estate

Balance Sheet (All Equity)

$645.6 million
Old assets:  $645.6 million Equity:
(12 million shares of stock)

Suppose Stephenson decides to issue equity to finance the purchase

What is the net present value of the project?

The firm’s pre-tax earnings will increase by$11.5 million per year in perpetuity. These

earnings are taxed at a rate of 21 percent (state and federal).

Earnings increase = $11,500,000(1– . 21) = $9.085million

Since Stephenson is an all-equity firm, the NPV of the purchase is: NPV= – $49,000,000 +

($9,085,000 / . 105)

NPV = $37,523,809.5

Construct Stephenson’s market value balance sheet after it announces that the firm will

finance the purchase using equity. What would be the new price per share of the firm’s

stock? How many shares will Stephenson need to issue to finance the purchase?

Equity Value = $645.6 million + $37,523,809.5

Equity Value = $683123809.5

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Stephenson Real Estate

Balance Sheet (After announcement)

Old assets:  $645.6 million

$688023809.5
NPV : $37,523,809.5 Equity:
(12086086 shares of stock)

Proceeds from new issue stock: $4900000

Total Assets: $688023809.5 Debt plus equity $688023809.5

The market value of the firm’s equity is 683123809.5 and the firm has 12 million shares of

common stock outstanding.

New price per share=683123809.5/12000000= $56.92

Stephenson need to raise $49 million to finance the purchase and new share price is 56.92.

Shares to issue = 4900000/56.92=86085.7=86086

Construct Stephenson’s market value balance sheet after the equity issue but before the

purchase has been made. How many shares of common stock does Stephenson have

outstanding? What is the price per share of the firm’s stock?

Stephenson Real Estate

Balance Sheet (After equity issue)

Old assets:  $645.6 million

$688023809.5
NPV : $37,523,809.5 Equity:
(12086086 shares of stock)
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Stephenson Real Estate

Balance Sheet (After equity issue)

Total Assets: $688023809.5 Debt plus equity $688023809.5

Shares outstanding = 12,000,000 + 86086= 12,086,086 shares outstanding

Stock price per share = 688023809.5/12,086,086 = $56.9.

Construct Stephenson’s market value balance sheet after the purchase has been made?

Stephenson Real Estate

Balance Sheet (After purchase)

Old assets:  $645.6 million

$688023809.5
PV : $37,523,809.5 Equity:
(12086086 shares of stock)

Total Assets: $688023809.5 Equity $688023809.5

Suppose Stephenson decides to issue debt to finance the purchase.

What will the market value of Stephenson be if the purchase is financed with debt?

Current market value of Stephenson: $645.6 million

Market value after the purchase is made :- 645.6million + 49million + 37523809

=$732,123,809.5
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Construct Stephenson’s market value balance sheet after both the debt issue and the land

purchase. What is the price per share of the firm’s stock?

Stephenson Real Estate

Balance Sheet (After purchase)

Old assets:  $645.6 million Debt: $4900000

$688,023,809
PV : $37,523,809.5 Equity:
(12 million shares of stock)

Proceeds from debt: $49 million

Total Assets: $732,123,809.5 Debt plus Equity $732,123,809.5

Current price of share = 688,023,809/ 12000000=57.33

Which method of financing maximizes the per-share stock price of Stephenson’s equity?

The share price of the stock is comparatively higher when the financing is done with debt. Once

the lender is paid off the business relationship with the lender ends (Vaidya, (n.d.).

Conclusion

Based on the discussion in the paper we can conclude that the financing with the debt

would increase the share price for the investors. The market value of the firm was calculated

when the financing was done with Debt and when the financing was done with equity. The

number of shares remains the same when financing with debt and number of shares increases

financing is needed to be done with debt.

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References

Ross, S. A. (2022). Corporate finance. McGraw Hill LLC.

Slovin, J. (n.d.). The Effect of Debt on the Cost of Equity. Retrieved January 30, 2022, from

https://www.sapling.com/6700645/effect-debt-cost-equity

Vaidya, D. (n.d.). Debt financing vs equity financing February 12, 2021, from

https://www.wallstreetmojo.com/debt-vs-equity-financing/