Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 16, Problem 5MC
Summary Introduction
Case summary:
SP is a real estate firm that was established by the present CEO, RS, 25 years ago. The company had been profitable for the past 18 years. Before commencing the real estate business, RS was involved in a bankruptcy of a farming business. SP has a plan to buy a tract of land in U Country for $45 million. This land will be leased to tenant farmers. The land purchase will raise the annual pre-tax earnings by $10 million in perpetuity.
KM, the new CFO, has been put in charge of the current project. KM has determined that the firm’s cost of capital is 10.5%. KM feels that the firm should issue debts to finance the project. Based on some planning, KM thinks that the company can issue bonds at par value with a coupon rate of 7%; she also believes that the firm’s capital structure in the range of 70% equity and 30% would be optimistic. The firm has to bear 40% corporate tax rate.
To determine: Which method of financing method are used to maximize the per –share stock price of SP’s equity.
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Chapter 16 Solutions
Corporate Finance
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
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