Scenario: hightower, inc. plans to announce it will issue $2.0 million


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 $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 1,050-word memo advising the management of Hightower, Inc. on the financial impact, including the following: 

  • What      is the expected return on the company’s equity before the announcement of      the debt issue?
  • 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.
  • What      is the company’s stock price per share immediately after the repurchase      announcement?
  • 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?
  • Discuss      the advantages and disadvantages of debt financing over equity financing. 

Show all calculations in Excel (using Excel formulas) and submit with your memo. 

Format your paper consistent with APA guidelines. 

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