FIN 571 Team Assignment Effect of Debt Issuance on Stock Valuation Homework Help

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bt-issuance-on-stock-valuation/
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
Resources:​ ​ Corporate Finance
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?