Topic
Corporate Finance
Instructions
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.
Answer Preview
Return on company’s equity
Return on a company’s equity refers to the ratio of the net profit to shareholders’ equity expressed as a percentage. Return on a company’s equity measures how well a company uses shareholders’ funds to generate a profit.
The company expected to return in Equity is expressed as follows
Expected return = Net income/Current Firm value
In this case, the expected rate of return = 13%
From an equity of $7,500,000, the company expects a return of 13%
Word Count: 200